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:

  • Victor Jacobowitz (aka Victor Jacobs), age 72, is a resident of Brooklyn, New York. Victor Jacobs served as the chairman of Allou's board of directors from 1985 to May 2003.

  • Herman Jacobowitz (aka Herman Jacobs), age 44, is a resident of Brooklyn, New York. Herman Jacobs served as Allou's CEO from July 2000 to April 2003, and as a director from 1985 to May 2003. Herman Jacobs is a son of Victor Jacobs.

  • Jacob Jacobowitz (aka Jacob Jacobs), age 41, is a resident of Brooklyn, New York. Jacob Jacobs served as executive vice president of Allou from July 2000 to April 2003, and as a director from 1985 to May 2003. Jacob Jacobs is also a son of Victor Jacobs.

  • David Shamilzadeh, age 58, is a resident of New York, New York. Shamilzadeh served as Allou's CFO from April 1990 to September 2001, as Allou's president from July 2000 to April 2003 and as principal accounting officer from September 2001 to April 2003. Shamilzadeh served as a director of Allou from July 1989 to April 2003.

  • Irvin Brown, age 43, is a resident of Monsey, New York. Brown worked at Allou from at least 1991. As the head of the information technology department, Brown functioned as Allou's de facto chief information officer.

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:

Victor Jacobs: violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13;

Herman Jacobs and Shamilzadeh: violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13;

Jacob Jacobs: violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5; and aiding and abetting violations of Sections 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1; and

Brown: violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13.

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.

SEC Complaint in this matter