Summary of United States v. Stockman

This post concludes and summarizes our coverage of the case United States v. Stockman. The government filed the Indictment in March of 2007 in the Southern District of New York. The named Defendants were David Stockman, Paul Barnaba, David Cosgrove, and J. Michael Stepp. Stockman was the CEO and Chairman of the Board of global auto parts manufacturer Collins & Aikman, Inc (C&A). Barnaba was the Director of Financial Analysis for the Purchasing Department, and later the Vice President and Director of Purchasing for the Plastics Department. Cosgrove served as Group Controller for the Plastics Group. Stepp was Vice Chairman of the C&A board.

According to the Indictment:

·          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 financial covenants. 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 performance ratio measured by C&A’s net debt divided by EBITDA. Discussed here.

The indictment alleged that Stockman and the other defendants joined in a scheme to defraud C&A’s investors, banks, and creditors by manipulating C&A’s reported revenue and earnings because of the operational pressures and covenants to keep C&A’s financial performance at certain levels.

C&A provided Defendants with Director & Officer Insurance (D&O Insurance) to help with the cost of defending against the indictment. The burn rate of the D&O policies quickly became another issue as the policy depleted by an estimated $1.67 million per month for Defendant Paul Barnaba. Total coverage under the policy was $50 million. For discussion of the adequacy of $50 million D&O insurance for a company the size of C&A see Stockman and the Limits of D&O Insurance and US v. Stockman and the Burn Rate on the D&O Policy.

As the D&O policy diminished, the number of documents increased to 12 million. On April 8, 2008 Barnaba filed a motion to dismiss, alleging violation of his constitutional right to a speedy trial. Discussed here. The government argued that the number of documents in discovery justified the trial delay. Judge Barbara Jones agreed with the government, and denied Barnaba’s motion to dismiss in the July 24, 2008 status conference.

Barnaba continued his effort to speed the trial along by filing a motion to sever on August 25, 2008. Discussed here. Barnaba argued that he:

·       has not been able to pay counsel for 2.5 months and his Motion for Appointment of Counsel under the Criminal Justice Act filed August 18, 2008 was still pending. Barnaba claimed that he was ready for trial and making him wait until May 2009 would “impair [his] ability to put on an effective defense due to his limited resources.

Judge Jones orally denied Barnaba’s Motion to Sever during the August 25, 2008 status conference. Barnaba filed a second Motion to Sever in October of 2008. Discussed here.

On January 9, 2009 the Government filed a Nolle Prosequi, dismissing the charges against Stockman, Barnaba, Cosgrove, and Stepp. The Government provided little reasoning for the dismissal by stating:

·          After a renewed assessment of the evidence, including evidence and information acquired after the filing of the Indictment, it has been concluded that further prosecution of David A. Stockman, J. Michael Stepp, David R. Cosgrove, and Paul C. Barnaba would not be in the interest of justice.

Professor Brown speculated as to what may have happened in his post The Stockman Dismissal: What Really Happened? He indicated that contributing factors to the dismissal may have included the amount of government resources exhausted by the 15 million documents in discovery, the vigorous defense put up by defense counsel, and the Southern District’s preparation for the Madoff case.

For documents filed in the Stockman case (including many of the status hearings before the trial judge), go to the DU Corporate Governance web site.

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