U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19806 / August 17, 2006
Accounting and Auditing Enforcement Release No. 2475 / August 17, 2006
SEC v. Dawn M. Schlegel and Sandra Hatfield, (U.S. District Court for the Southern District of Florida, Civil Action No. 06-61251-CIV-SEITZ/McAliley filed August 17, 2006)
The Securities and Exchange Commission today announced the filing of securities fraud charges against Dawn M. Schlegel and Sandra L. Hatfield, two former officers of DHB Industries, Inc., a major supplier of body armor to the United States military and law enforcement agencies. The SEC alleges that Schlegel, DHB's former Chief Financial Officer, and Hatfield, DHB's former Chief Operating Officer, routinely overstated the value of the company's inventory and directed the booking of numerous fraudulent journal entries in order to reduce the company's cost of goods sold. This had the effect of falsely increasing the company's gross profit margins, and in some instances, net income. As a result of their misconduct, DHB materially misstated key financial information in filings with the SEC and in public statements.
According to the SEC's complaint, Schlegel, of Eastport, N.Y., and Hatfield, of Pompano Beach, Fla., 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 complaint alleges that together Hatfield and Schlegel also transferred millions of dollars of expenses from cost of goods sold to research and development costs to materially increase the company's gross profit. The complaint further alleges 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 is alleged to have lied to DHB's auditors and provided fake inventory schedules and other documents to conceal the fraud.
The complaint also alleges that during the period of their fraudulent conduct, Schlegel and Hatfield collectively profited by over $8.2 million from the cashless exercise of warrants and sale of over 400,000 DHB shares. Schlegel and Hatfield sold these 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's complaint charges Schlegel and Hatfield with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting DHB's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint also alleges that Schlegel violated Rules 13b2-2 and 13a-14 under the Exchange Act. In its complaint, the Commission seeks permanent injunctions, disgorgement, civil penalties, insider trading penalties, and officer and director bars against Schlegel and Hatfield.
The United States Attorney's Office for the Eastern District of New York conducted a parallel investigation of this matter. Simultaneous with the SEC's announcement of this action, the United States Attorney's Office announced the filing of charges against Hatfield and Schlegel for securities fraud and conspiracy to commit securities fraud.
The staff's investigation is continuing.