Current and former management members of Collins & Aikman Corp., a financially ailing portfolio company of Heartland Industrial Partners, have been named as defendants in several class action lawsuits filed on behalf of the company’s shareholders. One of the defendants is David Stockman, founder of Heartland Industrial Partners. The lawsuits allege that some of the upper echelon of Collins & Aikman, a manufacturer of auto interiors and related products, issued false and misleading statements that significantly overstated the value of its revenues and net income.
The suit contends that Collins & Aikman’s shareholders were led to believe that the company was in prime financial condition until two months before it filed for bankruptcy protection under Chapter 11 on May 17, 2005. Law firms Wolf Haldenstein Adler Freeman & Herz LLP, Murray, Frank & Sailer LLP and Stull, Stull & Brody LLP are among at least 13 law firms that filed class action suits against Collins & Aikman on behalf of investors who purchased public shares in the company between the aggregate dates of May 15, 2003, and March 17, 2005.
Stockman served as Collins & Aikman’s CEO from Aug. 11, 2003, until he resigned from the post on May 12, 2005-five day’s before the company sought bankruptcy protection. Stockman, also the founding partner of Heartland, resigned from his firm less than two weeks later. Other defendants listed are Jerry Mosingo, who served as Collins & Aikman’s president and CEO until Aug. 11 2003; J. Michael Stepp, who served as the company’s vice president and CFO until Oct. 13, 2004; and Bryce Koth, who took over the CFO position when Stepp left the post.
Heartland declined to comment for this story and Collins & Aikman did not return phone calls by press time.
According to the class action complaint filed by Wolf Haldenstein, “Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices and a course of conduct… in effort to assure investors of Collins & Aikman’s value and performance and continued substantial growth…” This, the complaint alleges, was done through misrepresentations and/or purposeful omissions of material facts by defendant’s.
The statements which the suit deemed misleading were made via press releases as well as through forms that were filed with the Securities and Exchange Commission. Among these reports is one dated Nov. 9, 2004, in which Stockman says: “For the fifth consecutive quarter our EBITDA performance, excluding restructuring impairment charges, was up from the prior year on a comparable basis. This was achieved despite the headwinds from increased commodity costs and OEM production cuts. The savings from the restructuring program that began in the third quarter of 2003 has generated significant fixed cost reductions.”
But a less lucrative picture of the company’s balance sheets came to light about six months later. On March 17, 2005, Collins & Aikman announced that it had commenced an internal review of how it was accounting for supplier rebates. In the review, which covered an aggregate of approximately $88 million of vendor transactions during fiscal years 2002 through 2004, the company’s management believes that net adjustments to the tune of $10 million to $12 million will be required for the nine months ended Sept. 30, 2004.
After earning more than $3.9 billion in net sales in 2003, according to its own documents, Collins & Aikman revealed on May 12, 2005-the same day as the announcement of Stockman’s resignation-that it only had $13.4 million in available cash and financing. It filed for bankruptcy protection less than a week later.
“We can speculate with some degree of accuracy that the company was in such financial distress that it was no longer able to keep that distress from the outside world,” said Fred Taylor Isquith, a partner at Wolf Haldenstein. “And when it faced a financial crisis and found itself unable to operate without the protection of the bankruptcy court, it had no choice but to tell the story.”
Collins & Aikman operates 102 plants in 12 countries, with a bulk of its manufacturing operations located in the U.S. and Europe. The company, which employs about 23,000 workers, manufactures plastic automotive interior and exterior trim and a range of products, including automotive fabric, molded carpet, acoustic systems, floor mats and convertible tops.
Major customers of Collins & Aikman include DaimlerChrysler, Ford and General Motors-a trio that accounts for about 75% of its total sales, according to the company. When the three automotive powerhouses slowed production due to less demand, rising gas prices, increased competition, and most recently, the high yield downgrade, Collins & Aikman felt the pinch. Due to the ongoing investigation into the company’s accounting matters, Collins & Aikman has not completed its 2004 audited financial statements and is still in the process of reviewing results for the first quarter of 2005.