Friday, August 18, 2006
Two senior executives of DHB Industries, Inc., a supplier of body armor to the U.S. military, were arrested on insider trading, securities fraud, and conspiracy charges, and the SEC filed a civil suit alleging securities fraud. The former officers are Dawn M. Schlegel, DHB's CFO, and Sandra L. Hatfield, the chief operating officer, and the charges were filed by the U.S. Attorney's Office for the Eastern District of New York. The charges involve both accounting fraud and the sale of DHB securities that resulted in a profit of over $8 million. According to the SEC Litigation Release (here), the two defendants:
[R]egularly overstated the value of DHB's inventory by fraudulently increasing inventory quantities, labor costs, overhead costs, and the amount of raw materials used in DHB's products. The complaint alleges that together Hatfield and Schlegel also transferred millions of dollars of expenses from cost of goods sold to research and development costs to materially increase the company's gross profit. The complaint further alleges that Schlegel falsely inflated DHB's $60 million charge against earnings taken in the third quarter of 2005 to mask her and Hatfield's fraudulent conduct. Schlegel is alleged to have lied to DHB's auditors and provided fake inventory schedules and other documents to conceal the fraud.
The complaint also alleges that during the period of their fraudulent conduct, Schlegel and Hatfield collectively profited by over $8.2 million from the cashless exercise of warrants and sale of over 400,000 DHB shares. Schlegel and Hatfield sold these shares at the end of 2004 at the height of DHB's stock price and before the public knew about the misrepresentations in DHB's filings and public statements.
Last year, the military ordered the recall of one of the company's body armor products due to quality issues. Former CEO David Brooks, whose daughter's $10 million bat mitzvah party featured legendary rockers Steven Tyler and Joe Perry of Aerosmith, left the company on July 10 "pending the outcome of federal, state, and internal investigations" while DHB settled shareholder suits (press release here) Because federal prosecutors did not file any charges against Brooks at the same time as they did against Schlegel and Hatfield, it may be that he is cooperating in the investigation. Brooks made over $190 million from the sale of DHB stock in 2004, so he is a likely target of the grand jury investigation. (ph)