Voodoo Justice & David Stockman

The year 2005 was a tough time to be an executive at an auto parts company.

The Big Three automakers, in shambles from growing health and pension costs and declining sales, were making merciless demands on suppliers to trim prices. Tower Automotive, a supplier of suspension systems and body structures, was forced into bankruptcy in February of that year. Delphi, the largest supplier of parts, went bust in October. The entire industry was suffering from dramatic price cuts, either directly or in the form of big rebates, which resulted in thinning margins. Industry CEOs were feeling the pressure that comes with operating in such a difficult business environment.

Perhaps no industry executive was struggling harder than David Stockman, a private equity investor who, as the largest shareholder, had installed himself as CEO of Collins & Aikman, a supplier of interior trim and components that he had assembled through a series of acquisitions. Like its industry peers, C&A was being squeezed by increasing pricing pressure from its large automaker customers and increasing raw material costs upstream. Stockman, whose private equity firm, Heartland Industrial Partners, owned 40 percent of C&A’s stock, was certainly feeling the heat. To make matters worse, its auditor, KPMG, had launched an internal investigation to look into how the company had accounted for some vendor rebates.

Yet the Michigan native had reason to believe that things were about to turn around. He had personally secured the promise of price concessions from C&A’s largest customer, DaimlerChrysler, and other customers had signaled that they would also be willing to provide some relief in the form of better pricing. Stockman had also worked with C&A’s major banks to win waivers on loan covenants and an extra $75 million in financing. The concessions would buy C&A time to get back on its feet. Meanwhile, Stockman was secretly working behind the scenes, and he says he was close to securing a sale of the company to Lear Corp, a competitor.

The sale never happened. Instead, it all came crashing down for Stockman on May 12, 2005, when he unexpectedly received a curt message that he was to dial into an 800 conference call number. Members of the C&A board were waiting for him on the line. “It was very surreal,” recalls Stockman. “These were my friends and colleagues, and on the other end of the line there was just silence.” The board directors of C&A broke that static silence to ask Stockman to resign immediately as chairman and CEO, despite his firm’s 40 percent ownership. He protested that his ouster would be a death sentence for the company, since it was likely to cause creditors and suppliers to panic and scuttle the impending sale of the company. He says he was blindsided by the allegations. “Before that day, I had not heard a word of criticism,” says Stockman. “Not one question was raised about where we were going.” He later learned that DavisPolk, the law firm that was conducting the internal investigation, had recommended his immediate ouster. He also learned that DavisPolk warned board members that they could be held personally liable and recommended that they not speak to Stockman.

Less than a week later, the company sought Chapter 11 bankruptcy protection. But Stockman’s real troubles were just beginning. This past March he was indicted, along with seven other C&A executives, on eight counts related to improperly booking vendor rebates and making misleading disclosures. Four C&A executives pled guilty and are now expected to help the government in its case against Stockman and the others. He faces the possibility of 30 years in prison.

Bullying Tactics?
Stockman refutes the charges and says that his case is just the latest example of an overzealous Department of Justice run amok. Whether or not the government’s allegations have merit, the C&A case offers a cautionary tale for corporate officers, as well as directors, especially for those serving at companies with financial difficulties or where internal investigations are being conducted. “The whole law enforcement process is generally going to drag directors closer to the fire. They deserve hazardous duty pay like soldiers in wartime,” says Charles Stillman, a defense attorney at Stillman, Friedman, and Shechtman. Although Stillman did not want to comment specifically on Stockman’s case, he agrees that it is not uncommon for federal prosecutors to use overly aggressive tactics. “There is no question that aggressive law enforcement has led to convictions that were not justified. We are now starting to see an outcry from corporate leaders who say that it has gone too far.” Stillman and other attorneys say that the government is attempting to criminalize bad business judgment that in the past would have been handled with restatements and possibly a fine.