Investors in Delphi file suit
October 6, 2005
Bloomberg News

Delphi and several former and current senior executives engaged in a series of sham sales of worthless inventory designed to improve the company's bottom line, shareholders have claimed in a lawsuit in New York. Delphi, the biggest maker of auto parts in the United States, sold "problematic inventory" to third parties for "enormous sums of money," two state pension funds and two European funds claim in the class action suit. Delphi agreed to buy the material back later, while recording almost $300 million from those transactions, the investor complaint claims.

"Delphi knowingly gave the investing public a misleadingly positive impression of its financial performance by creating the appearance of income and cash flow-generating sales that were in reality disguised loans," according to the Sept. 30 complaint. The U.S. Securities and Exchange Commission has been investigating Delphi, which began an internal audit after the company found it had misstated finances for at least three years. The company is considering bankruptcy as it seeks financial aid from its former parent, General Motors, and concessions from its unions.

"Delphi doesn't comment on court proceedings," said Steve Gaut, a spokesman for the company in Europe. Delphi's chief executive officer, Steve Miller, who took over in July, has said he may take the company's U.S. operations into bankruptcy as early as Oct. 17, if it does not get financial aid from General Motors and concessions from unions. Delphi posted a $741 million first-half net loss as GM, its biggest customer, reduced production amid slumping U.S. sales.

Delphi improperly booked proceeds from the sales as income to increase cash flow and earnings from 1999 to 2001, the investors say in the suit. Delphi, based in Troy, Michigan, also made $202 million in warranty settlement payments in 2000 to GM and booked them as pension settlements, the complaint said, citing a Delphi earnings restatement. Doing so allowed the company to record the expense over several periods rather than all at once, the complaint says, shoring up the bottom line for 2000.

The complaint also says Delphi prematurely recognized $50 million in warranty credits received from GM and failed to record a $410 million warranty obligation. The investors sued Delphi, nine investment banks, an accounting firm, six former or current Delphi executives, 15 former or current directors and two other companies as defendants. GM is not named as a defendant...