Funds sue Delphi over 3rd-party deals

NEW YORK October 5, 2005; Reuters reported that two U.S. state pension funds and other large investors have sued Delphi Corp., contending that executives at the troubled auto parts supplier made bogus deals with third-party vendors aimed at hiding the company's financial problems.

The lawsuit, whose lead plaintiffs include the Teachers' Retirement System of Oklahoma and the Public Employees' Retirement System of Mississippi, was filed in federal court in New York on Friday and seeks class-action status.

The suit contends that Delphi concocted a "broad and complex scheme to lie about its financial results" after it was spun off from long-time parent General Motors Corp. in 1999 and faced competitive pressures.

The suit names the company, current and former directors including former CEO J.T. Battenberg III, former Chief Financial Officer Alan Dawes, outside auditor Deloitte & Touche LLP and others as defendants.

Delphi spokesman Lindsey Williams declined to comment on Wednesday, saying the company does not comment on pending litigation.

According to the suit, senior Delphi executives instructed subordinates to violate accounting rules overseeing how revenue and expenses should be recognized.

"The fraud could not have succeeded, or achieved the magnitude it did, without the direct participation of third parties who were all too willing to engage in sham transactions intended to falsify Delphi's reported financial results," according to the complaint.

From 1999-2001, the lawsuit contends, the company entered into a string of deals in which it purported to transfer assets to third parties in exchange for hundreds of millions of dollars, with an associated obligation to buy back the same assets.

"Rather than disclosing these transactions as the off-balance sheet financings that they actually were, Delphi falsely presented the proceeds of these loans as though they were the product of asset sales in the ordinary course of business," according to the complaint.

Delphi has struggled since its spin-off from GM, posting net losses of $741 million in the first half of this year on high wage and benefit costs, lower production on key models at GM and high raw materials prices.

The company has been in talks with GM and the United Auto Workers, the union that represents many of its workers, on a deal that would help it drastically cut costs. The company has said it may have to file for bankruptcy protection if GM and the UAW do not aid in a bailout.

Besides the Oklahoma pension fund, which has more than $7 billion in assets under management, and the $16 billion Mississippi public employees pension fund, other plaintiffs include Raiffeisen Kapitalanlage-Gesellschaft, a mutual fund manager in Vienna, Austria, and Stichting Pensioenfonds ABP, a public pension fund in the Netherlands.

The plaintiffs' lawyers include attorneys from law firm Bernstein Litowitz Berger & Grossmann LLP, which played a major role in winning a $6.1 billion class-action securities settlement for former WorldCom Inc. investors.