Reagan Aide Stockman Targeted in Fraud Probe

By Carrie Johnson
Washington Post Staff Writer
Friday, September 8, 2006

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.

After leaving the government, Stockman received more than $2 million for a tell-all book, in which he skewered friends, enemies and himself. In it, Stockman wrote about his thought process as chief of the Office of Management and Budget, citing the hope that he and other officials could dig themselves out of the growing deficit hole. "All along I had assumed that somehow tomorrow it would all work out . . . All we needed was one more inning," he wrote.

Stockman, like many former politicians, decided to try his luck on Wall Street. He joined Salomon Bros. Inc. in an arrangement that both sides eventually agreed was a bad fit. Stockman preferred to crunch numbers rather than schmooze clients, colleagues told the Wall Street Journal at the time. Then he joined the Blackstone Group, a private New York investment fund that buys public companies with a little money down and lots of borrowing, then reshapes and ultimately sells them at large gains. Stockman prospered at Blackstone, taking a leading role in 10 deals with a combined value of $10 billion, including one involving Collins & Aikman, according to a biography since removed from the Heartland Web site.

His Blackstone tenure helped make Stockman wealthyHis stock sales of one company, GrafTech International Ltd., in the late 1990s had a market value of more than $800 million, according to securities filings.

Stockman is married to Jennifer Blei Stockman, a technology consultant. Friends credit Blei with giving the bookish Stockman social pizazz. In recent years, she has served as president of the Guggenheim Foundation and co-chair of abortion-rights group the Republican Majority for Choice. The Stockmans have two daughters, one of whom has attended Northwestern University. The couple owns a Greenwich, Conn., estate that was assessed at more than $11 million in 2003 and another multimillion-dollar home in Aspen, Colo.

Stockman's investment in Collins & Aikman was supposed to mark the triumphant return to the state he once represented in Congress. As part of a broader plan at Heartland to reinvigorate depressed Rust Belt companies, Stockman poured millions of dollars into Collins & Aikman, eventually becoming chief executive after he and the board expressed dissatisfaction with previous managers.

A lawsuit filed last year by debt-holder MacKay Shields LLC claimed that Stockman had a thorough grasp of the finances at Collins & Aikman, which outfits more than 90 percent of the vehicles made in North America with such items as cup holders, dashboards and floor mats. Stockman served as the company's chief liaison with Wall Street and investors, from whom he fielded increasingly pointed questions.

As costs for materials mounted and demand from the nation's biggest automakers dwindled, eventually squeezing Collins & Aikman's rivals into bankruptcy, Stockman acknowledged a "maelstrom" in the industry and said cash was a "challenge." On a March 17, 2005, conference call, Stockman assured Wall Street analysts that the company could manage its way out of trouble. He went on to call the rumors about a cash crisis "totally false" and said, according to conference call transcripts, "We're in a very good position over the next few weeks and months to improve our liquidity."

The sources sympathetic to Stockman said he genuinely thought that the company had enough cash and that he could force customers, including DaimlerChrysler AG, to accept price increases, giving it more room to maneuver.

In early April, an independent analyst issued a report asserting that the company's liquidity "is not as strong as recent headlines depict" and predicting that "bankruptcy is a definite possibility." Stockman raced to hit the phones, securing a $75 million line of credit from lenders, according to a company news release.

It was not enough. Stockman clashed with the board, which prodded him to resign May 12. Five days later, Collins & Aikman filed for bankruptcy protection. News reports at the time of Stockman's departure said company insiders had criticized Stockman for keeping information about the company's troubles too close to the vest.

The company's current management team has painted a dire portrait of Collins on the eve of its bankruptcy. Collins executives had "almost no working capital, had no source of liquidity and were leveraged," according to bankruptcy court documents filed last week. "The debtors had a negative cash balance and faced imminent interruptions in production . . . Cash management systems were in disarray."

Collins & Aikman is conducting its own investigation, for which the company's lawyers have reviewed 3 million documents and interviewed at least 70 current and former employees, according to papers filed with the bankruptcy court. The lawyers are negotiating with the SEC over whether Collins & Aikman will be required to pay fines to settle possible civil charges related to its accounting practices, the documents indicate. Dennis E. Glazer, a lawyer at Davis, Polk & Wardwell who is representing the company's board, declined to comment. A spokesman for Collins & Aikman said the company is "cooperating" with investigators.

Researcher Richard Drezen contributed to this report.