Free Complaint - District Court of Delaware - Delaware

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UNITED STATES DISTRICT COURT DISTRICT OF delaware ) ) ) ) Plaintiffs, ) vs. ) ) DAVID A. STOCKMAN, J. MICHAEL ) STEPP, BRYCE M. KOTH, DAVID R. ) COSGROVE, PAUL C. BARNABA, ) ROBERT A. KRAUSE, JOHN A. ) GALANTE, CHARLES E. BECKER, ) ELKIN B. MCCALLUM, THOMAS E. ) EVANS, CYNTHIA HESS, DANIEL P. ) TREDWELL, W. GERALD MCCONNELL, SAMUEL VALENTI, III, ) HEARTLAND INDUSTRIAL PARTNERS, ) ) L.P., HEARTLAND INDUSTRIAL ) ASSOCIATES, L.L.C., HEARTLAND ) INDUSTRIAL GROUP, L.L.C., PRICEWATERHOUSECOOPERS LLP and ) ) KPMG LLP, ) Defendants. ) COLLINS & AIKMAN CORPORATION and COLLINS & AIKMAN PRODUCTS CO., as Debtors in Possession,

Civil Action No. JURY TRIAL DEMANDED

COMPLAINT

Plaintiffs Collins & Aikman Corporation and Collins & Aikman Products Co., as Debtors in Possession ("Plaintiffs") allege the following based upon the investigation of Plaintiffs' Special Counsel. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

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JURISDICTION AND VENUE 1. The claims asserted herein arise under and pursuant to Sections 10(b), 14(a)

of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rules 10b-5 and 14a-9 promulgated thereunder by the SEC [17 C.F.R. §240.10b-5] and applicable state law. 2. This Court has jurisdiction over the subject matter of this action pursuant

to 28 U.S.C. §1331 and Section 27 of the Exchange Act [15 U.S.C. §78aa]. 3. Venue is proper in this District pursuant to Section 27 of the Exchange

Act and 28 U.S.C. §1391(b); Plaintiffs are Delaware corporations and many of the acts and practices complained of herein occurred in substantial part in this District. 4. In connection with the acts alleged in this complaint, Defendants, directly

or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

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THE PARTIES Plaintiffs 5. Plaintiffs Collins & Aikman Corporation and Collins & Aikman Products Co.

are Delaware corporations. Collins & Aikman Corporation, through its subsidiaries, was engaged in the design, manufacture and supply of automotive interior components. 6. Plaintiffs Collins & Aikman Corporation and Collins & Aikman Products

Co., together with thirty-six of their subsidiaries, each filed a petition for relief under Chapter 11 of Title 11 of the United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division ("Bankruptcy Court") on May 17, 2005. Those Chapter 11 cases have been consolidated for administrative purposes under Chapter 11 Case No. 05-55927(SWR) pursuant to

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order of the Bankruptcy Court, and each of those Chapter 11 cases remains pending in the Bankruptcy Court at the present time. The Plaintiffs and their debtor subsidiaries are debtors and debtors in possession in their Chapter 11 cases having all of the rights and powers, entitled to perform all of the functions and duties of a Chapter 11 trustee (with exceptions not here relevant) of a trustee serving in a case under Chapter 11 in accordance with section 1107 of the Bankruptcy Code, 11 USC section 1107. 7. Plaintiffs and their debtor subsidiaries have proposed and expect to

confirm a Chapter 11 plan of reorganization ("Plan") shortly, perhaps as soon as June 5, 2007, and to consummate the Plan within a reasonable period thereafter. Under the Plan, on the date the Plan is consummated, all claims and causes of action of Plaintiffs and their debtor subsidiaries against third parties, whether then pending or available to be brought in the future, are to be assigned to a litigation trust to be administered by a Litigation Trust Administrator for the benefit of the creditors of the Plaintiffs' estates. The proceeds thereof are to be distributed to the creditors of the Plaintiffs' estates according to the terms of the Plan, the Litigation Trust Agreement, and the orders of the Bankruptcy Court having jurisdiction over the Chapter 11 cases. 8. This action is brought by Plaintiffs in their capacities as debtors in

possession, qua trustees of their Chapter 11 estates, to fulfill their fiduciary duties for the benefit of the creditors of such estates who will share in any proceeds of this action. Upon the consummation of the Plan, this action shall be transferred to and carried on by the Litigation Trust formed pursuant to the Plan, under the supervision and direction of the Litigation Trust Administrator appointed by the Bankruptcy Court, and the Litigation Trust will seek to be substituted for the named Plaintiffs in this action.

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Defendants Director and Officer Defendants 9. Defendant David A. Stockman ("Stockman") served as a Director of Collins

& Aikman Corporation ("Collins & Aikman" or the "Company"), Chairman of the Board and CEO of the Company as follows: Director from February 2001 to May 12, 2005; Chairman of the Board from August 2002 to May 12, 2005; and CEO from August 2003 to May 12, 2005. Defendant Stockman was a Managing Member of Heartland LLC, as defined below, and was a founding partner and a Senior Managing Director of Heartland LP, as defined below. 10. Defendant J. Michael Stepp ("Stepp") served as the Company's Vice

President and Chief Financial Officer ("CFO") from January 2002 to October 2004, when he resigned as CFO. Defendant Stepp also served as a Director of the Company and Vice Chairman of the Company's Board of Directors from 2000 until his resignation. Defendant Stepp was also a Senior Managing Partner of Heartland LP. 11. Defendant Bryce Koth ("Koth") served as the Company's CFO starting on

October 13, 2004. Prior to serving as CFO, Defendant Koth served as the Company's Vice President, Tax of the Company from December 2002 to May 2004 when he was elevated to Vice President, Finance, Controller, and the Company's head of Tax. 12. Defendant David R. Cosgrove served as the Company's Vice President of

Finance from February to August 2002, Vice President for Financial Planning and Analysis from August 2002 until October 2004 and Corporate Controller until May 2005. 13. Defendant Paul C. Barnaba served as the Director of Financial Analysis

for the Company's purchasing department from April 2002 to December 2004 when he

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became a Vice President and the Director of Purchasing for the Plastics Division, a position he held until April 2005. 14. Defendant Robert A. Krause served as Vice President and Treasurer of the

