Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010 - (Page E28)

Page E28 CRAIN’S DETROIT BUSINESS May 3, 2010 Scandals and Dubious Deeds Decades had their share of misdeeds here are watershed moments in the lives of people and organizations when they don’t measure up. From taking shortcuts with corporate accounting to misleading employees and constituents, Detroit has had its share of scandals and misdeeds. T Kilpatrick saga continues Kwame Kilpatrick was elected Detroit’s youngest mayor in 2001 at the age of 31. In 2008, he stepped down after a train of events set in motion by a Detroit Free Press series of stories exposing text messages showing that he lied under oath about an affair with his chief of staff in a whistleblower lawsuit that ultimately was settled for $8.4 million. Kilpatrick Kilpatrick pleaded guilty to obstruction of justice and served 99 days in the Wayne County Jail. After his release in 2009, Kilpatrick, his wife, Carlita, and their three sons moved to a suburb of Dallas, where he is employed by Covisint, a unit of Detroit-based Compuware Corp. But the final verse in the Kilpatrick ballad has yet to be written. Kilpatrick has said he can afford only $6 a month in restitution payments, but a Wayne County Circuit Court judge found hidden funds and records of lavish spending. The fall of Monica Conyers Monica Conyers at first swept into the Detroit City Council on a tide of goodwill. The wife of U.S. Rep. John Conyers had campaigned on a platform of integrity, saying she’d put the city before personal interests. In the 2005 election, the political newcomer finished second only to veteran councilman Ken Cockrel Jr., earning the job of council president pro tem. But in 2008, Conyers Conyers made waves at the Democratic National Convention when police were called to her Denver hotel on reports she had caused a disturbance over the size of her room. The same year she called Cockrel “Shrek” in a meeting. In late 2008, she rose to council president when Cockrel became mayor following Kilpatrick’s resignation. But in 2009, she pleaded guilty to federal charges of conspiring to commit bribery, after switching her vote on a sludgehauling contract. This spring, she was sentenced to 37 months in jail to begin by July 1, but at press time was trying to withdraw her guilty plea. The SEC alleged in the suit that Delphi, Battenberg and six other executives engaged in a series of accounting schemes that misstated its financial performance and misled investors. The allegations date back to irregularities first spotted in 2000. The SEC said Delphi logged rebates it received as a one-time revenue source, rather than accounting for the rebates over the life of a contract. That practice and other off balance-sheet arrangements inflated pretax earnings by $60 million in 1999, $61 million in 2001 Battenberg and $116 million in 2000. A shakeout followed. Leaving were CFO and Vice Chairman Alan Dawes and Chief Accounting Officer and Controller Paul Free. Vice President of Treasury John Blahnik was reassigned to a nonexecutive job. Battenberg announced his resignation nine days before a March 4, 2005, Securities and Exchange Commission filing detailing the extent of the scandal. Last month, U.S. District Judge Avern Cohn called Battenberg “reckless” for not ensuring the financial documents he signed were accurate and decided the case will go to trial. was out of baseball — and deep into behavior that would eventually earn him stints in jail. He was indicted in 1984 by the U.S. JusMcLain tice Department under the Racketeer Influenced and Corrupt Organizations Act and for cocaine trafficking, but he ended up serving just three years of a 23-year sentence. In 1993, McLain invested in the Chesaning-based meat-packing Peet Packing Co., which declared bankruptcy two years later. McLain was convicted in 1996 of embezzlement, money laundering, mail fraud and conspiracy linked to the disappearance of $2.5 million from the company’s pension fund. He served six years of an eight-year sentence. That plan imploded, as a string of canceled orders from the Detroit 3 pushed Henderson to sell the company. Henderson delayed payHenderson ments to suppliers to stay afloat, and though he got $15.1 million in the sale, he owed about twice that to creditors, who soon forced a Chapter 7. Later, after retreating to his second home in Tampa, Fla., Henderson filed for personal Chapter 11 to shield his assets. Lump of coal for investors Barton Greenberg was living a jet-set lifestyle in 1986. The 44-year-old founder of Bloomfield Hills-based Diamond Mortgage Corp. and affiliate A.J. Obie & Associates had a private airplane, horse farm and expensive home in Genesee County. But in August 1986, Michigan’s attorney general charged him with operating a Ponzi scheme. That was bad news for the 3,026 investors who had plunked down $74 million to invest in mortgages with yields of 12 percent to 14 percent with Diamond and Obie. Investigators said only $24 million of that was used to invest. Greenberg wound up facing numerous charges of securities fraud and improperly using company money. The companies were shut down by the state. Greenberg was sentenced to six to 10 years in prison. Collins & Aikman dissolves Big deals and big losses at Collins & Aikman kept it in the headlines for much of the past decade. The CEO was also in the crosshairs of federal regulators, who in 2007 charged him with eight counts of securities fraud. Eight other executives also were indicted for misleading Stockman investors. David Stockman, the former congressman from Michigan and Reagan administration budget czar, grew Collins & Aikman through acquisitions into an auto interiors giant that posted more than $4 billion in annual revenue at its peak. Stockman jumped ship in the midst of a cash flow