By Dan Primack
February 3, 2011

Dear David Stockman,

Hey, how are you? It’s been a couple of months since we last talked, and my best guess is that you feel a bit betrayed by the magazine column that followed. You know, the one in which I argued that media sycophants should at least mention your miserable investment career before promoting you as an economic oracle.

So you know, I happen to agree with many of your concerns about how America’s debt affects its economic future. And about the lack of serious attention being paid to such matters in Washington, D.C. (which is different than political attention, of which it’s gotten lots).

But I’m writing today because, once again, you’ve gone and tried to defend the indefensible: Heartland Industrial Partners, the private equity firm you created in 1999.

Heartland’s $1.3 billion fund is among the worst-performing private equity vehicles of all time, which prompted peHUB’s Bernard Vaughan to ask you what went wrong (as part of a larger series). You replied with a five paragraph screed against those who prosecuted you for fraud, and against those who aided in the prosecution. A sampling:

Heartland’s outcome has nothing to do with investment performance. The fund was destroyed by Davis Polk in a grotesque act of reckless legal malfeasance in May 2005. Their destructive attack on me and Heartland’s lead company, Collins & Aikman, was compounded when they forced it into an unnecessary bankruptcy, and then recruited an incompetent, rogue prosecutor from the U.S. Southern District to bring charges against me and other officers of the company…

In short, Heartland’s flagship company was destroyed and thousands of people lost their job because in its eagerness to book millions in Sarbanes-Oxley investigation fees, Davis Polk acted with rash, careless arrogance. Since Collins & Aikman constituted one-third of the Heartland’s portfolio, it could not recover from this body-blow nor from all of the disruption that attended my unwarranted prosecution—notwithstanding my ultimate vindication.”

Look, I get why you’re pissed off at David Polk and prosecutor Helen Cantwell (now at Debevoise & Plimpton LLP). You believe that the original evidence was fundamentally flawed, that you managed to prove those flaws and that you still got railroaded into a $7.2 million settlement with the SEC (which you memorably called a “money-harvesting machine”). And, no doubt, the investigation forced you to leave Heartland prematurely.

But there is no way that you can credibly place the blame for Heartland’s failure on any doorstep other than your own. You formed the firm in order to pursue a belief in a coming Rust Belt revival, and formed a concentrated portfolio that would live or die on the legitimacy of your thesis. As you might have noticed, the Rust Belt has only gotten rustier over the past decade-plus.

Collins & Aikman certainly struggled under the weight of federal investigation, but it was in trouble long before that. Don’t you remember moving up to Michigan — even renting out a motel room for months at a time — in order to take over as CEO in 2003? Pretty sure that was to help prop up what had become a sagging investment. Perhaps you were improperly forced out in 2005, but the investigation isn’t why Collins & Aikman filed for bankruptcy just days later.

In fact, you’ve previously admitted that the company’s main problem was a systemic collapse of the U.S. auto industry. In other words, a repudiation of your investment thesis. How is that the fault of attorneys or prosecutors?

Moreover, who is to blame for other portfolio missteps? Like Metaldyne, on which Heartland lost much of its equity investment before ultimately selling the company to Japan’s Asahi Tec in exchange for stock. Not only did Metaldyne itself go bankrupt once Asahi Tec opted to stop propping it up, but the value of Asahi Tec stock has sunk around 90% in the interim. Or Spring Industries, which has hardly been a winner for Heartland (now a Brazil-based company where your equity stake is valued at just around $27 million, based on Q3 2010 holdings). TriMas TRS has performed well, but not enough to help Heartland’s fund even approach break-even.

You might find this hard to believe, but I bear you no ill will. I just ask that you take ownership of Heartland’s failure, and for the losses suffered by those who put their faith in you. Not only because it’s the right thing to do, but because it’s the honest thing to do.

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