Risk & Compliance

Friedman’s Will Pay $2 Million in Settlement

Retailer ''systematically inflated earnings to meet Wall Street's expectations,'' alleges the SEC, while concealing the fact that a growing percent...
Stephen TaubDecember 1, 2005

Jewelry retailer Friedman’s Inc. has agreed to pay $2 million to the consumer-fraud fund of the United States Postal Inspection Service as part of a settlement of securities fraud charges, according to the Securities and Exchange Commission.

In U.S. District Court for the Eastern District of New York, the SEC alleged that the retailer “systematically inflated earnings to meet Wall Street’s expectations” while concealing the fact that a growing percentage of its credit accounts receivable were likely not collectible. The commission also alleged that Friedman’s, which filed for bankruptcy in January 2005, made material misrepresentations concerning its credit program and its write-off policy, and systematically underreserved for bad debts using various non-GAAP accounting practices.

In addition, the SEC alleged that from at least fiscal year-end 2001 through September 2003, Friedman’s used certain one-off actions to manipulate its earnings and improve the appearance of its balance sheet. According to the commission, these actions included: prematurely recognizing, as a reduction in its cost of sales, merchandise discounts that Friedman’s received from its suppliers; failing to account properly for the sale of receivables that Friedman’s had written off; and using certain related-party transactions to capitalize expenses that Friedman’s should have recognized immediately.

As part of a settlement of a parallel investigation by the Department of Justice, Friedman’s also agreed to make certain reforms to its corporate governance and to its financial accounting controls.

Steve Moore, Friedman’s chief administrative officer said that “the company is very happy to get this behind us,” according to Reuters.

Two years ago, Friedman’s disclosed that it would restate its results back to at least fiscal 2000 due to concerns over its accounting of bad debt and losses, and the company’s auditor, Ernst & Young, withdrew its audit opinions on previously filed annual financial statements.