U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20055 / March 26, 2007

Accounting and Auditing Enforcement Release No. 2581 / March 26, 2007

Securities and Exchange Commission v. Collins & Aikman Corporation, David A. Stockman, J. Michael Stepp, Gerald E. Jones, David R. Cosgrove, John G. Galante, Elkin B. McCallum, Paul C. Barnaba, Christopher M. Williams and Thomas V. Gougherty, United States District Court for the Southern District of New York, SEC v. Collins & Aikman Corporation, et al. Civil Action No. 1:07-CV-2419(LAP) (S.D.N.Y. March 26, 2007)

Washington, D.C., March 26, 2007 - The Securities and Exchange Commission today filed civil fraud charges against auto parts manufacturer Collins & Aikman Corporation ("C&A"), David A. Stockman ("Stockman"), who served as C&A's former Chief Executive Officer and Chairman of the Board of Directors, and eight other former C&A directors and officers.

The SEC's complaint alleges that between 2001 and 2005, Stockman personally directed fraudulent schemes to inflate C&A's reported income by accounting improperly for supplier payments. In furtherance of those schemes, the complaint alleges that Stockman and other defendants obtained false documents from suppliers designed to mislead C&A's external auditors. According to the complaint, when aspects of the schemes were discovered in March 2005, Stockman 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. During the time Stockman was engaged in this fraudulent conduct, he was collecting millions of dollars of the management fees C&A paid Stockman's private equity fund, Heartland Industrial Partners. The other former officers, including the Chief Financial Officer, Corporate Controller, and Treasurer, and a former member of C&A's Board of Directors, are alleged to have participated in the accounting schemes or the campaign to mislead investors. The SEC and C&A have agreed to settle the charges against the company.

In addition to Stockman, the other former C&A directors and officers charged in the complaint are:

  1. J. Michael Stepp, the former Chief Financial Officer of C&A and Vice-Chairman of its Board of Directors;
  2. Elkin B. McCallum ("McCallum"), a former member of C&A's Board of Directors;
  3. David R. Cosgrove, the former Corporate Controller of C&A;
  4. John G. Galante, the former Treasurer of C&A;
  5. Christopher M. Williams, the former Executive Vice President of C&A's Business Development Group;
  6. Gerald E. Jones, the former Chief Operating Officer and Executive Vice President of C&A's Fabrics Division.
  7. Paul C. Barnaba, the former Vice President and Director of Purchasing for C&A's Plastics Division; and
  8. Thomas V. Gougherty, the former Controller of C&A's Plastics Division.

The Commission's complaint alleges that between late 2001 and early 2005, the defendants engaged in multiple fraudulent schemes and made materially false and misleading statements concerning C&A's financial condition and operating results in, among other things, filings with the Commission, offering documents, and press releases. The allegations include the following.

  • Between the fourth quarter of 2001 and the first quarter of 2003, Stockman and other defendants negotiated a series of "round-trip transactions" with McCallum. These transactions were structured to give the appearance that C&A was receiving rebates that would increase C&A's income from a company McCallum owned. In fact, because C&A repaid McCallum or his companies for each purported rebate, the transactions should have had no impact on C&A's income statement, and C&A's use of these transactions to inflate its income was improper.
     
  • From at least as early as the second quarter of 2002 until the scheme was discovered in early 2005, C&A accounted improperly for actual rebates it received from its suppliers. Some of these rebates were recognized in income prematurely, while others should never have been recognized in income at all. At the direction of Stockman and other defendants, C&A's Purchasing Department solicited and received false confirmation letters from suppliers that purported to justify the immediate recognition of rebates in income, and were intended to mislead C&A's outside auditors if they questioned these transactions.
     
  • Between the round-trip transactions and the improper accounting for rebates, C&A fraudulently and materially increased its reported income by over $49 million. As a result, C&A overstated its reported pre-tax operating income (or reduced its loss) by ten percent or more in eight different quarters.
     
  • In March 2005 questions from its outside auditor forced C&A to publicly acknowledge the improper accounting for supplier rebates. However, Stockman, in concert with other defendants, engaged in a campaign to reassure investors, analysts and others that C&A was still economically viable, when in fact the company was on the verge of bankruptcy. In press releases, an earnings call and a presentation to potential bond investors, Stockman, and other defendants, concealed C&A's liquidity crisis and made unreasonable financial projections. As a result of these false and misleading statements, C&A obtained additional financing. But when a more accurate picture of C&A's financial condition emerged a month later, C&A was forced to declare bankruptcy.

C&A simultaneously settled the charges, without admitting or denying the Commission's allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The settlement is subject to the approval of the United States District Court for the Southern District of New York.

The Commission's complaint alleges that the individual defendants violated and/or aided and abetted C&A's violations of the federal securities laws as follows:

  • Stockman and Stepp violated Section 17(a) of the Securities Act; Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b 5, 13a-14, 13b2-1, and 13b2-2 thereunder, and aided and abetted C&A's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b 20, 13a-1, 13a-11, 13a-13 thereunder;
     
  • McCallum and Galante violated Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b 5, 13b2-1, and 13b2-2 thereunder, and aided and abetted C&A's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b 20, 13a-1, 13a-11, 13a-13 thereunder;
     
  • Cosgrove violated Section 17(a) of the Securities Act; Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b 5, 13b2-1, and 13b2-2 thereunder, and aided and abetted C&A's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b 20, 13a-1, 13a-11, 13a-13 thereunder;
     
  • Williams violated Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b 5 and 13b2-1 thereunder, and aided and abetted C&A's violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b 20 and 13a-11 thereunder;
     
  • Jones, Barnaba and Gougherty violated Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b 5, 13b2-1, and 13b2-2 thereunder, and aided and abetted C&A's violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5,12b 20, 13a-1, 13a-11, 13a-13 thereunder;

As to all of the individual defendants, the complaint seeks permanent injunctions against future violations of these provisions, officer-and-director bars, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties.

Today the U.S Attorney's Office for the Southern District announced parallel indictments against Stockman and others. The Commission acknowledges the assistance and cooperation in this investigation of the U.S. Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service.

The Commission's investigation is continuing.

SEC Complaint in this matter