From the indictment, Paul Barnaba appears to be a bit player in the criminal action against David Stockman. Yet he is in the middle of a criminal case involving at least two other defendants and some 12 million documents, with no trial date in sight. He has sought severance (along with dismissal) in order to get his criminal exposure resolved. The severance issue is still undecided.

The most recent development in the case shows the consequences to people like Barnaba. Unable to severe and get a trial date, he has stood by while the D&O policy for Collins & Aikman, the bankrupt auto parts company, has vanished. What is the latest? The insurance is gone. In his motion of appointment of counsel, counsel for Barnaba, Solomon Wisenberg, noted that the D&O policy had a cap of $50 million, with four layers. The fourth tier, as predicted, is now exhausted, having been exceeded by the last round of bills. As he notes:

 

• On August 7, 2008, Barnaba’s attorneys received word that all proceeds of the D&O Policy were exhausted as of July 31, 2008. Indeed, the final insurance carrier’s preliminary estimate is that open invoices submitted on or before that carrier’s July 31, 2008, deadline exceeded the final $10,000,000.00 layer of coverage by $1,600,000.00.

With no more funding coming, Barnaba has moved for appointment of counsel under the Criminal Justice Act,
18 USC §3600A, and has asked that his current lawyers, Solomon Wisenberg and Adrienne Wisenberg of Wisenberg & Wisenberg, PLLC be appointed. The Criminal Justice Act is no great substitute. According to the statute:

• Any attorney appointed pursuant to this section or a bar association or legal aid agency or community defender organization which has provided the appointed attorney shall, at the conclusion of the representation or any segment thereof, be compensated at a rate not exceeding $ 60 per hour for time expended in court or before a United States magistrate [United States magistrate judge] and $ 40 per hour for time reasonably expended out of court, unless the Judicial Conference determines that a higher rate of not in excess of $ 75 per hour is justified for a circuit or for particular districts within a circuit, for time expended in court or before a United States magistrate [judge] and for time expended out of court.

In other words, Barnaba's counsel will be paid a modest amount (despite the statute, the amount in New York is apparently $100 an hour), something that might be described as a pittance in an era when some lawyers bill at over $1000 an hour.

Barnaba is, of course, lucky.  He has counsel willing to stay with him for very little compensation.  David Stockman likely has the financial wherewithal to continue to pay his attorneys, although even his personal fortune may not be enough if the current billing levels remain constant.  The next defendant to need his circumstances resolved will be David Cosgrove.  Cosgrove is represented by Craig Stewart at Arnold & Porter.  Stewart noted this at the last status hearing.

• MR. STEWART: But maybe that we are back in front of you on his behalf asking that he receive appointed counsel because he simply would not have the money to retain private counsel, given the scope and scale of this case, to defend it. And so I think actually, your Honor's hesitation is understandable, but I think it's fortuitous that the issue has come up because, really, I think within a week, there won't be any more insurance money to cover the cost of defense.
  

It remains to be seen whether appointed counsel is Arnold & Porter.  When we know, we will report it here.

The motion of appointment of counsel, along with most of the other important primary documents in this case, can be found at the DU Corporate Governance website.  

What's going on in the David Stockman case?  Sixteen or so months after the indictment, there is still no trial date and the parties are sweltering in more than 12 million documents.  As for the D&O policy, the fourth and last tier has been exhausted.  That insurance spigot has run dry.

A status conference was held on July 24.  Stockman's team, headed by Elkan Abramowitz (Morvillo, Abramowitz), made the case for delaying the trial selection date.  Abramowitz noted that the case looked to involve more than 12.5 million documents and that although there had been 29 to 32 lawyers reviewing the documents for six months, they had not yet finished examining one third of the materials.  As he noted:

• I would urge you not to fix a trial date today.  We are nowhere near ready to say that we could -- we're ready to try this case.  And even if you arbitrarily put it a year from now, it won't make -- it's not a realistic -- it's not a realistic judgment on your Honor's part.  It wouldn't be, because we're in no position to say that we've got a handle on what we're doing here, so I couldn't -- I really urge you not to do that.
  