Company from October 2002 to October 2004 when he assumed the positions of Senior Vice President, Finance and Administration. 15. Defendant John A. Galante served as Director, Strategic Planning from

October 2002 to October 2004 and Vice President, Treasurer and Executive Officer of the Company from October 2004 to termination of his employment on July 29, 2005. Galante was also a Vice President of Heartland LP. 16. Defendant Charles E. Becker ("Becker") served as Vice Chairman of the

Board and a Director from July 2001 to his resignation on May 6, 2004. Becker owned Becker Group LLC which was sold to Collins & Aikman in July, 2001. Becker also served as interim-CEO for a period after Defendant Stockman resigned in May 2005. Defendant Becker was also a limited partner in Heartland LP. 17. Defendant Elkin B. McCallum ("McCallum") served as a Director of the

Company from September 2001 until his resignation on May 6, 2004. McCallum was the Chairman of the Board and CEO of Joan Fabrics Corporation which sold Joan Automotive Fabrics to Collins & Aikman in September 2001. 18. Defendant Thomas E. Evans served as President and CEO of the

Company from April 1999 to August 2002 when he resigned his positions. 19. Defendant Cynthia Hess ("Hess") served as Director of the Company from

2001 to 2003. Hess was elected as a director of the Company in connection with

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Heartland's acquisition of Collins & Aikman stock and was a Senior Managing Partner of Heartland LP. 20. Defendant Daniel P. Tredwell served as a director of the Company from

February 2001 to May 10, 2006 when he resigned his position. Tredwell was also a cofounder of Heartland LP and a Member of Heartland LLC. 21. Defendant W. Gerald McConnell served as a director of the Company

from February 2001 to May 10, 2006 when he resigned his position. McConnell was a Senior Managing Director of Heartland LP and was also a Member of Heartland LLC. 22. Defendant Samuel Valenti, III, served as a director of the Company from

February 2001 to September 30, 2004. Valenti was a Senior Managing Director of Heartland LP. 23. The Defendants referenced in ¶¶9-22 above are sometimes referred to

herein as the "Director and Officer Defendants." 24. Each officer and director of Collins & Aikman owed Collins & Aikman,

its shareholders and creditors the duty to exercise a high degree of care, loyalty and diligence in the management and administration of the affairs of the Company, as well as in the use and preservation of its property and assets. The conduct of the Director and Officer Defendants complained of herein involves fraudulent misconduct ­ a knowing, intentional and culpable violation of their obligations as officers/directors of Collins & Aikman and the absence of good faith on their part for their duties to the Company, its shareholders and its creditors. 25. By reason of their positions as officers, directors and/or fiduciaries of

Collins & Aikman and because of their ability to control the business and corporate

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affairs of Collins & Aikman, the Director and Officer Defendants owed Collins & Aikman, its shareholders and creditors fiduciary obligations of candor, trust, loyalty and care, and were required to use their ability to control and manage Collins & Aikman in a fair, just, honest and equitable manner, and to act in furtherance of the best interests of Collins & Aikman, its shareholders and creditors and not in furtherance of their personal interests or benefit. In addition, as officers and/or directors of a publicly held company, the Director and Officer Defendants had a duty to promptly disseminate accurate and truthful information with respect to the Company's operations and financial condition so as to fulfill their duty of candor and honesty to Collins & Aikman, the shareholders of Collins & Aikman and its creditors. 26. To discharge their duties, the directors of Collins & Aikman were required

at all times to exercise reasonable and prudent supervision over the management, policies, practices and controls of the business and financial affairs of Collins & Aikman. By virtue of such duties, the Director and Officer Defendants were required, among other things, to at all times: (a) Manage, conduct, supervise and direct the business affairs of

Collins & Aikman in accordance with law (including the U.S. securities laws and Sarbanes-Oxley), government rules and regulations and the charter and bylaws of Collins & Aikman; (b) Neither violate nor knowingly permit any officer, director or

employee of Collins & Aikman to violate applicable laws, rules and regulations; (c) Remain informed as to the then current status of Collins &

Aikman's operations and upon receipt of notice or information of imprudent or unsound

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practices, to make a reasonable and diligent inquiry in connection therewith, and to take steps to correct such conditions and practices and make such disclosures as were necessary to comply with the U.S. federal securities and other laws and their duty of candor to the Company's shareholders, creditors, suppliers, customers, employees and others doing business with the Company; (d) Establish and maintain systematic and accurate records and reports

of the business and affairs of Collins & Aikman and procedures for the reporting of the business and affairs to the Board of Directors and periodically investigate, or cause independent investigation to be made of, said reports and records; (e) Maintain and implement an adequate, functioning system of

internal legal, financial and accounting controls, such that Collins & Aikman's financial statements would be accurate and complete and the actions of its officers and directors would be in compliance with all applicable laws; (f) Exercise reasonable control and supervision over public statements

to the securities markets and over trading in Collins & Aikman stock by the officers and employees of Collins & Aikman; and (g) Supervise the preparation and filing of any financial reports or

other information required by law from Collins & Aikman and examine and evaluate any reports of examinations, audits or other financial information concerning the financial condition and affairs of Collins & Aikman and make full and accurate disclosure of all material facts concerning, inter alia, each of the subjects and duties set forth above. 27. During all times relevant hereto, each of the Director and Officer

Defendants occupied a position with Collins & Aikman or was associated with the

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Company in such a capacity as to make him or her privy to confidential and proprietary information concerning Collins & Aikman and its operations, finances and financial condition. Because of these positions and such access, each of the Director and Officer Defendants knew that the true facts specified herein regarding Collins & Aikman's business and finances had not been disclosed to and were being concealed from its shareholders, its creditors, vendors, customers, employees and the public. The Director and Officer Defendants, as corporate fiduciaries entrusted with non-public information, were obligated to disclose material adverse information regarding Collins & Aikman and to take any and all action necessary to ensure that the officers and directors of Collins & Aikman did not act upon such privileged non-public information in a manner which caused the Company to violate the law. Because of the officer and director defendants' positions with the Company, they knew of the adverse non-public information about Collins & Aikman's operations and finances, as well as its accounting practices, markets and business prospects, via access to internal corporate documents (including Collins & Aikman's financial statements, operating plans, budgets and forecasts and reports of actual operations), conversations and connections with other corporate officers and employees, attendance at management and/or board of directors' meetings and meetings of committees thereof and via reports and other information provided to them in connection therewith. Each of the officer and director defendants participated in the issuance and/or review of false and/or misleading statements, including the preparation of false and/or misleading press releases, SEC filings and reports to Collins & Aikman shareholders and/or creditors. Heartland Defendants

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28.

