Reagan Aide Stockman Targeted in Fraud Probe

David A. Stockman was budget director early in the Reagan administration. (By James K.w. Atherton -- The Washington Post)

To old hands in Washington, David A. Stockman will always be the long-haired numbers cruncher who led the cheers for Reaganomics but nearly lost his job for privately denigrating the administration's budget at the same time he sold it to the public.

Stockman's trip "to the woodshed" with President Ronald Reagan and his denouncement of the "rosy scenario" of White House fiscal policy helped coin political phrases that linger in the capital's lexicon more than two decades after he left government.

Now the man who put one over on Congress could face far more severe consequences for possibly misleading Wall Street.

Lawyers at the Securities and Exchange Commission recently notified Stockman that he could face civil charges related to upbeat statements he made to investors two months before an auto parts company he ran sought bankruptcy protection last year, according to sources familiar with the issues who spoke on condition of anonymity because the investigation continues.

Securities regulators are examining the role Stockman and other former executives played in alleged financial irregularities at Collins & Aikman Corp., with an eye on whether Stockman may have lied to investors by telling them the company's finances were being "managed quite effectively" when he was aware of mounting problems. Federal prosecutors have also subpoenaed financial records from the company.

Stockman, 59, declined interview requests. But two sources sympathetic to him who spoke on condition of anonymity because of the ongoing investigation said Stockman did nothing wrong. Rather, they said, he knocked himself out to save Collins & Aikman from crippling industry forces that sent several competitors into bankruptcy proceedings.

The sources said Stockman had no motivation to commit fraud. He apparently did not sell Collins & Aikman stock he owned during his tenure there and doubled his personal holdings to more than 300,000 shares between August 2004 and the day he left the Southfield, Mich., company in May 2005.

Stockman did not receive a salary or stock options from Collins & Aikman. Instead, the privately operated investment partnership he ran, Heartland Industrial Partners L.P., struck a deal that required the parts maker to pay it annual fees in exchange for financial services and Stockman's advice. Heartland bought a stake in Collins & Aikman in 2001 for $260 million and ultimately invested another $100 million in the company. The fee agreement is a relatively typical arrangement among Wall Street buyout firms and their portfolio companies, but it also makes it hard to know how much Stockman collected and what his incentives were as he ran Collins & Aikman. Stockman did not earn more money under the terms of the deal, nor did Heartland, after he became chief executive of Collins & Aikman in 2003.

Collins & Aikman agreed to pay Heartland $4 million each year as an advisory fee and to reimburse the partnership for out-of-pocket expenses and other services. It also agreed to give Heartland 1 percent of the value of acquisitions -- and there were many, valued at more than $1 billion total.

Between 2001 and 2004, a time when Collins & Aikman reported annual losses, Heartland received more than $44 million from the auto parts company, according to securities filings and a shareholder lawsuit. The money went into Heartland's coffers. How it was distributed among Stockman and his partners remains unclear. The percentage Stockman owns of Heartland, which operates with few public disclosure requirements, could not be determined. He stepped aside as managing partner last year.

A self-described Michigan farm boy who won a House seat before becoming one of the youngest Cabinet officials in history, Stockman was a key player in pushing Reagan's "supply side" economic platform, a crucial facet of the president's domestic policy, which reasoned that benefits from big tax cuts for corporations and wealthy individuals would trickle downhill to the middle class.

But as he made bold public pronouncements supporting the plan, Stockman and William Greider, a Washington Post editor at the time, for months privately discussed "Trojan horses" and "magic asterisks" that hid mounting budget deficits. Stockman grew disenchanted with politics, criticizing opponents and his own party for failing to cut entitlement programs and bring the deficit under control. Greider eventually published a magazine story containing Stockman's statements, which almost got the young White House aide fired.