From The Detroit News

TROY, MI — Delphi Corp., already on the verge of bankruptcy and cooperating with a massive federal investigation into its accounting practices, now faces a new inquiry into stock trades made by more than a dozen former and current employees.

The U.S. Securities and Exchange Commission has subpoenaed the stock trading records of executives who left the company since March, including CFO Alan Dawes, Controller Paul Free, Treasurer Pam Geller and John Blahnik, a former vice president of treasury, mergers and acquisitions, said four people familiar with the investigation.

At least another eight current and former executives and mid-level employees have received subpoenas for trading records dating back to the company’s spinoff from General Motors Corp. in 1999, people familiar with the investigation said.

A separate criminal investigation into the huge Troy, MI-based auto supplier’s accounting practices led by the Justice Department’s fraud section and the FBI is continuing.

Former Chairman and CEO J.T. Battenberg III is represented by Washington lawyer William H. Jeffress in the investigation. Jeffress declined to say whether Battenberg has been subpoenaed.

It’s unclear what prompted the latest subpoenas, and whether the SEC is focusing on specific trades made by executives.

James Burdick, a Bloomfield Hills, MI, attorney who has handled securities fraud cases, said the SEC has taken a great interest in insider trading, noting the recent investigation of Sen. Bill First.

“This is a logical next step in an investigation,” Burdick said.

Joseph E. Papelian, assistant general counsel at Delphi, declined to comment. A Delphi spokeswoman had no comment.

Delphi has admitted to improperly accounting for hundreds of millions of dollars in transactions, including overstating cash flow by $200 million in 2000 and income by $61 million in 2001.

The SEC has had a formal investigation into Delphi’s accounting practices since August 2004. The probe is being led by Jonathan Scott, an SEC lawyer in Washington.

Delphi shares have dropped steadily from $8.50 in January.

On Wednesday, Delphi shares dropped 10 cents to close at $2.65. The company is threatening to file for Chapter 11 bankruptcy protection unless it can wrestle concessions from the United Auto Workers and secure a financial bailout from GM before Oct. 18 when stricter bankruptcy laws take effect.

GM was subpoenaed by the SEC in April to turn over records in connection with the Delphi transactions. GM has been hiring outside defense lawyers to represent several company employees involved in the Delphi transaction, people close to the investigation say.

Typically, a company hires lawyers to represent employees who are to be questioned by investigators, as Delphi has done on behalf of about 20 current and former employees.

For months, GM has been producing documents in response to questions from the SEC. GM spokeswoman Toni Simonetti declined Wednesday to comment on the “ongoing investigation” or comment on whether any GM employees have been subpoenaed to testify before the SEC.

Delphi continues to answer additional questions and requests for documents from the SEC since it turned over the results of its 10-month internal investigation in June.

As part of the investigation, Delphi created an database of more than a million company e-mails by “imaging” or copying the hard drives of computers of top executives. The SEC has asked company lawyers to search the database for specific phrases in recent months.

In June, The Detroit News reported that internal investigators searched for journal entries and e-mails that had terms like “fraud” and “accounting” or “jail” and “accounting.” The searches also focused on transactions in question.

The SEC has also scrutinized Delphi transactions involving Bank One and Delphi’s independent auditor, Deloitte & Touche and Southfield, MI-based turnaround firm BBK Ltd.

The SEC has questioned a number of current and former employees, with some sessions lasting 16 hours over two days.

Following an investigation completed in June, Delphi reduced 2001 earnings by $265 million, cut 2002 net income by $24 million and trimmed the company’s 2003 net loss by $46 million.

Delphi said it has agreed with the SEC to waive the statute of limitations for its investigation until April 6, 2006. Lawyers for some of the executives have been sent waivers by the SEC asking them to waive the statute, people familiar with the probe say.

The investigations are centered on whether Delphi officials were intentionally involved in fraudulent bookkeeping in order to make internal financial targets and hide the company’s declining financial condition.

Dawes was ousted in March when accounting irregularities came to light and Delphi directors said they no longer had confidence in him.

The SEC has obtained hundreds of thousands of pages of company documents, while investigators and the FBI have conducted dozens of interviews with current and former employees.

In July 2004, EDS went to the SEC about a rebate transaction with Delphi, essentially a $20 million loan EDS had given Delphi that the supplier treated as income.

By late July, the SEC had given Delphi a subpoena for records connected to the transaction. And in August, the SEC informed Delphi that it had opened a formal probe.

After receiving the order, Delphi’s audit committee hired Wilmer Cutler in late August to conduct an internal review of the transaction.

2005 The Detroit News. All Rights Reserved.

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