Defendant Heartland Industrial Partners, L.P. ("Heartland LP") is a limited

partnership organized under the laws of Delaware. The managing general partner of Heartland LP is Heartland LLC. Heartland LP is a $1 billion private equity firm. Defendant Stockman is the founding partner and a Senior Managing Director of Heartland LP; Director Defendants Tredwell, McConnell, and Valenti are all Senior Managing Directors of Heartland LP; and Director Defendant Hess was also a Senior Managing Director of Heartland LP. Collins & Aikman is one of Heartland LP's largest investments, representing at least 30% of Heartland LP's total investments. 29. Defendant Heartland Industrial Associates, L.L.C. ("Heartland LLC") is a

limited liability company organized under the laws of Delaware. As of July 1, 2004, Heartland LLC beneficially owned 33,574,772 shares of Collins & Aikman, 34,314,147 shares as of January 1, 2005, and 32,714,147 shares as of March 17, 2005, exclusive of shares owned by Heartland's partners and affiliates as the general partner of several limited partnerships. In 2001, Heartland owned at least 59.7% of the outstanding common stock of Collins & Aikman and by January 1, 2005, owned 41% of the outstanding common stock. 30. Defendant Heartland Industrial Group, L.L.C. ("Heartland Industrial") is a

limited liability company organized under the laws of Delaware. 31. Heartland LP, Heartland LLC and Heartland Industrial are collectively

referred to herein as "Heartland" or the "Heartland Defendants." As the managing general partner, Heartland LLC exercised complete control over Heartland LP and, accordingly, beneficially owns and exercises control over all of the Collins & Aikman common stock held by Heartland LP. At all times relevant to the allegations herein,

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Heartland controlled Collins & Aikman through its share ownership of the Company and by designating a majority of the members of the Company's Board of Directors. Moreover, Defendants Stockman and Stepp were Senior Managing Directors of Heartland LP, and John A. Galante, the Company's Treasurer since October 2004, was a Vice President of Heartland LP. 32. In connection with Heartland's acquisition of Collins & Aikman stock,

Heartland LP and Collins & Aikman entered into a Services Agreement dated February 23, 2001, which was subsequently amended on August 7, 2001 (collectively, the "Heartland Services Agreement"). Under the Heartland Services Agreement, Collins & Aikman was required to pay certain annual fees to Heartland equal to (a) a fee of $404,494.38 in cash for the period from the date of the closing of Heartland's purchase of Collins & Aikman stock through March 31, 2001; (b) $3,000,000 in cash for the balance of calendar year 2001; and (c) $4,000,000 for each calendar year thereafter, through the "Termination Date" as such term is defined in the Services Agreement. The Heartland Services Agreement required Collins & Aikman to pay to Heartland LP a fee of $12,000,000 and to reimburse Heartland LP and its affiliates for the reasonable out-of pocket expenses incurred in connection with Heartland LP's purchase of Collins & Aikman stock. Furthermore, the Heartland Services Amendment provides that, in connection with the consummation of each acquisition or divestiture by the Company or any of its subsidiaries of any business constituting a going concern or any division or line of business or separable plant or manufacturing facility or significant set of related assets, with respect to which Heartland LP provides any significant advisory services, in negotiating, analyzing, arranging and executing such acquisitions and divestitures,

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Collins & Aikman shall pay to Heartland LP or its designees a transaction fee in an amount equal to 1% of the aggregate total enterprise value of the business or assets being acquired or divested. 33. During 2001, 2002, 2003 and 2004, Heartland received total advisory fees

from Collins & Aikman of $24.5 million, $5.7 million, $4.0 million, and $10.6 million, respectively ­ a total of more than $44 million. Of these monies, $22 million went to Defendant Stockman personally. Auditor Defendants 34. Defendant PriceWaterhouseCoopers LLP ("PwC") was engaged by Collins & Aikman to provide independent auditing, accounting and/or consulting services to the Company, including the examination and review of Collins & Aikman's consolidated financial statements for fiscal years 2001 and 2002. As a result of the services it rendered to the Company, PwC's representatives were frequently present at Collins & Aikman's corporate headquarters and financial offices during 2001, 2002 and a portion of 2003 and during that period had continual access to the Company's confidential corporate financial and business information, including internal and external financial statements and information as to Collins & Aikman's true financial condition and rebate accounting, which information PwC negligently disregarded. PwC actively participated in the examination and review of Collins & Aikman's false financial statements for the years 2001 and 2002 and interim periods. Defendant PwC issued unqualified audit opinions on Collins & Aikman's 2001 and 2002 financial statements. 35. Defendant KPMG, LLP ("KPMG") was engaged by Collins & Aikman to

provide independent auditing, accounting and/or consulting services to the Company, including the examination and review of Collins & Aikman's consolidated financial