The argument convincing, the trial judge did not set the date.  As part of the argument, Abramowitz gave some insight into the defense that he was developing for trial.  

• This is not a standard securities fraud case.  This is an unusual one, not only in the size and scope of the documents, that certainly makes it unusual, but most of the time, cases deal with established fraudulent acts and the defense is, generally, I didn't know about it or I didn't do it.  This case deals more often than not with situations where the facts are there and the facts happened, but where our -- our defense is, there is no crime here, that the accounting principles that are enunciated in the indictment and the accounts re -- the factoring principles that are enunciated in the indictment, the disclosure principles that are dicussed in the indictment and the particular transaction called the Joan Transaction, we -- our defense is those were pefectly legitimate transactions and that the fraud that's alleged is essentially saying that the accounting standards that were used were not the correct ones.

It has also become clear that the concern raised by Solomon Wisenberg (Wisenberg & Wisenberg), counsel for Paul Barnaba, about the burn rate of the D&O insurance has in fact come to fruition.  Abramowitz noted that the issue of reimbursement was "getting to be a very serious problem."  The policies were "going to run out in a matter of weeks; not months, weeks, for all of us."  Wisenberg indicated more specifically that the "fourth and final layer carrier has informed us that -- basically, not to assume there's going to be any money after invoices submitted on July 31st . . . "  Craig Stewart (Arnold & Porter), counsel for Cosgrove, another defendant, indicated that his client lacked the funding "to continue having us represent him as it stands, and that will be true as soon as the insurance money runs out."  As a result, he might have to return to the court to ask that Cosgrove "receive appointed counsel because he simply would not have the money to retain private counsel, givne the socpe and scale of this case, to defend it."    

The depleting policies was a factor in Barnaba's argument for severence and an earlier trial date.  Although the judge hasn't ruled on the motion (specifically reserving decision), Barnaba may get his wish.   The government conceded that it was considering a superseding indictment.  "If we do supersed, I imagine there will be a motion or motions for severence, and your Honor may be inclined to grant those motions.  And if that's the situation, we may not oppose in that particular situation." 

 A transcript of the hearing and other materials on this case can be found on the DU Corporate Governance website.

We note that Kevin LaCroix at the D&O Diary, a one stop shop for all things about D&O insurance, has commented on the post on this Blog that discussed the burn rate of the D&O policy used to pay legal expenses in the current litigation against officers and other personnel from the bankrupt Collins & Aikman.  His comments are worth repeating:

• The first and most basic point is the importance of defense expense in the limits adequacy analysis. The potential for defense expense to exhaust or substantially deplete the available limits is most obvious in a catastrophic claim like the one involving Collins & Aikman, but even in less catastrophic circumstances, accumulating defense expense can substantially reduce the indemnity protection available even in a large insurance program. And the insurance is supposed to able to respond adequately in all circumstances, even the unlikely event of a catastrophic claim. In considering the requirements that a catastrophic claim can present, it is important to note that the aggregate defense expense related to the Collins & Aikman claim consumed $15 million in just nine months.
• The second point is that one of the problems in the Collins & Aikman claim is that so many different people are accessing the policy, for a wide variety of different matters. The potential for the policy limits to drain away through so many different access points is perhaps inherent in the current standard D&O policy structure, in which so many different people are included as “insured persons” and so many different kinds of matters fall within the definition of a covered “claim.”
• While this breadth of coverage is generally viewed as a positive thing from the policyholder’s perspective, it has the inherent potential (a potential that is being dramatically realized in the Collins & Aikman claim) for accelerated policy erosion and even depletion. The erosion potential inherent in the breadth of available policy coverage is a consideration that is too infrequently considered in connection with the question of limits adequacy.
• Third, the problem Barnaba faces is not just his alone – all of the other “insured persons” are also facing imminent insurance program depletion. Once the available insurance is used up, these individuals will face continued complex litigation without further insurance available to defend or indemnify themselves. Among other things, it could prove difficult and painful for the defendants in the civil lawsuits to extricate themselves without insurance available.

