Ex-White House Budget Director Faces Fraud Charges

By Greg Farrell

NEW YORK — When David Stockman, former White House budget director, criticized the Reagan administration’s handling of budget numbers in the early 1980s, President Reagan famously “took him to the woodshed” as a rebuke.

But if he’s convicted of the criminal charges filed against him Monday by federal prosecutors in Manhattan, Stockman could end up in a far worse place: prison.

In a 65-page indictment made public Monday, prosecutors hit Stockman with eight criminal counts, including conspiracy, securities fraud and bank fraud, for actions he allegedly took as CEO of Collins & Aikman, an auto parts supplier, from 2002 to 2005.

Prosecutors say Stockman and three subordinates allegedly defrauded investors, banks and creditors by manipulating C&A’s earnings during that period.

Specifically, the indictment alleges, Stockman boosted C&A’s earnings in 2002 by accepting upfront “rebates” from one supplier, Joan Fabrics. Under generally accepted accounting principles, rebates aren’t supposed to be recognized as earnings until after an underlying transaction has occurred.

Worse, in this case, the government alleges that the upfront payments from Joan Fabrics weren’t rebates at all, but loans that Stockman promised to repay through a series of secret side letters. All told, prosecutors say, the scheme inflated C&A’s earnings by $43.6 million.

The indictment also alleges that in early 2005, as C&A faced a cash crunch, Stockman misled executives from General Electric Capital and Credit Suisse First Boston about the health of C&A in order to borrow millions.

C&A’s board ousted Stockman in May, just before the company filed for bankruptcy-court protection.

In federal court Monday afternoon, Stockman pleaded not guilty, as did three co-defendants, J. Michael Stepp, David Cosgrove and Paul Barnaba.

In a statement, Stockman said that he did nothing wrong, pointing out that he poured millions of dollars of his own money into C&A in a desperate effort to keep it afloat. “All of my disclosures, forecasts and public statements reflected reasonable business judgments and a realistic and balanced view of the facts as I understood them,” he wrote.

Attorneys for Stepp and Barnaba maintained their clients’ innocence; Cosgrove’s attorney did not return a phone call.

According to court documents, four other former C&A executives have pleaded guilty in the matter. Those witnesses could be a big problem for Stockman if he claims he wasn’t aware of what was happening at C&A, says Jack Coffee, an expert in securities law at Columbia University. “There are four witnesses against this man. He’s in deep trouble,” Coffee says. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.