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statements for fiscal years 2003 and 2004 (the latter never having been completed). As a result of the services it rendered to the Company, KPMG's representatives were frequently present at Collins & Aikman's corporate headquarters and financial offices between part of 2002 and 2003 to 2005 and had continual access to the Company's internal and external financial statements and confidential corporate financial and business information, including information as to Collins & Aikman's true financial condition, internal and external financial statements and rebate accounting, which information KPMG negligently disregarded. KPMG actively participated in the examination and review of Collins & Aikman's false financial statements. Defendant KPMG issued unqualified audit reports on Collins & Aikman's 2003 financial statements. SUBSTANTIVE ALLEGATIONS Overview of the Destruction of Collins & Aikman 36. Collins & Aikman was engaged in the design, manufacture and supply of

automotive interior components. The Company sold its products to automotive original equipment manufacturers ("OEMs") such as GM, Ford, Chrysler and others. 37. Heartland took control of Collins & Aikman in early 2001. Thereafter, at

the direction of Heartland, Collins & Aikman went on an acquisition spree, acquiring various businesses in an effort to cement the Company's position as a Tier 1 supplier to OEMs. By the end of 2001, Collins & Aikman had announced and/or completed three major acquisitions which dramatically increased the size of the Company. This acquisition spree positioned the Company for disaster. 38. Indeed, at the time that Collins & Aikman was aggressively growing its

business, auto parts manufacturers and the OEMs were coming under increasing

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competitive threats and adverse business conditions. OEMs, the major automakers, were increasingly demanding lower prices and were squeezing the profit margins of Collins & Aikman and other car parts manufacturers. At the same time, the prices of raw materials continued to rise, thereby further squeezing profits. Adding to and exacerbating these negative trends, Collins & Aikman was struggling to integrate its acquisitions into its existing operations. 39. By early 2002, these negative factors were dramatically depressing the

Company's financial results and the Company was increasingly finding itself locked into long-term contracts with little upside earnings potential. Unfortunately for Collins & Aikman, its creditors, shareholders, customers, vendors and employees, instead of dealing with the issues facing the Company in an open and legal manner, Defendants concealed the true financial results of operations and condition of the Company, embarking on a fraudulent accounting scheme which hastened the demise of the Company and left it unable to right itself. 40. As detailed further herein, from the fourth quarter of 2001 to the time of

the Company's bankruptcy filing, Defendants employed a variety of fraudulent schemes designed to artificially inflate the Company's reported financial results, avoid triggering debt covenants and enable Collins & Aikman to borrow additional funds, thereby deepening its insolvency. 41. On May 12, 2005, Collins & Aikman filed for bankruptcy protection

under Chapter 11. Subsequently, Collins & Aikman determined that the best course for its creditors and employees would be the sale and liquidation of all of its businesses. At

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present, Collins & Aikman is in the process of selling off all of its businesses and other assets and it will soon cease to exist. Heartland Takes Control of Collins & Aikman and Expands the Company's Business Through a Series of Acquisitions 42. In February 2001, Heartland acquired a controlling interest in Collins &

Aikman. As a result, Defendant Stockman and other Heartland representatives assumed positions on the Company's Board of Directors and in Company management. In addition, Collins & Aikman and Heartland entered into the Heartland Services Agreement, as detailed herein. 43. Plaintiffs and Heartland L.P. entered into the Heartland Services

Agreement thereby giving Heartland contractual control and dominion over the Company's affairs. Thus, Heartland not only owed plaintiffs fiduciary duties, but also owed them express and implied contractual obligations of good faith, fair dealing and honest performance of the services it provided to the Company under the Heartland Services Agreement and for which it was munificently compensated. 44. In July 2001, Collins & Aikman acquired Becker Group L.L.C., which

manufactured plastic parts for automobiles (the "Becker Acquisition"). Collins & Aikman paid 17 million shares of the Company's stock, issued a three year warrant to the sellers for 500,000 shares at $5 per share and paid off $60 million of Becker Group debt all as part of this purchase price for the Becker Acquisition. In connection with the acquisition, Heartland was paid an advisory fee of $12 million. 45. In addition, the Company agreed to pay Becker $18 million for a non-

compete agreement, which was to be paid out over five years in equal annual installments (the "Becker Non-Compete"). In March 2003, after making two years of such payments,

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Collins & Aikman bought out the Becker Non-Compete for $11.3 million. Under applicable law, Becker was obligated to not compete with the Company and, therefore, there was no reason to enter into a non-compete with him, and he was not entitled to receive any monies from the Company for his agreement not to compete. At the time of the Becker Acquisition, Becker joined the Company's Board of Directors and served on the Board until he resigned his position on May 6, 2004. 46. In September 2001, Collins & Aikman acquired Joan Automotive Fabrics

from Joan Fabrics, Inc., which manufactured fabrics (the "Joan Fabrics Acquisition") in exchange for $100 million in cash and 12,760,000 shares of Collins & Aikman common stock. In connection with the Joan Fabrics Acquisition, Defendant McCallum joined the Company's Board of Directors and served on the Board until he resigned his position on May 6, 2004. 47. In December 2001, Collins & Aikman purchased the trim division of

Textron Automotive Company, known as "TAC-Trim." Collins & Aikman paid $1 billion in cash and assumed debt, 18 million shares of Collins & Aikman common stock and $245 million in preferred stock of Collins & Aikman Products Company for TACTrim. Heartland was paid $12.5 million in connection with the TAC-Trim acquisition. Improper and Manipulative Accounting Practices Damage Collins & Aikman 48. The Joan Fabrics Roundtrip Transactions: As detailed above, in

September 2001, Collins & Aikman acquired Joan Automotive Fabrics from Joan Fabrics. Shortly thereafter, Defendants Stockman, Stepp and others acting at their direction engaged in a series of fraudulent "round-trip" transactions with Joan Fabrics which were designed to

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enable Collins & Aikman to improperly increase its reported income and artificially inflate its reported financial results. 49. In the fourth quarter of 2001, Defendant Stepp asked Defendant

McCallum, then Chairman of the Board and CEO of Joan Fabrics, for a $3 million payment that would be used to inflate Collins & Aikman's financial results for the fourth quarter of 2001. It was agreed at that time that the Company would repay the $3 million to Joan Fabrics in the future. In other words, the $3 million payment was nothing more than a short term loan. As detailed further herein, the $3 million payment was falsely characterized on Collins & Aikman's financial statements as a supplier rebate for past purchases, which permitted the Company to artificially inflate its fourth quarter of 2001 operating results. 50. Thereafter, Defendant Stockman personally negotiated additional round

trip payments from Joan Fabrics with Defendant McCallum. In total, between the fourth quarter of 2001 and the first quarter of 2003, round-trip payments totaled $15 million. In each case, the "payment" was falsely characterized as a rebate for past purchases from or services provided by Joan Fabrics. As McCallum knew, Joan Fabrics had no legal obligation to make the payments and had only done so at his direction with the agreement that Joan Fabrics would be repaid in the future. 51. Defendants Stockman, Stepp and others acting at their direction, repaid

the "rebates" through a series of transactions which were structured so as to obscure the fact that Joan Fabrics was being repaid. The following payments took place: · the Company gave back certain looms to Joan Fabrics which were worth $3.1 million for no consideration. In March 2002, Stockman and McCallum had agreed that the Company would repay the $3 million

