• (1)  the entire set of interview memoranda from the 2005 Audit Committee Investigation, and (2) the notes of witnesses interviewed during the Government's investigation.

The next status conference in the case is scheduled for January 21, at 10:00 am.  At the conference, "Defendants will be expected to advise the Court as to the status of discovery."

The order, along with other primary material, is posted on the DU Corporate Governance web site.

Most of the parties (Paul Barnaba excepted) agreed to a briefing schedule with the parties due to file on January 15, the government having until Feb. 12, and the replies due Feb. 27th.   Oral argument will follow, presumably sometime in March.  (A subsequent letter from counsel at Morvillo, Abramowitz sought a two week extension, altering the dates to January 30, Feb. 26 and March 13).

Similarly, deadlines were worked out for expert discovery were resolved.  With Karen Seymour, counsel for defendant J. Michael Stepp taking the lead, she got the government's agreement to complete expert discovery by Feb. 27.  Defense would do the same by March 20.  What would this entail?

• THE COURT: Now, by discovery, you mean they're going to declare they have one and give you a report, is that what we're talking about?
• MS. SEYMOUR: That's what we're anticipating.
• MR. BERGER: Yes, an expert notification letter.

The issue of appointed counsel was more or less resolved.  Once the D&O insurance proceeds evaporated, the issue of counsel and the payment of fees came to the fore.  Solomon Wisenberg, counsel for Paul Barnaba, moved to be appointed counsel under the Criminal Justice Act.  At the October hearing, the trial judge approved the appointment.  She also noted that, "[w]ith respect to Mr. Cosgrove, . . .approval should be coming through in another day or two."

Much of the hearing was devoted to the time needed to prepare for trial, a matter complicated by the number of documents involved.  That number had increased from the already impressive 11 million to 15 million.  Counsel for Dave Stockman (Elkan Abramowitz) indicated a need for 70 to 80 weeks.  With both counsel and the trial judge overwhelmed by the number of documents, the court had this to say about the length of time needed for preparation:

• THE COURT: Well, I can only -- I see we have a new assistant here today, Mr. Sahni? (Indicating) I can only ask the government to go back and talk to people who may have had cases like this, reach out for lawyers who may have left the office and see if there are some solutions out there or some comparisons that can be made because: One, I don't know what it takes to search 15 million documents. Two, I don't know how search terms work, especially when I'm told there's a first level of review and then another level of review. I can't say to the defendants at this moment that it won't take them 70 to 80 weeks; and under that circumstance, then I have to look at the government and say do you want to wait that long?  The ball is in your court, gentlemen. Unless I'm convinced that 70 to 80 weeks is unreasonable, and no one is telling me that, I think we would be in the situation of waiting a very long time as Mr. Abramowitz is getting us off the dime. The flip side is, of course, Mr. Abramowitz can't guarantee that even if he's given these materials, he can do it any faster. So you're not getting any deal here -- you're not getting an agreement from Mr. Abramowitz that "I can do it six months faster if you give me this." He's hopeful. I think a little more thought has to go into this back at the U.S. Attorney's office just because I'm unaware of there being this length of time between indictment and the ability to get through discovery and set a reasonable trial date. I mean, at the moment I don't think it's overly long, but I haven't gone back and compared it with other cases, and it might be helpful to do that.

In short, unless Paul Barnaba gets his severence and an earlier trial, this matter is not likely to be before a jury for somewhere around 18 months (from October) with even that prediction uncertain.

Primary materials on this case can be found at the DU Corporate Governance web site.

According to Barnaba, recent developments make immediate severance “even more crucial.” On August 7, 2008 Barnaba’s attorneys learned that the D&O insurance had been exhausted effective July 31, 2008. Barnaba first expressed his fear that the insurance would run during the July 12, 2007 status conference, but the Government dismissed this argument as “wholly speculative.” Barnaba has not been able to pay counsel for 2 ½ months and his Motion for Appointment of Counsel under the Criminal Justice Act filed August 18, 2008 is still pending. Barnaba claims that he is ready for trial now and making him wait for trial in May 2009 with his limited resources would “impair [his] ability to put on an effective defense.”