In short, for a multi-billion dollar company like Collins & Aikman, $50 million in insurance limits may not be enough.

We have been following the criminal action filed against David Stockman, the former director of OMB under Ronald Reagan. Most of the parties are mired in discovery, with the Government having produced somewhere around 10 million documents.

With one exception. Defendant, Paul Barnaba, is pushing for a quick trial, having originally sought a date this summer. One (but by no means the only) reason for the quick trial date has been concern over the burn rate of the D&O policy. The Government described the concern as "wholly speculative and unsubstantiated."

In reply, Barnaba vigorously disagrees. In so doing, he provides considerable insight into the terms of the D&O insurance policies applicable in this case. Total coverage is $50 million, with the first tranche exhausted in June 2007 and has an estimated $1.67 million per month burn rate. As the memorandum provides:

• the impending exhaustion of these funds is neither speculative nor unsubstantiated. The D&O Policy in question provides four layers of coverage—a total of $50 million. It provides coverage to a wide array of former Collins & Aikman (“C&A”) executives and employees, including those who have been charged in this case, those who have been sued or subpoenaed in the civil SEC matter, and those who have been sued or subpoenaed in various class actions and other civil suits taking place around the country. The first $15 million layer of coverage was exhausted on or about June 15, 2007. The second $15 million layer of coverage was exhausted on or about March 31, 2008. Invoices were submitted to the second layer carrier between in or around July 2007, and in or around March 2008, invoicing for work performed between in or around June 2007 and in or around February 2008. In other words, the second $15 million layer of coverage was exhausted in nine months at a rate of approximately $1.67 million per month. The monthly burn rate was higher at the end than at the beginning of this nine-month period.

The bottom line? The remainder of the policy may well be exhausted by year's end.

• This leaves $20 million of coverage remaining, but this amount is for invoices submitted beginning on or about April 1, 2008 for work that was performed beginning on or about March 1, 2008. Assuming a monthly burn rate of $2 million to $3 million, which is realistic and likely conservative, all policy proceeds will be exhausted sometime between mid-September 2008 and December 31, 2008.

The $50 million amount seems typical for a company the size of C&A.  The burn rate is substantial but then so is the amount of litigation swirling around the company, with charges filed by the Securities and Exchange Commission augmenting the criminal proceedings. 

Barnaba likewise continues to assert that his efforts at a speedy trial are supported by his limited role in the criminal charges, something born out in the indictment.  As he notes: 

• And even if those usual rationales, such as the public’s interest in economy, convenience, and prompt trials, are not trumped, they are of limited application here. Here, granting Barnaba’s severance request will insure the accused’s prompt trial. Here, because of Barnaba’s relatively limited role in the charged offenses, because he is the only Purchasing Department employee charged with a crime, and because he has virtually no involvement in any alleged scheme other than the Supplier Rebate Fraud Scheme, severing him will entail only limited duplicative effort.

We are redoing the corporate governance web site.  Once completed, we will post this pleading. 

We are following the criminal case filed against David Stockman, the former head of OMB under President Reagan.

Among the other defendants is Paul Barnaba. The indictment describes him as "employed by [Collins & Aikman] in the Purchasing Department." Specifically, he served as the Director of Financial Analysis and eventually Vice President and Director of Purchasing for the Plastics Division. According to the indictment, the defendants inflated income by "systematically recognizing 'rebates' from C&A's suppliers before those cost reductions had in fact been earned." The rebates were price reductions provided by suppliers. Barnaba allegedly played a role in this part of the scheme.