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payment from the fourth quarter of 2001 by transferring the looms to Joan Fabrics for no cost; · the Company overpaid McCallum the purchase price for Southwest Laminates Inc. in March 2002. Specifically, in exchange for future "rebate" payments, the Company purchased Southwest for $17 million, which was at least $7 million more than the Company estimated it was worth; the Company deliberately overpaid to purchase air jet texturing machines from a subsidiary of Joan Fabrics; and the Company purportedly purchased looms from Joan Fabrics for the purpose of running a furniture fabrics business. The Company purchased the looms for $4.7 million even though they were only worth approximately $2 million. By engaging in round-trip transactions with Joan Fabrics and improperly

· ·

52.

accounting for the payments as rebates, Collins & Aikman's financial results were artificially inflated by at least $14.9 million between 2001 and 2003. 53. The Rebate Scheme: Commencing in early 2002, Defendants caused or

allowed Collins & Aikman to begin improperly recognizing rebates from the Company's suppliers before the rebates had actually been earned by the Company. 54. In the automotive industry, supply contracts generally provide that

suppliers will pay rebates to customers in return for a specified volume or type of future business. Under GAAP, rebates should be recorded as reductions in cost. Rebates can only be recognized when the promised purchases have been made. 55. Starting in early 2002, Defendants caused Collins & Aikman to inflate its

earnings by improperly recognizing rebates in three ways (the "Rebate Scheme"). First, rebates would be improperly pulled forward, i.e. taken before they were earned. Under this scenario, the Company and a supplier would agree to price reductions over future quarters based on projected purchases. Defendants pulled these rebates forward into the

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current quarter, and in order to hide the fraudulent scheme, they had the supplier provide a side letter which stated that the rebate was for past purchases when, in fact, it was not. Second, similarly, rebates would be recognized immediately when they were contingent on future events, usually additional business, which had not yet occurred. Again, the supplier would provide a side letter attributing the rebate to past purchases when that was not the case. Finally, some of the improperly recognized rebates involved capital expenditures by the Company. Under this scenario, the Company would purchase some capital equipment and would receive a rebate from the seller characterized as a rebate for past purchases of spare parts and/or maintenance. In truth, the Company had purchased the equipment or maintenance services for above-market, deliberately inflated prices and then received back the difference between the cost and the true market price as a "rebate." These "rebates" were booked as income in the current quarter as opposed to a reduction in the cost basis of the equipment and/or maintenance purchased. 56. The following chart sets forth some of the improperly accounted for

rebates and the suppliers who aided and abetted Defendants in their scheme: Name ATC, Inc. The Brown Corporation of America Clariant Corporation The Dow Chemical Company Invista Inc., formerly known as DuPont Textiles & Interiors Inc. Flambeau Corporation Momentive Performance Materials Inc., formerly known as GE Advanced Materials. Jackson Plastics, Inc. Rebate Amount (Quarter Recognized) $123,470 (Q4 2002) $900,000 (Q3 2002) $500,000 (Q2 2003) $49,000 (Q2 2004) $400,000 (Q2 2003) $1,200,000 (Q2 2003) $235,000 (Q3 2002) $1,000,000 (Q3 2003) $1,500,000 (Q2 2004)

$138,750 (Q3 2002) $46,250 (Q4 2002)

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Name M. Dohmen, U.S.A., Inc. Manufacturer's Products Co. Pine River Plastics, Inc. PPG Industries, Inc. Reko International Group, Inc. Unifi, Inc. 57.

Rebate Amount (Quarter Recognized) $150,000 (Q2 2004) $150,000 (Q2 2003) $67,000 (Q4 2002) $500,000 (Q2 2002) $250,000 (Q4 2003) $200,000 (Q2 2004)

In 2004, as noted above, Defendants expanded the rebate scheme to capital

equipment expenditures. The following chart sets forth some of the transactions in the capital equipment scheme and the suppliers who aided and abetted Defendants in this scheme: Name The Conair Group, Inc. Demag Plastics Group Milacron Inc., formerly known as Cincinnati Milacron Inc. Krauss Maffei Corp. 58. Rebate Amount (Quarter Recognized) $38,000 (Q4 2004) $1,000,000 (Q2 and Q3 2004) $92,000 (Q4 2004) $1,000,000 (Q3 2004) 165,000 or roughly $224,000 (Q4 2004)

By engaging in the Rebate Scheme, Collins & Aikman's financial results

were artificially inflated, as detailed further herein. Collins & Aikman Suffers a Liquidity Crisis and Avoids Triggering Debt Covenants Through Improper Accounting Practices 59. By early 2002, Collins & Aikman was struggling under the weight of money-

losing long term contracts, increasing pricing pressures from OEMs and increasing raw material prices. In order to avoid triggering debt covenants, Defendant Stockman and others acting at his direction engaged in the accounting schemes detailed herein which served to artificially inflate the Company's operating results so that the Company could satisfy its debt covenants. 60. In August 2004, Collins & Aikman sold approximately $415 million in

12.875% Senior Subordinated Notes due 2012 (the "August Senior Note Offering"). The

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offering materials used to sell the notes presented materially false and misleading financial results for the Company as they included financial results that were artificially inflated due to the accounting improprieties detailed herein. In addition, the August Senior Note Offering further deepened the insolvency of the Company by providing it with funds it would rapidly lose and be unable to repay due to the huge hidden operating losses it already had incurred and was continuing to incur. 61. Indeed, during the time that Defendant Stockman and his confederates ran

the Company, Collins & Aikman's debt load had dramatically increased from approximately $884 million as of December 30, 2000 to approximately $1.6 billion as of December 31, 2004. 62. By January 2005, just a few months after raising the $415 million in the

August Senior Note Offering, the liquidity crisis at Collins & Aikman worsened. 63. At or around this time, Defendant Stockman and others acting at his

direction engaged in a scheme to defraud General Electric Capital Corporation ("GECC"). In December 2004, GECC and the Company entered into an agreement whereby GECC factored certain of Collins & Aikman's receivables and advanced monies to the Company based on collateral consisting of a pool of eligible accounts receivable ­ referred to as the "borrowing base." The amount of money that the Company could "borrow" was determined by calculating the amount of the borrowing base and comparing it to the outstanding debt owed to GECC. If the borrowing base amount exceeded the amount owed to GECC, Collins & Aikman could receive an amount equal to the difference from GECC.

