Reagan Budget Head Stockman Is Charged With Fraud

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By Carrie Johnson
Washington Post Staff Writer
Tuesday, March 27, 2007

NEW YORK, March 26 -- David A. Stockman, a chief architect of President Ronald Reagan's economic revolution turned Wall Street money man, was indicted Monday on charges of conspiracy, securities fraud and obstruction of justice.

Stockman, 60, who faces the prospect of three decades in prison, is accused of defrauding investors and banks during his stewardship of Collins & Aikman, a large Southfield, Mich., auto-parts maker that descended into bankruptcy in 2005.

First elected to the House of Representatives at age 30, the boy wonder grew in stature when he was named Reagan's first director of the Office of Management and Budget. In that post he became the highly visible point man for the "trickle-down" economic doctrine of the 1980s. But his private conversations about the budget with a journalist instigated a falling out with Reagan, who took him, he said, to the "woodshed." Disillusioned with Washington, Stockman eventually left for the world of investment banking in New York.

Stockman turned himself in at the U.S. Postal Inspection Service on Church Street in lower Manhattan shortly before 10:30 a.m., when investigators removed his blue-and-gold tie as a security precaution. Two hours later, he appeared in court wearing a navy pinstriped suit, tasseled loafers and a pair of tortoiseshell glasses. In a firm voice, Stockman pleaded "not guilty." He was released on a $1 million personal recognizance bond.

Manhattan U.S. Attorney Michael J. Garcia said that Stockman and a team of handpicked executives entered into secret agreements with suppliers, created false documentation to fool auditors and lied repeatedly about a cash squeeze to ensure that banks would continue to finance their operations. Stockman also misled company investigators examining deals between Collins & Aikman and a business owned by a board member, according to the grand jury indictment.

"Stockman did not only have money at stake," Garcia said at a news conference. "His reputation was on the line as well."

Prosecutors charged three other former Collins & Aikman officials, including a former finance chief and a former controller. Four other employees have pleaded guilty and agreed to testify against their onetime supervisor.

Outside the courthouse, Stockman presided over an impromptu news briefing, calmly discussing his efforts to move to a motel and work 16-hour days to save the company in the midst of an unprecedented cash crunch. "I took from my pocket to help," Stockman said. "I didn't line my pockets in any way."

By all accounts, Stockman operated Collins & Aikman with both hands on the wheel, fielding questions from reporters and analysts, negotiating directly with key clients, hoisting a canvas sack filled with fiscal projections and installing trusted subordinates into top posts at the auto firm, which once equipped more than 90 percent of all North American vehicles with dashboards, floor mats and other parts.

He is pursuing his defense in the same driven, detail-oriented way. Stockman blasted the charges against him as "hypertechnical" disputes about accounting policies and business judgments in an environment where board members still run scared from lawsuits after scandals at Enron and WorldCom. Stockman and prominent New York defense lawyer Elkan Abramowitz met twice with law enforcement officials in an unsuccessful bid to prevent the government from bringing the case after nearly two years of investigation.

At their news conference Monday, investigators pointed to what they called "purposeful lies" by Stockman and his team, all with an eye aimed at digging Collins & Aikman out of an ever-deepening financial hole. Ron Walker, inspector in charge of the Postal Inspection Service's New York division, said Stockman and his allies engaged in "increasingly desperate attempts to lie to lenders . . . to get them to throw good money after bad."

Stockman blamed his May 2005 ouster from the company and the multiple federal probes that followed as a "reckless spasm" of the Sarbanes-Oxley corporate accountability law. He argued that his case could not be more different than accounting scandals five years ago. "This wasn't any kind of joyride," he said. "This was Detroit" at a time when auto suppliers and the Big Three car makers were struggling to survive.

Stockman is almost certain to take the witness stand when the case goes to trial no earlier than next year, in part because he already has provided sworn testimony to securities regulators. Abramowitz told reporters Monday that the idea of a guilty plea "never came up."

A former babysitter for then-Sen. Daniel Patrick Moynihan (D-N.Y.), Stockman enjoyed a meteoric rise. He served two House terms as a Republican from Michigan and, at 34, was appointed the youngest Cabinet secretary in a century. Stockman's eventual exit from government in the mid-1980s made him hugely wealthy. The long-haired workaholic with the oversized eyeglasses wrote a book about the perils of political life and the struggles of truth-telling in Washington. Eventually he joined the Blackstone Group, a lucrative private investment partnership that brought him tens of millions of dollars.

But he remains best known for his bold projections as Reagan's first OMB director. Reagan chastised his young budget chief for expressing doubts to a Washington Post editor about massive defense spending, tax cuts and the resulting deficits at the same time he was selling the plan to the public and the Congress. The article threw Washington into uproar.

Stockman and his advisers hasten to point out that he and his Greenwich, Conn., investment firm, Heartland Industrial Partners, lost more than any other investor when Collins & Aikman veered off course. Heartland poured $360 million into the auto business, and Stockman lost $13 million more. Moreover, Stockman said he and Heartland continued to buy stock throughout his tenure at the company, on more than 150 trading days between 2002 and 2004, without unloading shares on the open market.

Linda Chatman Thomsen, enforcement director at the Securities and Exchange Commission, which filed related civil charges against Stockman on Monday, said that Heartland had received $45 million in fees and services over Stockman's tenure, half of which she said Stockman personally collected. Government lawyers are seeking forfeiture of more than $1.35 billion, a portion of the $1.6 billion in outstanding debt and financing the company received from such banks as Credit Suisse and J.P. Morgan Chase, lead prosecutor Helen V. Cantwell said.

In the end, Collins & Aikman, founded in 1843, will not survive intact. The company, which will pay no criminal or civil fines in connection with Monday's court filings, shed more than 11,000 employees. Current officials are selling off the company in pieces, a process that may be complete long before the Stockman case goes to trial.


© 2007 The Washington Post Company

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