Now that the trial has been set for 13 months after Barnaba announced he was ready for trial, Barnaba claims that there is a “greater and more certain” risk his right to speedy trial will be compromised. In addition to waiting 6 ½ months for trial to begin, Barnaba argues that he should not have to wait an additional 4 months for the Government and Stockman to put on their case (each had stated that they would need to 6-8 weeks to present their cases) since his trial would need only a fraction of the time. Barnaba also points out that the length of delay and a defendant’s invocation of his right to a speedy trial are two key Barker v. Wingo elements. The Barker test is used by courts to determine whether a defendant’s right to speedy trial has been violated. A court will consider the length of delay, the reason for the delay, whether the defendant has asserted his right, and prejudice to the defendant. Barker v. Wingo, 407 U.S. 514, 530 (1972).

Although the Government believed discovery was complete in February 2008, Barnaba states that it has become clear that discovery is incomplete and the other co-defendants have informed the court that the Government’s discovery delays will delay its readiness for trial. Barnaba argued that he has “stayed out of all discovery disputes” since announcing that he was ready for trial in April 2008 to “avoid any hint or suggestion that he is being disingenuous by simultaneously demanding speedy trial and asking for delays to examine additional Government document productions.” According to Barnaba the Government’s inability to provide him with complete and error-free discovery shows that it lacks of justification for a lengthy delay, which is another key Barker v. Wingo element.

Finally, Barnaba is not claiming that his right to a speedy trial has been violated since he tried this argument in his first motion and the court rejected it. He is arguing, however, that if his motion is denied and he does have to wait until May 2009 his right to a speedy trial and other “related trial rights” will be “compromised.”

The documents discussed here can be found on the DU Corporate Governance website.

The documents for which discovery was denied relate to a 2005 internal investigation initiated by the Collins & Aikman board of directors and conducted by New York-based Davis Polk & Wardwell. Bloomberg reports that Collins & Aikman dismissed David Stockman after investigating lawyers discovered evidence pointing to Stockman’s alleged issuance of bogus earnings projections.

At a July 24, 2008 status conference, Stockman attorney Elkan Abramowitz argued that the documents from the Davis Polk investigation were critical to the defense’s theory that Davis Polk was misled by Collins & Aikman CFO Bryce Koth and that it was Koth's false information that caused the bankruptcy, not the conduct of David Stockman and the other defendants. Because the Davis Polk materials were the basis for the government’s allegations, Abramowitz also maintained that they were needed if the defense was to review the 12 ½ million documents already produced by the government in anything approaching a timely fashion or a reasonable cost. Status Conference, US v. Stockman, SDNY, July 24, 2008.

As we have discussed in previous posts, cost is a critical issue because Collins & Aikman’s $50 million D&O insurance policy was exhausted as of July 31, 2008. This means that defense costs are now coming out of the defendants’ own pockets or are being paid, at a greatly reduced rate, by the court out of public funds.

After an in camera review of the documents, the Court found that the report and work plan contained nothing that would significantly help the defendants uncover admissible evidence, prepare witnesses, corroborate testimony, or assist impeachment or rebuttal. Because the documents did not meet the Brady standards for exculpatory evidence and were not deemed material for defense preparation, the Government does not have to turn them over.

The Court is still reviewing 42 memoranda containing statements from government witnesses that the defendants argue should be produced now to “move the case along.” But, unless the memoranda contain Brady material, the Government does not have to produce them at this point in the discovery process. 18 U.S.C. § 3500 provides that no prior statements of government witnesses shall be discovered until the witness has testified on direct examination at trial.

In her order, Judge Jones stated, “I am not certain that early discovery of the 3500 material will speed up the Defendants’ review of discovery, but even so, I do not have the authority to order the Government to turn over its 3500 material before the statute requires it.”