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64.

In January 2005, Defendant Stockman and others learned that under the

GECC agreement, the Company owed $21.8 million to GECC, money which it was unable to pay. In order to avoid alerting GECC to the amount owed and the fact that the Company did not have the money to pay what it owed GECC, Defendant Stockman and others acting at his direction improperly and fraudulently included tens of millions of dollars of receivables in the borrowing base that were not eligible for inclusion. In this way, they were able to artificially and fraudulently reduce the amount of money then owed to GECC ­ from $21.8 million to $11.8 million. Thereafter, Defendant Stockman and others acting at his direction continued to include tens of millions of dollars of ineligible receivables in the borrowing base. In short, Defendant Stockman and others acting at his direction engaged in a pattern of fraudulent conduct with respect to GECC that, when discovered, caused great harm to the Company, its relations with GECC ­ a major lender to the Company, and its reputation in the business community. 65. On March 17, 2005, Collins & Aikman issued a press release announcing

that it was delaying the issuance of its financial results for fiscal year 2004 while it conducted an internal review of how it accounted for supplier rebates. The Company further announced that it expected to restate its financial results for the nine months ended September 30, 2004, to reflect the correct accounting for those rebates and that it was continuing to evaluate whether a restatement of prior periods was necessary. The press release stated that based on an "internal review of vendor rebates" "net adjustments of approximately $10-12 million are required primarily occurring during fiscal 2004." The press release also indicated that the Company had liquidity of $86 million as of December 31, 2004.

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66.

The representations in the press release about the rebate accounting, the

scope of that problem and the liquidity of the Company were materially false, fraudulent, and misleading when made. As Defendants knew, the rebate accounting issue spanned a period as far back to late 2001 and covered substantially all of the rebates that the Company had recognized during that time, as detailed herein, and the Company did not possess $86 million in liquidity - - rather, Collins & Aikman only had $12 million of liquidity due to restrictions on its borrowings. 67. Following the earnings release, Defendant Stockman and others held a

conference call to discuss the Company's financial results. During that call, Defendant Stockman continued to conceal the true scope of the accounting fraud at the Company, concealed the true liquidity of the Company and deliberately misrepresented the predicted future performance of the Company. For example, Defendant Stockman told investors on the call that the Company would have EBITDA of between $65-75 million for the first quarter of 2005, even though at that time internal information indicated that the figure would be half that amount (the quarter only had two weeks to go at this point). Defendant Stockman told investors that the Company's capital expenditures for the first quarter of 2005 would be $30 million when at that time they already exceeded $30 million and would be $50 million. Finally, during the conference call, Defendant Stockman denied that the Company was experiencing liquidity issues when he knew that the Company was then experiencing a severe liquidity crisis. 68. On March 24, 2005, Defendant Stockman made a presentation to JP

Morgan Chase and Credit Suisse First Boston Corporation for the purpose of securing a waiver of compliance with financial covenants in its credit agreements. During the

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presentation, Defendant Stockman concealed the true financial condition of the Company and again understated the Company's capital expenditures for the first quarter of 2005. 69. Also on March 24, 2005, Collins & Aikman issued a press release

announcing that the Audit Committee of the Board of Directors had retained independent counsel to conduct a review of the supplier rebate accounting. Again, the press release understated the scope of the problem at the Company. 70. In early April 2005, Defendant Stockman and others sought additional

financing for the Company from Credit Suisse First Boston Corporation. In order to induce Credit Suisse to lend the Company additional money, Defendant Stockman and others acting at his direction made numerous materially false and misleading statements to Credit Suisse First Boston Corporation concerning the Company's liquidity, capital expenditures and prior and projected financial results. Based, in material part, on these misrepresentations, Credit Suisse First Boston Corporation agreed to lend Collins & Aikman an additional $75 million in financing. 71. On April 4, 2005, Collins & Aikman issued a press release announcing

that it had obtained a commitment from Credit Suisse to provide $75 million in financing and stating, among other things, that the Company had liquidity of $86 million as of December 31, 2004, and $81 million as of March 31, 2005. The representations concerning liquidity were materially false, fraudulent and misleading when made because due to covenant restrictions the Company did not have $86 million of liquidity as of December 31, 2004, but rather had only $12 million, and its liquidity as of March 31, 2005, was $9 million not $81 million.

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72.

Because the Company was hemorrhaging cash and losing money at a

furious pace, this particular $75 million borrowing further deepened the insolvency of the Company. 73. Five days later, on May 12, 2005, Collins & Aikman issued a press release

announcing, among other things, that Defendant Stockman had been forced by the Board of Directors to resign his positions at the Company. 74. On May 17, 2005, Collins & Aikman and its subsidiaries filed for

protection under Chapter 11 of the Bankruptcy code. Defendants Caused Collins & Aikman to File False and Misleading Reports with the SEC and to Issue False and Misleading Statements to Investors 75. From the fourth quarter of 2001 to the time that the Company filed for

bankruptcy protection, Defendants caused Collins & Aikman to file false and misleading quarterly and annual reports with the SEC and to issue materially false and misleading statements to investors concerning the Company's financial performance, operations and prospects. These filings and statements were materially false and misleading because, among other reasons, they contained financial results which were artificially inflated by the improper accounting practices detailed herein. Indeed, Defendants' positive statements falsely portrayed the Company as well positioned to succeed and financially sound when, in truth and in fact, the Company's business was dramatically deteriorating and it was suffering a deepening liquidity crisis. Had the truth been known, Collins & Aikman would have never been able to continue raising money from the public and investment banks. 76. On or about August 26, 2004, Defendants caused Collins & Aikman to

circulate an offering memorandum in connection with the August Senior Note Offering. The offering memorandum incorporated the Company's financial statements for fiscal

