SEC Announces Fraud Charges Against David A. Stockman and Eight Other Former Collins & Aikman Corporation Officers and Directors

Collins & Aikman Corporation Settles with SEC

United States Attorney's Office for the Southern District of New York Announces Parallel Indictments Against Stockman and Others

FOR IMMEDIATE RELEASE
2007-53

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, 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. 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.

Linda Chatman Thomsen, Director of the SEC's Enforcement Division, said, "This case demonstrates again that the Commission will take strong action when a company and its officers are alleged to have engaged in accounting fraud to inflate the company's reported operating results. The conduct we allege here is especially egregious because Stockman and the other defendants not only repeatedly engaged in fraud, but went to great efforts to cover-up their misconduct, and the company's financial difficulties, from investors, analysts and others."

Christopher Conte, an Associate Director in the Division of Enforcement, said, "The facts here are particularly troubling because of the number of fraudulent transactions C&A engaged in, the length of time over which they occurred, and the number of C&A employees, including a large number of senior officers, who carried out the fraudulent conduct, as alleged in our complaint. Moreover, during the same period in which we allege Stockman was defrauding investors, he was collecting millions of dollars of the management fees C&A paid to Stockman's private equity fund, Heartland Industrial Partners."

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

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

The complaint charges violations of the antifraud, reporting, record-keeping, certification and lying to auditors provisions of the federal securities laws. 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.

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 the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. The settlement is subject to the approval of the United States District Court for the Southern District of New York.

Regarding the settled action against the company, Mr. Conte stated, "C&A took significant remedial steps and cooperated extensively with the Commission's investigation. Consistent with the principles announced in the Commission's January 2006 Statement Concerning Financial Penalties, the Commission considered C&A's remediation and cooperation, among other things, in deciding not to impose a penalty."

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 of the U.S. Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service in this investigation.

The Commission's investigation is continuing.

SEC Contacts:

Linda Thomsen
Director
(202) 551-4500
Division of Enforcement
Securities and Exchange Commission

Christopher R. Conte
Associate Director
(202) 551-4834
Division of Enforcement
Securities and Exchange Commission

  Additional materials: Litigation Release No. 20055