However, the custom in the Southern District for New York is to turn over 3500 material to the defendant before trial and Judge Jones has directed the Government to advise the Court and counsel when they will produce the 3500 materials. In recognition of the unique circumstances of this case, Judge Jones has urged the Government to turn over the memoranda of statements well in advance of trial to give the defense counsel sufficient time to prepare.

For now though, the defendants’ attorneys must continue to review discovery documents without the aid of statements by prospective government witnesses or other materials from the Audit Committee investigation.

The primary materials for this case are available on the DU Corporate Governance website.  

Sahni studied at Emory University as an undergraduate. Sahni also received the McMullan Award, an award given to a graduating senior who demonstrated outstanding citizenship, exceptional leadership, and great potential to improve their local and global community. Sahni attended Yale law school. As a United States Attorney Sahni has lead prosecutions against gunrunners, drug dealers, and investment fraud linked to terrorists. These cases have yet to go to trial to provide practical experience. However, Sahni's apparent talent for prosecuting conspiracies could prove a useful supplement to the other United States Attorneys.

The primary materials for this post are available on the DU Corporate Governanceweb site.

One of the cases followed by students is the criminal trial of David Stockman.  Students have produced the first post in the case.  It was written by William McEachron, an articles editor for the Blog.  Professor Jeff Hartje supervised the post and discussed the matter with students.

Barnaba was the CFO of Collins & Aikman, Inc., (“C&A”) during the period of the accused fraud. The charges center on a conspiracy between the Board of Directors to defraud C&A’s creditors. The complex nature of the fraud and the subsequent collapse of C&A generated over 10 million documents.

The staggering number of documents prompted the parties to support the creation of an internet based search system. Barnaba and the other defendants consistently rejected offers for hard copies of the documents. Barnaba is the only defendant to file a motion to dismiss based on a violation of his right to a speedy trial.

The Speedy Trial Act requires that a trial commence within seventy days after filing or first appearance, whichever occurs last. The statute contains automatic and discretionary exclusion periods that prevents the seventy days from running against the prosecution. Unique or complex cases often trigger these exclusions to promote the interests of justice. Barbana’s own motions triggered some of the automatic exclusions.

The Speedy Trial Act permits discretionary exclusions when necessary to: (a) organize and prosecute an unusual or complex case; (b) provide the defense with enough time to prepare their case; (c) and prevent injustice. These exclusions do not require the consent of the defendant and are at the judge’s discretion. Discretionary exclusions for one defendant apply to all the defendants when prosecuting multiple defendants or a conspiracy.

Barnaba argued the discretionary exclusions violated the Speedy Trial Act. The United States responded by describing the unique and complex nature of the case. The millions of documents, the complex conspiracy, and the collapse of C&A all make the case difficult to prosecute. In addition, the development of the internet search system proved more challenging and time consuming than initially anticipated. The defendants were aware of this delay, but continued to deny hard copy documents at each of the status meetings. The United States contended they were diligent in developing the system and the discretionary exclusions were reasonable.

The United States then responds to Barnaba's 6^th Amendment argument. The United States argued the delay was reasonable due to the amount of the discovery and the complex nature of the case. Barnaba ’s own motions and the development of an internet based search system caused the delays in the trial. The United States was not responsible for the delays in the trial.

Barnaba argued the delays depleted the defense’s coffers, thus creating a situation where he could no longer afford to defend himself. The United States was unimpressed. For the United States, Barnaba’s argument appeared speculative because he failed to state any precedence supporting his position. The United States requested that the court reject Barnaba’s motion to dismiss because he failed to show a violation of his rights under either the Speedy Trial Act or the 6^th Amendment.

On July 24^th, United States District Judge Barbara S. Jones denied Barnaba’s motion. The Judge followed the United States’ lead in finding the complexity of the case, Barnaba’s own motions, and the defendants’ continued denial of hard copy discovery caused the delays in the case. These delays failed to trigger the Speedy Trial Act or infringe on Barnaba’s rights under the 6^th Amendment.

The primary materials for this post are available on the DU Corporate Governance web site .

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.  

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.

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

• 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.

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. 

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.

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.

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.   

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.

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