The case has settled into the discovery phase. The government finished providing documents on Feb. 27th. The government produced somewhere around 10 million pages. Counsel for Stockman (Elkin Abramowitz of Morvillo Abramowitz) disclosed that all of the defendants had "at various times between 40 and 60 contract lawyers" working on reviewing the documents, including 30 or so employed on behalf of Stockman.

Most of the defendants were apparently wading through the morass, with one exception. At a status conference held in January 2008, counsel for Barnaba (Solomon and Adrienne Wisenberg, Wisenberg & Wisenberg) asked for a short trial date, seeking a trial in June. Counsel noted that "under the insurance policies, the money may run out by the end of 2008." In a hearing in April, counsel for Barnaba indicated that he was ready to go to trial. At the hearing, the other defendants indicated that the determination of a trial date was "premature" and indicated a need for additional time.

Counsel for Barnaba promptly filed a motion to sever. As the brief noted:

• Barnaba bases this motion on the applicable law in combination with two important facts: first, Barnaba is ready to go to trial and his Codefendants are not; and second, Barnaba’s purported involvement in the charged offenses pales in comparison to that of his Codefendants. This Motion is premised on the substantial risk that Barnaba’s speedy trial and related trial rights will be compromised if his trial is not severed.

According to the brief, Barnaba's life has been in shambles. He was "[i]mmediately fired from his job upon being indicted." He formed a consulting group "in order to feed his family" but was fired "when the customer learned of the Indictment." Moreover, the information about the indictment was easy to find.

• In the Internet Age, one Google search can reveal an indictment to any prospective employer. The detrimental publicity, disgrace, and censure resulting from the charges have only been heightened in Barnaba’s case by the prominence of Stockman, and by Stockman’s decision to comment on the case in highly public forums.

The troubles have not ended with employment. The charges created havoc in his personal life and with his finances. As the memorandum noted:

• Barnaba is going through a divorce and is down to his last $16,000.00 in savings. He has no other liquid assets and no guarantee of future employment, until these charges are resolved through trial. Once his savings run out, he will be forced to dip into his modest 401(k) pension fund. He maintains a separate residence from his soon-to-be ex-wife, and has two small children to support. The psychological and financial strains of his uncertain legal status are exacting a heavy toll. As Barnaba puts it in his sworn affidavit: “The delay in getting to trial in this case has caused, and continues to cause, excruciating stress in every aspect of my life. It is extremely difficult to exist in a state of uncertainty and limbo. The presumption of innocence may apply in the courtroom, but not in many other areas of life. I appear to be presumed guilty in the eyes of the business community, until proven innocent.”

Likewise he expressed concern with the D&O Policy, noting that "the proceeds of that policy are quickly dwindling." See also Memorandum, at 10 ("Barnaba’s legal team estimates, based on the recent burn rate, that the D&O Policy funds could easily be exhausted by the end of September and will last no longer than December 2008.").

Although acknowledging that it was ready to go to trial, the government opposed the motion to sever.  The government said little about the personal issues but described the concern over the demise of the insurance proceeds as "wholly speculative and unsubstantiated."  As for the argument that he played a lesser role than his codefendants, the government argued that "[r]egardless of how he attempts to characterize the charged conduct attributable to him, Barnaba cannot escape the reality of being charged together with each of his codefendants in all of the securities fraud-related counts in the Indictment."  Severing would result in duplication and represent an inefficient use of the court's time.  

• The Government intends to call witnesses who worked alongside Barnaba and the other codefendants, and offer documents and emails, many of which Barnaba and his codefendants created or reviewed at the time the frauds were being committed. Separate trials would therefore result in a wasteful duplication of the presentation of this evidence, and offer an unfair advantage to the second group of defendants being tried, who will have an opportunity to assess the Government's witnesses and theories beforehand. (citation omitted)

The motion is pending.  Barnaba has also filed a motion to dismiss the indictment and, in the alternative, a motion to set a trial date, and a motion to recuse one of the government's lawyer in the case.

