The owners of a suburban Detroit automotive supplier have pleaded guilty to federal criminal fraud charges in a case officials said will serve as a deterrent to other firms looking to cut costs by using cheaper resins.
David Bernhardt, former president of injection molder Davalor Mold Corp., and Orman Bernhardt, former operations director, pleaded guilty June 13 to one count of wire fraud each in U.S. District Court in Detroit for misleading customers and auditors about the quality of materials it used in making seat-belt components.
The U.S. attorney's office in Detroit said in court filings that from about March 2008 to April 13, 2010, Davalor Mold, based in the Detroit suburb of Chesterfield Township, sometimes used less-expensive resin and used a higher level of regrind material than permitted in company contracts.
The federal case also said the company “ceased or decreased” the number of quality and revalidation tests required and had employees create false test reports for customers and auditors.
Sentencing is set for October. A plea agreement calls for sentences of 151/2 months in prison. The federal government agreed not to seek any other action against the company or any other employees as part of the deal.
Lawyers for David and Orman Bernhardt have said the seat-belt components — sold to a variety of auto suppliers — passed safety requirements, but U.S. Attorney Barbara McQuade said in a news release that an auto supplier creates an “unacceptable public safety risk” when it uses inferior materials and procedures.
“We hope this prosecution will deter other suppliers from illegally cutting corners to increase their profits.”
FBI Special Agent Andrew Arena, who oversaw the investigation, added that the FBI will “continue to aggressively pursue” fraud cases.
“Auto suppliers who provide substandard products to the automotive manufacturers negatively impact the quality of products and the automotive industry,” Arena said.
Court documents stated the value of the fraud is hard to determine, but said it was between $30,000 and $70,000.
New management at Davalor Mold did not immediately respond to requests for comment.
Using less-expensive resins or higher levels of regrind is not common in the industry, but it is also not unheard of, according to Jeff Mengel, a partner with Plante & Moran PLLC with offices in Chicago. It would have been especially tempting in 2008-09 as resin prices climbed and the economy slowed.
In the auto industry, it is hard to get approval to change resins in midproduction, even if a less-expensive material will produce a part that meets the same requirements, he added.
What is new, however, is criminal charges for individuals within companies that give in to that temptation. Mengel said he knew of no other companies that have faced that kind of prosecution, rather than settling privately.
“This means you're playing a much higher risk for that kind of action,” he said.
Mengel compared it with criminal charges executives and financiers have faced for fiscal misdeeds.
“It highlights some of the issues and risks that people take on when they take shortcuts,” he said.