The Securities and Exchange Commission filed securities fraud charges on Thursday against the former CFO and former chief operating officer of DHB Industries, a major supplier of body armor to the United States military and law enforcement agencies. The charges alleged that an accounting scheme orchestrated by the duo caused the company to materially misstate key financial information in filings with the SEC and in public statements.
Former Chief Financial Officer Dawn M. Schlegel and former COO Sandra L. Hatfield were accused by the regulator of routinely overstating the value of the company’s inventory and directing the booking of numerous fraudulent journal entries as a way of reducing the company’s cost of goods sold.
The alleged plot had the effect of falsely increasing the company’s gross profit margins, and in some instances, net income, according to the complaint. “By manipulating DHB’s gross profit margin, Schlegel and Hatfield knew that investors would be given a false portrait of DHB’s operating results,” said Linda Chatman Thomsen, director of the SEC’s Enforcement Division, in a statement.
In addition, the United States Attorney’s Office filed criminal charges against Hatfield and Schlegel for securities fraud and conspiracy to commit securities fraud, according to the SEC.
In the SEC complaint, the regulator charged that Schlegel and Hatfield “regularly 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 suit also charged that the two former executives transferred millions of dollars of cost-of-goods-sold expenses to research and development accounts to materially increase the company’s gross profit.
Furthermore, the SEC asserted 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 also is alleged to have lied to DHB’s auditors and provided fake inventory schedules and other falsified documents to conceal the fraud.
The SEC accused Schlegel and Hatfield of collectively profiting by over $8.2 million from the cashless exercise of warrants and sale of over 400,000 DHB shares. Schlegel and Hatfield sold the 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, the Commission asserted.