United States Attorney, Michael Garcia indicted David Stockman and three others on March 21, 2007 for securities fraud, obstruction of justice, and charges of conspiracy. The lead prosecutor on the case is Assistant U.S. Attorney Helen Cantwell. Ms. Cantwell is the sole prosecutor responsible for investigating this matter; the Government intends to have additional prosecutors appointed to the case. This case will be heard before the Honorable Barbara S. Jones in the United States District Court for the Southern District of New York. Before Judge Jones joined the bench in 1996 she was the Chief Assistant United States Attorney to Robert M. Morgenthau.

The defendants have enlisted the help of several prominent attorneys: Elkan Abramowitz, Gandolfo DiBlasi, Craig Stewart, and Soloman Wisenberg.

Stockman’s attorney Elkan Abramowitz is a leading white-collar criminal defense attorney. According to New Yorker Magazine Mr. Abramowitz’s firm, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., is “the crème de la crème of white-collar criminal defense.” Mr. Abramowitz entered private practice in 1979. Prior to entering private practice he was an Assistant U.S. Attorney for the Southern District of New York, Assistant Deputy Mayor for the City of New York, Special Counsel to the Select Committee on Crimes for the U.S. House of Representatives and Chief of the Criminal Division in the U.S. Attorney’s Office.

In addition to Abramowitz Stockman’s team of attorneys includes Jodi Peikin, and James Stovall, both are attorneys of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.

Gandolfo DiBlasi is a partner at Sullivan & Cromwell in New York. Mr. DiBlasi has experience as lead counsel for cases involving: securities investigations of the Salomon Brothers treasury auction scandal, pay-to-play investigations in the municipal securities market, back dated options, and various Enron-related matters.

Craig Stewart is a litigation partner at Arnold & Porter LLP in New York. Mr. Stewart has extensive experience defending regulatory prosecutions. Prior to entering private practice, Mr. Stewart spent eleven years as an Assistant United States Attorney in the Southern District of New York.

Solomon Wisenberg is equally familiar with white-collar litigation. Prior to starting his own firm, Mr. Wisenberg was the chair of the White Collar Crime Practice Group at Rossi, Dixon & Bell, a Washington D.C. firm. Mr. Wisenberg was also an Assistant U.S. Attorney in Texas and North Carolina. During his time as an Assistant U.S. Attorney he received the Directors Award from Attorney General Janet Reno for his work on a $200 million Victoria Savings Scandal. During the 1980’s Mr. Wisenberg was Acting Special Counsel for Judicial Selection and Attorney Advisor in the U.S. Department of Justice under Attorney General Edwin Meese. The defendants have already moved to disqualify Ms. Cantwell for her involvement in earlier discussions with the defendants regarding pleas and related matters.

The primary materials for the Stockman Case including a summary of the indictment may be found on the DU Corporate Governance website.

The Race to the Bottom has as part of its mission the analysis and examination of cases that raise important issues of corporate governance.  This Blog will follow the case of David Stockman, the former Congressman and head of the Office of Management and Budget under President Reagan.  During the era of trickle down and the Laffer curve, Stockman helped push through the Reagan budgets.  His most famous moment was probably an unguarded comment made in an interview published in The Atlantic when he referred to the Reagan tax cuts as a "trojan horse." 

He left politics, went to Wall Street, and helped found the Blackstone Group, leaving the public eye but presumably becoming very rich in the process.  He's back, having been indicted for his role in overseeing Collins & Aikman, a auto parts manufacturer.  In defending himself from charges he manipulated financial information, one article reported that Stockman will rely on the "I am a moron defense".  

Students will obtain all filings in this case and post on them.  Jeff Hartje, a faculty member at the University of Denver Sturm College of Law, and an expert on litigation and evidence will discuss the filings with students and supervise the posts.  Most of the posts will appear in a separate tab on this page labeled "Stockman".  When developments occur of high significance, the posts will be on the main page. 

Enjoy the coverage.   

