U.S. Securities and Exchange Commission
Litigation Release No. 18751 / June 17, 2004
Accounting and Auditing Enforcement Release No. 2037 / June 17, 2004
Securities and Exchange Commission v. Victor Jacobowitz, et al., Civil Action No. 04 CV 2505 (E.D.N.Y.)
COMMISSION CHARGES FIVE FORMER EXECUTIVES WITH FINANCIAL REPORTING FRAUD AT ALLOU HEALTHCARE, INC.
Today, the United States Securities and Exchange Commission filed a complaint in the United States District Court for the Eastern District of New York alleging that Victor Jacobowitz, former Chairman of the Board of Directors of Allou Healthcare, Inc. ("Allou"), and four other former executives engaged in financial reporting fraud. The Commission's complaint alleges that beginning in the 1990s and continuing through March 2003, the defendants engaged in a scheme to defraud Allou's lenders and public investors. The defendants falsified Allou's accounting records, earnings reports, and periodic filings with the Commission by, among other things, materially overstating revenue and inventory. The complaint alleges that the defendants manipulated Allou's net income and earnings per share to meet Wall Street's expectations. The complaint also alleges that the defendants conducted this scheme, in part, for their own personal enrichment.
The complaint names the following defendants:
The complaint alleges the following. Allou, currently a bankrupt distributor of pharmaceuticals and health and beauty products, defrauded its lenders of hundreds of millions of dollars, as well as its public investors. Victor Jacobs and Herman Jacobs engaged in a scheme to misappropriate funds by overstating Allou's revenue, accounts receivable, and inventory. Specifically, Herman Jacobs recorded millions of dollars in false sales to Allou customers, and together with Victor Jacobs, manipulated Allou's accounts receivable to make it appear customers were paying for the products. David Shamilzadeh and Irvin Brown prepared a second set of books through password protected computer files to conceal the false invoices and manipulated accounts receivable. Jacob Jacobs was aware of the scheme. In September 2002, a fire destroyed a warehouse in Brooklyn used to store some of Allou's inventory. Allou reported in filings made with the Commission that the inventory destroyed in the fire had a cost-basis value of approximately $86 million.
During the fifteen months ended in March 2003, Allou recorded approximately $220 million of falsified sales. As a result of the defendants' conduct, Allou was able to overstate its revenue and accounts receivable and to borrow from its trade creditors significantly more funds than Allou's legitimate business merited. For example, Allou's Form 10-Q, dated February 11, 2003, which reported revenue of $471 million for the nine months ended December 31, 2002 included approximately $153 million of falsified sales, overstating actual revenue by forty-eight percent.
In addition, Shamilzadeh and Herman Jacobs manipulated Allou's net income and earnings per share by overstating inventory. By overstating inventory, Allou could understate expenses, and therefore manipulate net income and earnings per share so they would be in line with forecasts Shamilzadeh provided to Wall Street. Allou also borrowed funds from its lenders secured by this nonexistent inventory. Victor Jacobs and Jacob Jacobs were aware of the scheme. Victor Jacobs was simultaneously involved in misappropriating money from Allou by transferring millions of dollars to entities the Jacobs family controlled purportedly to pay for nonexistent inventory. Allou made approximately $179 million in payments to affiliated entities for nonexistent inventory during fiscal year 2002.
The complaint alleges that, based on the foregoing, Victor Jacobs, Herman Jacobs, Jacob Jacobs, Shamilzadeh, and Brown violated and/or aided and abetted Allou's violations of the antifraud, issuer reporting, internal controls, and books and records provisions of the federal securities laws. The complaint also alleges that Victor Jacobs, Herman Jacobs, and Shamilzadeh lied to Allou's auditors, and that Herman Jacobs and Shamilzadeh violated the certification requirements of the Sarbanes-Oxley Act of 2002. The Commission's complaint seeks an order permanently enjoining each defendant and ordering them to pay disgorgement and civil penalties. The Commission's complaint also seeks an order barring each defendant from acting as an officer or director of a public company. The specific charges alleged in the complaint are as follows:
The Commission acknowledges the assistance of the United States Attorney for the Eastern District of New York and the United States Postal Inspection Service in connection with this matter.