Delphi seeks court OK of SEC deal that enjoins company from securities violations

By Caroline Salls

Pittsburgh, Nov. 10 - Delphi Corp. requested court approval of a settlement with the Securities and Exchange Commission that permanently restrains and enjoins Delphi from violating some securities laws, but does not impose any monetary fine on Delphi, according to a Friday filing with the U.S. Bankruptcy Court for the Southern District of New York.

According to the motion, on Oct. 30, the SEC filed and settled with Delphi a lawsuit alleging violations of federal securities laws related to transactions that were the subject of a June 2005 financial restatement.

Specifically, Delphi said it completed a financial restatement in June 2005, reducing retained earnings as of Dec. 31, 2001 by $265 million, reducing 2002 net income by $24 million and improving 2003 net loss by $46 million.

In the lawsuit filed Oct. 30 in the U.S. District Court for the Eastern District of Michigan, the SEC charged Delphi with engaging in a pattern of fraudulent conduct between 2000 and 2004.

At that time, Delphi agreed to resolve the charges, without admitting or denying any wrongdoing, and to be enjoined from future violations of the securities laws.

The SEC also charged 13 individuals, nine of whom were former Delphi employees, for their alleged roles in the fraudulent conduct or in related reporting and books-and-records violations by Delphi.

None of those individuals are currently employed by or insiders of Delphi, the motion said.

The SEC's allegations included:

• In 2000, Delphi engaged in two fraudulent accounting and disclosure schemes with the purpose of hiding a $237 million warranty claim asserted by its former parent company and inflating its net income by $202 million;

• In the fourth quarter of 2000, Delphi entered into two improper inventory schemes, through which it agreed to sell about $270 million of metals, automotive batteries and generator cores to two third parties at year's end, while simultaneously agreeing to repurchase the inventory in the following quarter for the original sales price, plus interest charges and structuring fees.

The SEC alleged that the purpose of the schemes was for Delphi to inflate its cash flow from operations by $200 million, engineer $270 million in inventory reductions and improperly report $80 million in net income;

• In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi's providing new business to that company.

The SEC alleged that Delphi agreed to repay the $20 million over five years, with interest, which made the payment a loan to the IT company.

However, in order to meet earnings forecasts for the quarter, the SEC alleged that Delphi improperly accounted for the $20 million payment as if it was a non-refundable rebate on past business, rather than a liability;

• From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost non-GAAP pro forma measures of Delphi's financial performance that were relied upon by investors, analysts, and rating agencies.

The SEC alleged that hiding this factoring allowed Delphi to overstate materially its street net liquidity, a pro forma measure, during that two-year period.

In addition, in one quarter, the SEC alleged that Delphi also manipulated the hidden factoring to create a false $30 million boost in its street operating cash flow, another pro forma measure.

A hearing is scheduled for Nov. 30.

Delphi, a Troy, Mich.-based automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005. Its Chapter 11 case number is 05-44481.

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