Civil and Criminal Charges of Financial Fraud at Collins & Aikman Corp.

Today the SEC filed civil fraud charges against bankrupt auto parts manufacturer Collins & Aikman Corporation; David A. Stockman, C&A’s former CEO and Chairman of the Board; and eight other former C&A directors and officers:  J. Michael Stepp, former CFO and Vice-Chairman of the Board of Directors; Elkin B. McCallum, former member of the Board of Directors; David R. Cosgrove, former Corporate Controller; John G. Galante, former Treasurer; Christopher M. Williams, former Executive VP of Business Development; Gerald E. Jones, former COO and Executive VP of Fabrics; Paul C. Barnaba, former VP and Director of Purchasing-Plastics Division; and Thomas V. Gougherty, former Controller-Plastics Division.  SEC v. Collins & Aikman Corp., et al., Civil Action No. 1:07-CV-2419(LAP) (S.D.N.Y. March 26, 2007),  

Likewise, the US Attorney for the Southern District of New York unsealed charges of conspiracy, securities fraud, bank fraud, wire fraud, and obstruction of an agency proceeding, against Mr. Stockman.  The US Attorney also charged Messrs. Stepp, Cosgrove, and Barnaba.  Four felony Informations, filed today and last week, charge other C&A executives with related crimes.  

Today’s charges stem from an alleged scheme perpetrated between 2001 and 2005 and directed by Mr. Stockman.  According to the SEC’s complaint, Mr. Stockman and others used various methods to conceal C&A’s true financial health, including wash sales or “round trip transactions” concerning false rebates, improper revenue recognition for the company’s actual rebates, and overstating its reported pre-tax operating income (or reduced its loss) by ten percent or more in eight different quarters. Also, the SEC alleges that Mr. Stockman and others “embarked on a public campaign to mislead investors, potential financiers and others by minimizing the extent of the fraudulent accounting and hiding C&A’s dire financial condition.”

The company simultaneously settled the charges today, without admitting or denying the SEC’s allegations.  C&A consented to a permanent injunction, although the settlement still requires court approval.  As to all of the individual defendants, the complaint seeks permanent injunctions against future violations of the securities laws, officer-and-director bars, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties.