The Securities and Exchange Commission has charged a major supplier of body armor to the U.S. military and law enforcement agencies with engaging in a massive accounting fraud, and separately charged three of the company’s former outside directors and audit committee members for their complicity in the scheme.
The SEC alleges that Pompano Beach, Fla.-based DHB Industries (now known as Point Blank Solutions) engaged in pervasive accounting and disclosure fraud through its senior officers and misappropriated company assets to personally benefit the former CEO. This resulted in the filing of materially false and misleading periodic reports to investors. The SEC further alleges that outside directors Jerome Krantz, Cary Chasin and Gary Nadelman were willfully blind to numerous red flags signaling the accounting fraud, reporting violations and misappropriation at DHB.
The SEC previously charged former DHB CEO David Brooks as well as two other former DHB senior officers for their roles in the fraud.
"We will not second-guess the good-faith efforts of directors,” said Robert Khuzami, director of the SEC's Division of Enforcement. “But in stark contrast, Krantz, Chasin and Nadelman were directors and audit committee members who repeatedly turned a blind eye to warning signs of fraud and other misconduct by company officers."
The SEC filed two separate complaints in the U.S. District Court for the Southern District of Florida against DHB and the former outside directors. According to the SEC’s complaint against Krantz, Chasin and Nadelman, their willful blindness to red flags allowed senior management to manipulate the company’s reported gross profit, net income, and other key figures in its earnings releases and public filings between 2003 and 2005. The company overstated inventory values, failed to include appropriate charges for obsolete inventory, and falsified journal entries.
By ignoring red flags, the three outside directors also facilitated the misconduct by Brooks, who diverted at least $10 million out of the company through fraudulent transactions with a related entity that he controlled. Their willful blindness to red flags additionally facilitated DHB’s improper payment of millions of dollars in personal expenses for Brooks, including luxury cars, jewelry, art, real estate, extravagant vacations and prostitution services. Despite being confronted with the red flags indicating fraud, Krantz, Chasin and Nadelman approved or signed DHB’s false and misleading filings.
The SEC’s complaints against DHB, Krantz, Chasin and Nadelman charge them with violating or aiding and abetting the antifraud, reporting, books and records, and other provisions of the federal securities laws. DHB has agreed to settle with the SEC and agreed to a permanent injunction from future violations. The proposed settlement took into account the remedial measures already taken by the company. The company is currently in bankruptcy and its settlement with the SEC is pending the approval of the bankruptcy court. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and officer and director bars against Krantz, Chasin, and Nadelman.
The U.S. Attorney’s Office for the Eastern District of New York previously filed criminal charges against Brooks, Hatfield and Schlegel based on the same misconduct. On Sept. 14, 2010, a jury convicted Brooks and Hatfield of, among other things, multiple counts of securities fraud, insider trading, and obstruction of justice, including obstructing the SEC’s investigation. Brooks and Hatfield are awaiting sentencing. Schlegel previously pled guilty to criminal charges pursuant to a plea agreement. The SEC’s civil actions against Brooks, Hatfield and Schlegel are stayed pending the full resolution of the criminal actions.
The SEC’s case was investigated by attorneys Sondra Hickey Panahi, Christine Lynch, and Chedly C. Dumornay, and accountant Michelle Lama of the SEC’s Miami Regional Office. Christopher Martin of the Miami Regional Office will be litigating the SEC’s case.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access