We will be following the case of United States v. Stockman, 07-0220 (S.D.N.Y. filed Mar. 21, 2007) through a series of posts as the case progresses. This post outlines the background of the case as well as the Grand Jury charges found in the Indictment.

The Grand Jury charges flow from activities between 2000 and 2005 of Collins & Aikman, Inc., (“C&A”), which was a public company listed on the NYSE. C&A was a global automotive parts supplier, who by 2005 had grown to be one of the largest suppliers in the world. In 2001, a private equity firm, formed in part by David Stockman, acquired a controlling interest in C&A. Stockman, served as CEO and Chairman of the Board of Directors of C&A. Under Stockman’s control, C&A availed itself to a variety of sources of debt financing including: notes, revolving credit lines, and securitizing accounts receivables. C&A’s debt financing was subject to certain financial covenants and failure to comply with these covenants would constitute a default by C&A and warrant demand for immediate payment. The covenants required C&A to maintain a certain ratio of performance measured by C&A’s net debt divided by EBITDA.

In general, the Indictment alleges that in response to these operational pressures and covenants to keep C&A’s financial performance at certain levels, Stockman orchestrated a scheme joined by the other defendants to defraud C&A’s investors, banks, and creditors by manipulating C&A’s reported revenue and earnings. The other Defendants include – Michael Stepp, who at various times served as CFO and on the Board of Directors of C&A; David Cosgrove, C&A’s vice president of finance; and Paul Barnaba, Director of Financial Analysis for C&A’s Purchasing Department.

At the forefront of the alleged scheme to defraud was C&A’s improper “rebate” accounting practices. The alleged “rebate” scheme came in three varieties. The first variety took the form of C&A asking for lump sum payments from a supplier, which C&A would characterize as a supplier “rebate.” However, according to an agreement C&A would have with the supplier, C&A systematically repaid this money through additional purchases. Under this variety, C&A improperly recognized what was essentially a loan as a current reduction in costs or “rebate.” Thus, increasing EBITDA and improperly inflating C&A’s current financial performance.

The second variety of “rebate” occurred when C&A negotiated upfront payments called “slotting fees” or “rebates” from its suppliers in exchange for future business. Because C&A’s right to retain the rebate was conditioned on C&A’s promise of future business, GAAP required C&A to recognize these “rebates” as a reduction in cost of sales only after C&A satisfied all the contractual terms entitling it to the lump sum. However, in order to inflate its EBITDA for the current period Stockman and Cosgrove directed C&A’s employees to obtain separate documents that falsely attributed the supplier rebate to past purchases to justify its characterization.

The third variety of “rebate” involved accounting for capital equipment. Under GAAP, discounts on the price of capital assets result in the reduction of the cost basis of the asset, and would have no impact on EBITDA. For the purpose of inflating C&A’s EBITDA, C&A employees, under Stockman’s direction, negotiated contracts whereby C&A agreed to pay a higher price for capital equipment than originally requested by the supplier. In return for the higher price, C&A received a “rebate,” coupled with documentation that falsely attributed the “rebate” to other items, which decreased current expenses. The Indictment alleges that due to the three “rebate” schemes mentioned above, between 2001 and 2004, C&A improperly inflated their operating income by approximately $43.6 million.

It is charged that in furtherance of this scheme, Stockman and the other Defendants made repeated public statements in which they falsely described C&A’s operating performance and financial results, and in order to mislead, omitted material facts necessary to make C&A’s financial performance complete and accurate. In addition, Stockman and the other Defendants caused C&A to file financial statements with the SEC that materially misrepresented C&A’s operating performance and financial results.

The Indictment includes eight counts dealing with the alleged fraudulent activity mentioned above. The first count charges all Defendants with a conspiracy to commit the substantive offenses contained in counts two through eight. (false statements in financial records and documentation, lying to auditors and engaging in bank fraud, wire fraud, and obstruction of an agency proceeding).