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years 2001 through the second quarter of 2004. Those financial statements were materially false and misleading because they were not prepared in accordance with GAAP and materially overstated the Company's financial performance, as detailed herein. Using the materially false and misleading offering memorandum, Defendants caused Collins & Aikman to sell and issue the $415 million in 12.875% Senior Subordinated Notes due 2012, thereby causing it to incur additional debt that it could not service and repay and which further deepened the Company's insolvency. 77. During 2002, 2003 and 2004, Defendants caused Collins & Aikman to file

and disseminate to its shareholders materially false and misleading Proxy Statements which failed to disclose that the Company was reporting financial results which were artificially inflated by the improper accounting practices detailed herein. In each of the Proxy Statements, Collins & Aikman sought shareholder approval for, among other things the election of directors, employee stock option plans and compensation policies. PwC's and KPMG's Professional Negligence and Accounting Malpractice and Aiding and Abetting Defendants' Breaches of Fiduciary Duty and Violations of Law 78. In the performance of their audits and reviews of Collins & Aikman's

financial statements, Defendants PwC and KPMG each owed Collins & Aikman a duty to act with reasonable care and competence and perform the services they rendered pursuant to their professional standards. However, PwC and KPMG each violated numerous professional standards and acted with such lack of care that they were indifferent to numerous red flags warning them of the massive financial fraud alleged herein. 79. Defendant PwC knew or should have known that it issued false audit

opinions on Collins & Aikman's false and misleading financial statements for the years ended December 31, 2002 and 2001, and that the Company's interim financial statements

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for the quarters ended March 31, 2001 through the quarter ended June 30, 2003, which it reviewed, were materially false and misleading. 80. Similarly, Defendant KPMG knew or should have known that it issued a

false audit opinion on Collins & Aikman's false and misleading financial statements for the year ended December 31, 2003, and that the Company's interim financial statements for the quarters ended September 30, 2003 through the quarter ended September 30, 2004, which it reviewed, were materially false and misleading. 81. In connection with their audits and reviews of Collins & Aikman's

financial statements, both PwC and KPMG had virtually limitless access to the Company's personnel and corporate information and documents, and accounting books and records. PwC and KPMG personnel were regularly present at Collins & Aikman's headquarters and had access to its employees via face-to-face meetings, e-mail and telephone. Given their intimate knowledge of Collins & Aikman's business, PwC and KPMG knew or should have known about the numerous accounting irregularities and improprieties alleged herein, and that the Company's financial statements, and related financial information, were materially false and misleading because, among other things, they violated GAAP in numerous respects.1 82. To ensure PwC's and KPMG's loyalty, Collins & Aikman also retained

PwC and KPMG to provide it with lucrative non-auditing services. In fact, from 2001

GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. Generally Accepted Auditing Standard ("GAAS") §AU 411.02. Regulation S-X [17 C.F.R §210.4-01(a)(1)] states that financial statements filed with the SEC that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate. Additionally, Regulation S-X requires that interim financial statements must also comply with GAAP. [17 C.F.R. 210.01-01]

1

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through 2003, the fees Collins & Aikman paid KPMG and PwC totaled $1.4 million and $11.8 million, respectively.2 PwC and KPMG partners who were responsible for the Collins & Aikman engagement were particularly motivated to appease Collins & Aikman and the Director and Officer Defendants because their remuneration was closely tied to the fees generated from Collins & Aikman engagements. In addition, the Detroit offices of both PwC and KPMG pressured its partners to establish and maintain a reputation for having a strong presence in the automotive industry and rewarded them financially for their successes in obtaining and maintaining client relationships. Accordingly, the partners of both PwC and KPMG were pressured to compromise themselves by helping their firms create and maintain this reputation and such client relationships. PwC's and KPMG's False and Misleading Audit Reports 83. As detailed herein, PwC and KPMG knew or should have known they falsely

represented that Collins & Aikman's financial statements were presented in conformity with GAAP. In addition, PwC and KPMG knew or should have known they falsely represented that their audits were performed in accordance with GAAS and the standards of the Public Company Accounting Oversight Board ("PCAOB").3 84. PwC issued the following false and misleading unqualified audit report,

dated February 26, 2002, on Collins & Aikman's financial statements for the year ended December 31, 2001:4

KPMG's fees subsequent to 2003 are currently unknown. The PCAOB is a private-sector corporation created by the Sarbanes Oxley Act ("SOX") to oversee the auditors of public companies. Section 103 of SOX directs the PCAOB to establish auditing, quality control, ethics, and independence standards and rules to be used by registered public accounting firms in the preparation and issuance of audit reports. 4 The index in Item 14(a)(1) of the Company's 2001 Form 10-K listed the following financial statements of Collins & Aikman: (i) Consolidated Statements of Operations for the fiscal years ended December 31, 2001, December 31, 2000 and December 25, 1999; (ii)
3

2

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To the Board of Directors and Shareholders of Collins & Aikman Corporation:In our opinion, the 2001 consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Collins & Aikman Corporation and its subsidiaries at December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. [Emphasis added.] 85. PwC issued the following false and misleading unqualified audit report dated February 18, 2003, on Collins & Aikman's financial statements for the years ended December 31, 2002 and 2001:5

Consolidated Balance Sheets at December 31, 2001 and December 31, 2000; (iii) Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2001, December 31, 2000 and December 25, 1999; (iv) Consolidated Statements of Common Stockholders' Equity (Deficit) for the fiscal years ended December 31, 2001, December 31,2000 and December 25, 1999; and (v) Notes to Consolidated Financial Statements. 5 The index in Item 15(a)(1) of the Company's 2002 Form 10-K listed the following financial statements of Collins & Aikman: (i) Consolidated Statements of Operations for the years ended December 31, 2002, December 31, 2001 and fiscal year ended December 31, 2000; (ii) Consolidated Balance Sheets at December 31, 2002 and December 31, 2001; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2002, December 31, 2001 and fiscal year ended December 31, 2000; (iv) Consolidated Statements of Common Stockholders' Equity (Deficit) for the years ended December 31, 2002, December 31, 2001 and fiscal year ended December 31, 2000; and (v) Notes to Consolidated Financial Statements.

