Delphi ex-CEO has his day in court

FORTUNE -- Early in his working life, J.T. Battenberg III was tabbed as a rising star at General Motors. Armed with an MBA from Columbia, he made his way up the company's ladder quickly by working in the plants.

At the young age of 42, he crossed over to marketing and became head of the Buick-Oldsmobile-Cadillac luxury group -- a career-topping assignment for many executives.

After GM's first brush with bankruptcy in 1992, Battenberg was handed one of the toughest jobs in the company -- making its inefficient and money-losing automotive components group competitive with outside suppliers.

Battenberg reorganized it, disposed of pieces that were non-strategic or merely obsolete, renamed it Delphi, and spun it off in an initial public offering in 1999.

For a time, Delphi seemed to prosper. But when GM, its biggest customer, cut back production, the company faltered. Early in 2005, Battenberg, then 61, abruptly announced his retirement.

Days later, the company admitted to irregular accounting practices and financial transactions to boost reporting earnings. Battenberg's protégé, CFO Alan Dawes, resigned after the board "expressed a loss of confidence in him."

The creative bookkeeping couldn't stave off financial collapse. Delphi went into bankruptcy later that year and didn't emerge until 2009.

Back in 2005, the company had settled the accounting issues with the SEC without admitting guilt or innocence and without paying civil penalties. Six individuals, including Dawes but not Battenberg, agreed to pay fines totaling more than $1.4 million.

The SEC continued to pursue charges against Battenberg and three other former Delphi executives, and last week, Battenberg went on trial in Detroit. He is accused of helping to orchestrate the improper accounting of a GM warranty payment to Delphi's reported earnings.

For Battenberg, the charges further dimmed a once-glittering career that, he hoped, would have had Delphi at its peak.

Although running a parts operation was far less glamorous than selling Buicks and Cadillacs, Battenberg had become personally invested in making Delphi a success. He recruited a blue-ribbon board of directors, including industrialist Roger Penske and former CBS (CBS, Fortune 500) CEO (and GM director) Thomas Wyman. With his perfectly-coiffed hair and starched white shirts, Battenberg had become Delphi's public face.

The commencement of the trial, which continues this week, raises some perplexing questions. Why didn't Battenberg settle with the SEC along with Dawes? Was he so intent on clearing his name that he demanded his day in court? Or had he, in fact, crossed a blurry line of guilt and innocence and hoped to strike a better deal by waiting out the SEC?

The basic facts in the case are not in dispute. After the spinoff in early 2000, GM demanded Delphi pay $800 million in warranty costs for parts Delphi had sold to GM before the spinoff.

Delphi resisted. The claim seemed unfair and the amount seemed excessive; when GM spun off Delphi in 1999, it had only set aside $53 million in reserves for warranty claims. After intense negotiations, Delphi agreed to pay GM $237 million.

For newly-public Delphi, the expense would make a big dent on the bottom line. But Delphi treated more than 85% of the amount as an actuarial loss in its pension fund rather than an expense. That enabled the company to report $148 million in net income in the third quarter of 2000, instead of a net of $15 million. (Delphi later restated the charge, recording the entire payment as a warranty expense).

Battenberg's lawyer says Battenberg was too busy running the company to pay attention to accounting matters and that he depended on the advice of outside auditors.

In a statement, Battenberg said the SEC complaint "relates entirely to a settlement of disputes...that I believed and continue to believe was entirely lawful and proper."

But a different picture of Battenberg emerges from a 2005 investor lawsuit filed in U.S. District Court in New York against Delphi and its IPO underwriters, which was settled for $342.1 million. It depicts Battenberg as an executive trying to prop up a failing company and line his pockets at the same time by using imaginative bookkeeping.

At the time of the IPO, which went out at $17 per share, Battenberg presented an optimistic long-term business plan for Delphi, with a gradual reduction of the company's reliance on GM as its primary customer. He proclaimed that by 2002, he wanted Delphi's earnings per share to grow by more than 10% a year.

As is common, Battenberg and other senior executives were to be rewarded with bonuses based on the company's performance. Based on financial results in its first fiscal year as a stand-alone company (1999), Battenberg received a $2.2 million bonus on top of his $1.2 million salary.

But in 2000, Delphi's business plan began to unravel as GM cut production. Yet Delphi surprised analysts and investors by continuing to report profitable quarters. For three years, the investor suit states, Delphi was consistently able to meet or exceed analyst earnings expectations.

At the time, Delphi's profitability was publicly attributed to greater efficiencies and cost-cutting methods that were allegedly creating greater margins.

Far from being ignorant of accounting practices, the suit alleged that "through his experience at GM and Delphi, Battenberg was intimately familiar with all aspects of the company's business and finances, including its accounting for warranties, rebates and rebate credits from suppliers, inventory financing transactions."

According to confidential sources quoted in the lawsuit, Battenberg and Dawes together pressured their accounting managers to make the numbers work despite deteriorating economics. The two men had a habit of saying "I don't like this picture" or "I don't like what this picture is telling me" when presented with a financial analysis that didn't meet their plan. Subordinates interpreted that as meaning, "change the numbers, rework it."

The litigants also found the timing of Battenberg's retirement announcement "highly suspicious." Rather than sticking to a longstanding plan to step down from his post, as Battenberg would explain later, "it plainly suggests an exit strategy to avoid humiliation and blame for the fraud that occurred under his leadership at the Company."

Now, Battenberg is getting his day in court to see if he can continue to avoid humiliation and blame and restore his reputation to its former luster.