Counts two through four charge all Defendants with Securities Fraud violations of 10b-5 in connection with the purchase or sale of common stock, 10.75% senior subordinated notes, and 12.875% senior subordinated notes respectively.

Counts five and six charge Stockman with Bank Fraud, under 18 U.S.C. § 1344, for knowingly executing schemes to defraud General Electric Capital Corporation (“GECC”) and JP Morgan Chase respectively.

Count seven charges Stockman with Wire Fraud, under 18 U.S.C. § 1343, arising from misleading and false statements made during a due diligence conference telephone call with Credit Suisse to obtain $75 million in financing.

Count eight charges Stockman and Stepp with Obstruction of an Agency Proceeding by knowingly causing false and misleading information to be provided to the SEC.

We will continue to follow this case as it progresses. This Indictment and other filings can be found on the

DU Corporate Governance website website.

In March 2007, US District Attorney, Michael J. Garcia, filed an indictment against David Stockman, J. Michael Stepp, David R Cosgrove, and Paul C Barnaba. The indictment alleges that all four persons acted either alone or conspired together to commit a series of violations. The list of accusations includes conspiracy to commit securities fraud, false statements in annual and quarterly reports, false entries in books and records, lying to auditors, bank fraud, wire fraud, and obstruction of an agency proceeding.

Both Stockman and Stepp were employed at Collins and Aikman, Inc. Stockman served as the CEO and Chairman of the Board. J. Michael Stepp served as the CFO and advisor to Collins and Aikman. Both defendants were partners in a private equity firm which was the largest single shareholder in Collins and Aikman. Cosgrove served as Group Controller and Vice President and later took on the position as Senior Vice President of the Financial Planning and Analysis Group. Lastly, Barnaba served as the Director of Financial Analysis.

Collins and Aikman was in the business of providing companies around the world a broad range of automotive supply parts. The company owned and operated factories in North America, South America, and Europe, and supplied parts to both domestic and foreign auto manufacturers, such as Ford, General Motors, and DaimlerChrysler. By 2005, Collins and Aikman had grown to be one of the largest automotive parts suppliers in the world.

The companies’ ability to leverage capital was conditioned upon complying with certain covenants as negotiated in their lender agreements. For example, Collins and Aikman had to maintain a level of performance predetermined by their investors. Failure to comply would constitute a default on such agreements and warrant a demand for immediate payment of the full amount of its credit obligations. Maintaining these performance levels also determined whether or not lenders would provide the company with additional financing in the future. Beginning in 2001, Collins and Aikman faced increasing pressures in its business operations, which, along with other issues, threatened to cause Collins and Aikman’s financial performance to fall to levels that might trigger a default on the financial agreements. Such a default would cut off funding that the company desperately needed and also require the company to repay creditors in full the amounts that Collins and Aikman had previously borrowed.

In order to stave off total insolvency, prosecutors allege that Stockman lied to banks about the firm's financial condition, inducing them to loan the company money it couldn't repay. He began structuring transactions as "rebates" that involved masking loans, which were supposed to be repaid as income. He exaggerated the manufacturer's prospects, knowing his claims were untrue, which led people to buy company securities that quickly became worthless.

In May 2005, the Board of Directors discovered that Collins and Aikman had run out of cash. Finding itself on the verge of financial insolvency, the Board was forced to file for bankruptcy. The prosecution asserted that Collins and Aikman’s financial situation occurred largely under Stockman’s direction, and the Board of Directors seemed to agree. Soon after the Board discovered that the company had run out of money, it immediately requested that Stockman resign. By this time, Collins and Aikman’s common stock became nearly worthless. The indictment alleges that the actions of the defendants- which include engaging in securities fraud, lying to auditors, and “cooking” the company books- resulted in hundreds of millions of dollars in investor and creditor losses. Currently, officials are selling off the company in pieces, a process that may be complete long before the Stockman case is set to go to trial in the later part of 2008.

The primary materials for this case may be found on the DU Corporate Governance website website.