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To the Board of Directors and Shareholders of Collins & Aikman Corporation:In our opinion, the 2002 and 2001 consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Collins & Aikman Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the 2002 and 2001 information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of Collins & Aikman Corporation as of December 31, 2000, and for the year then ended, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated February 14, 2001 (except with respect to the matter discussed in Note 24 (which in the current report on Form 10!K is Note 23), as to which the date is March 28, 2002). As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". [Emphasis added.] 86. KPMG issued the following false and misleading unqualified audit

report, dated March 15, 2004, on Collins & Aikman's financial statements for the year ended December 31, 2003:6 The index in Item 15(a)(1) of the Company's 2003 Form 10-K listed the following financial statements of Collins & Aikman: (i) Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001; (ii) Consolidated Balance Sheets at
6

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To The Board of Directors and Stockholders of Collins & Aikman Corporation:We have audited the 2003 consolidated financial statements of Collins & Aikman Corporation and subsidiaries as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collins & Aikman Corporation and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2003 financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in a material respects, the information set forth herein.As discussed in Note 2 to the financial statements, the Company changed its method of accounting for crib supply inventories in 2003. [Emphasis added.] 87. In addition, at all times relevant to this action, Article 10 of Regulation S-X [17 C.F.R. 210.10 01(d)] required PwC and KPMG to review, in accordance with professional standards, the 2001, 2002, 2003 and 2004 quarterly financial statements Collins & Aikman filed with the SEC on Form 10-Q. PwC and KPMG Knew or Should Have Known that Collins &Aikman's Financial Statements Were Materially Misstated and Violated GAAP

December 31, 2003 and 2002; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001; (iv) Consolidated Statements of Common Stockholders' Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001; and (v) Notes to Consolidated Financial Statements.

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88.

The above-noted audit reports were false and misleading because

Collins & Aikman's financial statements violated GAAP in numerous respects, including: · · · · · · 89. the Company's accounting for "round-trip" transactions with McCallum; the Company's accounting for cash received from suppliers and capital equipment vendors; the Company's failure to timely record an impairment in the value of its long-lived assets, goodwill; the Company's overstatement of its deferred tax assets; the Company's improper reporting of related party transactions; and the Company's failure to provide appropriate disclosure about its liquidity issues and ability to continue as a going concern. Indeed, the myriad of ways in which Collins & Aikman's financial

statements violated GAAP, coupled with the materiality and duration of such violations and Collins & Aikman's numerous internal control deficiencies is indicative of PwC's and KPMG's negligence in the "auditing" of such financial statements. In fact, Collins & Aikman has now admitted that in addition to violating GAAP, it also violated its internal accounting policies and practices, as PwC and KPMG knew or should have known. Improper Accounting of "Round-Trip" Transactions with McCallum 90. Collins & Aikman's improper accounting of transactions with

Defendant McCallum began in late 2001 when the Company sought $3 million from him solely to increase Collins & Aikman's reported income during the fourth quarter 2001. At the time the transaction was consummated, Collins & Aikman arranged to

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repay the $3 million to Defendant McCallum during the subsequent quarter. Therefore, this "round-trip" transaction was, in substance, a loan arrangement which should not have had any positive effect on Collins & Aikman's 2001 reported income. 91. Nonetheless, Director and Officer Defendants caused Collins &

Aikman to improperly account for $2.8 million of the $3 million as a reduction of its operating expenses during the fourth quarter of 2001, thereby inflating its pretax earnings during the quarter by a like amount. As a result of the improper accounting of this transaction alone, Collins & Aikman's operating loss during the fourth quarter of 2001 was understated by more than 17% and its annual 2001 operating income was overstated by approximately 9%. 92. Collins & Aikman's violations of GAAP in its accounting for

transactions with Defendant McCallum continued into 2002 when Director and Officer Defendants caused Collins & Aikman to improperly account for businesses and assets it purchased from Defendant McCallum. 93. During 2002, Collins & Aikman purchased two businesses,

Southwest Laminates and Dutton Yarns, from Defendant McCallum. With respect to Southwest Laminates, Collins & Aikman improperly inflated the fair value of the $10 million business by at least $7 million, or 70%, and improperly valued the transaction at $17 million in its financial statements. With respect to Dutton Yards, Collins & Aikman improperly inflated the fair value of the $2 million business by $2.2 million, or 110%, and valued the transaction in its financial statements at $4.2 million.

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94.

Similarly, during 2002, Collins & Aikman purchased furniture

loom assets from Defendant McCallum worth $2 million for $4.7 million, or approximately 135% more than its fair value, and improperly valued the assets at $4.7 million in its financial statements. 95. In exchange for receiving approximately $11.9 million in excess

consideration for Southwest Laminates, Dutton Yarns and furniture loom assets, Defendant McCallum agreed to have one of his companies, Joan Fabrics, reimburse Collins & Aikman in an equal amount over time, which Collins & Aikman falsely recorded as supplier rebates in its financial statements. 96. In doing so, the financial statements audited by PwC and KPMG

were presented in violation of at least the following provisions of GAAP: (a) Statement of Financial Accounting Standards ("SFAS")

No. 141, with respect to Collins & Aikman's accounting for business combinations; (b) FASB Statement of Concepts ("Concept Statement") No. 2,

with respect to accounting for a transaction's economic substance over its form; (c) SEC Staff Accounting Bulletin ("SAB") No. 101, Concept

Statement Nos. 2 and 5; SFAS No. 48; ARB No. 43; Opinion No. 10; Statement of Position ("SOP") 97-2, Emerging Issues Task Force ("EITF") Abstract Nos. 00-21, 01-09, 02-16, and Technical Practice Aids § 5100, with respect to the recognition of revenues; (d) of a loan; Concept Statement No. 6, with respect to the characteristics

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(e)

Accounting Principles Board ("APB") Opinion No. 6, with

respect to the cost of fixed assets; (f) Accounting Research Bulletin ("ARB") No. 43, with

respect to fixed asset depreciation; (g) cash flows; and (h) SFAS No. 57,