Risk Management

No Protection Against Massive-Fraud Charges

Ex-leaders of body-armor company DBH Industries committed seemingly almost every crime in the book, DOJ and SEC charges suggest.
Stephen TaubOctober 25, 2007

The Justice Department indicted two former officers of a body armor company insider trading, fraud, obstruction of justice, and tax
evasion.

David Brooks, former CEO of DHB Industries, and Sandra Hatfield, former chief operating officer, already had been indicted for securities fraud in August 2006. The new indictment supersedes the old one.

In a parallel action, the Securities and Exchange Commission Thursday filed securities fraud charges against Brooks, alleging he conducted a pervasive accounting fraud at DHB between 2003 and 2005, violated insider trading laws in 2004, and used millions of dollars in corporate funds to pay personal expenses.

The new indictment alleges that the defendants manipulated DHB’s financial records to increase reported earnings and profit margins, thereby inflating the price of DHB’s stock, of both had significant holdings.

They are also accused of conspiring to enrich themselves by causing the company to pay personal expenses and millions of dollars above their authorized compensation.

When DHB’s stock price rose to nearly $20 per share in late 2004, Brooks and Hatfield sold several million shares of their DHB stock. Brooks realized more than $185 million and Hatfield more than $5
million, according to the government.

The pair also allegedly defrauded the government out of millions of dollars in tax revenue by failing to report to the IRS more than $10 million in bonus payments to themselves and other DHB employees,
U.S. Attorney Benton Campbell said.

Brooks allegedly used DHB funds to purchase or lease luxury cars for him and his family members and Hatfield; finance expenses related to his horse racing business; and pay personal expenses for vacations, jewelry, cosmetic surgery, country club bills, and family celebrations.

Regarding the alleged accounting fraud, the indictment alleges that Brooks and Hatfield increased the net income and profit margins that DHB reported in its press releases and filings with the SEC by falsely inflating the value of DHB’s existing inventory, adding non-existent inventory to the books and records of DHB, and fraudulently
reclassifying expenses.

“We are committed to ensuring that our markets operate fairly and honestly and will vigorously investigate and prosecute executives who fraudulently enrich themselves,” said Campbell.

Brooks and Hatfield face a maximum of 25 years in prison or securities, mail and wire fraud, insider trading, and conspiracy to commit these offenses; 25 years for insider trading; 20 years for obstruction of justice and false statements; and five years for tax
fraud, evasion, and filing false returns.

They also face a fine equal to twice the gain or loss resulting from their fraud schemes, and the government is seeking forfeiture of approximately $190 million from them for securities fraud
violations.

The government also filed an application to freeze about $130 million of identifiable assets held by Brooks, including bank accounts and brokerage accounts.

The SEC’s complaint alleges that Brooks, with the assistance of Hatfield and DHB’s former finance chief, manipulated the company’s gross profit margin and net income by overstating inventory
values, falsifying journal entries, and failing to include appropriate charges for obsolete inventory.

Brooks also funneled millions of dollars out of DHB through
fraudulent transactions with a related entity he controlled, the complaint said. It further alleged that Brooks used company credit cards and checks to pay millions of dollars in personal expenses, including luxury cars, jewelry, art, real estate, extravagant
vacations, personal aircraft usage, and horse training.

As a result of the misconduct by Brooks, DHB filed false and misleading financial documents with the SEC and made false statements in company press releases, according to the regulator.

The complaint also alleges that Brooks sold his personal DHB stock for about $186 million at the end of 2004 at the height of DHB’s stock price, and did so while in possession of material, non-public information.

The SEC is seeking injunctive relief, disgorgement of ill-gotten gains, monetary penalties, an officer and director bar, and reimbursement by Brooks to DHB of bonuses and profits from stock sales pursuant to Section 304 of the Sarbanes-Oxley Act.

At the time of the alleged conduct, Brooks was subject to an SEC injunction entered by a federal court in December 1992 against future violations of the antifraud provisions, the SEC pointed out. In addition, in December 1992, the commission barred Brooks from
associating with any broker or dealer for five years.

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