crisis, just days before a Chapter 11 bankruptcy filing in May 2005. Four executives pleaded guilty shortly after the charges were filed. The fraud charges against Stockman were dropped in 2009, but the SEC continued a civil lawsuit, and Stockman agreed to pay $7.2 million in a settlement made public in April. itors out of $256 million by fraudulently churning houses through a web of subsidiaries, affiliated companies, limited partnerships and limited liability companies. One house in Detroit, for example, after a series of straw purchases, grew from a value of $8,500 in July 1995 to $111,000 by March 1999. Quinlan pleaded not guilty, but in 2005 was sentenced in a plea deal to 10 years in prison and ordered to make full restitution of $256 million. A handful of other company executives — former President and COO Lee Wells; CFO Quinlan Keith Pietila; controller Alexander Ajemian; VPs Cheryl Swain and John O’Leary; and Kevin Lasky, head of the special loan group — served varying prison terms; all have been released. S&L scandal hits the Pontch Though Phoenix resident Charles Keating earned national notoriety for the Lincoln Savings and Loan Association scandal in California, his failed loan portfolio impacted Detroit as well — it put the Pontchartrain Hotel into federal ownership for three years starting in 1989 after Keating’s loans were seized. Sadly, it’s not the only time the hotel’s ownership has been in limbo, with the 422-room hotel currently for sale by a court-appointed receiver after its latest owners defaulted on loans. Madoff’s Detroit connections Bernie Madoff’s epic Ponzi scheme had ripple effects that reached metro Detroit from its Wall Street epicenter. Madoff, a former Nasdaq chairman, admitted in March 2009 that he bilked investors for upwards of $50 billion in his fraudulent scheme through Bernard L. Madoff Investment Securities L.L.C., and he got a 150-year prison sentence and forfeiture of $170 billion in assets. The Ann Arbor-based Fair Food Foundation was forced to shut down in December 2008 when its primary donors, local philanthropists Jeanne and Kenneth Levy-Church, learned they had lost money with Madoff. They had committed $20 million. Other local Madoff victims included Detroit’s Lutz News Co., Todd-NYCBM Co. L.L.C. of Farmington Hills and a number of individuals and trusts. LoanGiant tumbles Southfield-based subprime mortgage lender World Wide Financial Services Inc., which did business as LoanGiant.com, was one of the early casualties of the lending crisis. The Southfield-based company filed for Chapter 11 bankruptcy protection on Oct. 4, 2005. In September 2004, the state had ordered LoanGiant to stop alleged fraudulent mortgage loan and documentation practices. Michigan’s Office of Financial and Insurance Services said an eight-month investigation of consumer complaints showed that LoanGiant had improperly qualified loans, falsified documents, misrepresented financial information and failed to keep appropriate records. The state in May 2006 revoked World Wide Financial’s license to write mortgage loans, and the company agreed to fines. Taubman rebounds While A. Alfred Taubman is well known as one of the country’s top retail developers, his name was synonymous with price-fixing at the end of the 1990s. As owner and chairman of Sotheby’s Holdings Inc., he was convicted of conspiring with rival auction house Christie’s International to set the commission prices clients paid to sell art. Taubman claimed the scheme was masterminded by CEO Diana “DeDe” Brooks, who pleaded guilty and received a light sentence in return for testifying against Taubman. The story dominated headlines from the start of the investigation in 1997 until his conviction in 2001. After a jury trial, he was ordered to pay a $7.5 million fine and spent 10 months in prison. He wrote a 2007 autobiography called Threshold Resistence detailing how he became a retail pioneer and expert on consumer behavior and a federal prisoner. He’s also an active philanthropist. (See Philanthropic Gifts, Page E31.) See Next Page The fall of DCT Inc. More dramatic than the rise of DCT Inc. was its fall. The automotive assembly line systems supplier closed its doors in February 2001 and left 400 employees with no severance, unpaid payroll and medical bills. In the mid-1990s, DCT grew under owner James Bronce Henderson III. Henderson promised that DCT, which posted revenue of about $200 million annually at its peak in the late 1990s, would be “the Wal-Mart of the welding business,” providing high-tech automated assembly lines at the lowest cost in the industry. High-flying MCA crashes Southfield-based MCA Financial Corp. was considered a successful company when a 20-count federal indictment against Chairman and CEO Patrick Quinlan Sr. was announced in 2002. The indictment accused Quinlan of bilking investors and cred- Delphi accounting scandal Former Delphi Corp. CEO J.T. Battenberg III is still in court, fighting a lawsuit filed in 2006 by the Securities and Exchange Commission to clear his name. Denny McLain strikes out Pitcher Denny McLain was a three-time All-Star and was instrumental in the Detroit Tigers’ 1968 World Series victory. But by 1972, he had been suspended for illegal gambling and http://www.LoanGiant.com

Table of Contents for the Digital Edition of Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010

Crain's Detroit Business 25th Anniversary
Looking Forward
25 Companies to Watch
25 Mainstays
25 People Then and Now
25 Scandals and Dubious Deeds.
25 Philanthropic Gifts
25 Newsmakers of the Year
25 Big Stories
25 Innovations
25 Gone But Not Forgotten
Health Care
Defense
Suppliers
The Internet and Communication
Energy
Finance
Signs of the Times

Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010

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