U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21867 / February 28, 2011
Accounting and Auditing Enforcement Release No. 3247 / February 28, 2011
SEC v. DHB Industries, Inc. n/k/a Point Blank Solutions, Inc., Civil Action No. 0:11-cv-60431-JIC (U.S. District Court for the Southern District of Florida, filed February 28, 2011)
SEC v. Jerome Krantz, Cary Chasin, and Gary Nadelman, Civil Action No.0:11-cv-60432-WPD (U.S. District Court for the Southern District of Florida, filed February 28, 2011)
The Securities and Exchange Commission today filed securities fraud charges against DHB Industries, Inc. n/k/a Point Blank Solutions, Inc. (“DHB”), a major supplier of body armor to the U.S. military and law enforcement agencies, for engaging in a massive accounting fraud that occurred at the company between 2003 and 2005. The agency also filed separate fraud charges against DHB’s former outside directors and audit committee members, Jerome Krantz, Cary Chasin, and Gary Nadelman, for facilitating the company’s fraud.
The SEC’s complaint against DHB, filed in U.S. District Court for the Southern District of Florida, alleges that the company, through its senior executive officers, engaged in pervasive accounting and disclosure fraud, and misappropriation of company assets that resulted in the company filing materially false and misleading periodic reports with the SEC. The complaint against Krantz, Chasin, and Nadelman alleges that they facilitated DHB’s fraud by willfully ignoring numerous, significant red flags signaling widespread accounting fraud and misappropriation at the company by senior officers.
The SEC’s complaint against Krantz, Chasin, and Nadelman alleges that from at least 2003 through 2005, they were willfully blind to numerous red flags signaling accounting fraud, reporting violations, and misappropriation at DHB. According to the complaint, Krantz, Chasin, and Nadelman’s willful blindness to these red flags, allowed senior management to manipulate the company’s reported gross profit, net income, and other key figures in its earnings releases and public filings. The company did so by, among other things, overstating inventory values, failing to include appropriate charges for obsolete inventory, and falsifying journal entries.
The complaint against Krantz, Chasin, and Nadelman further alleges that their willful blindness to red flags enabled DHB’s former chief executive officer, David Brooks, to divert at least $10 million out of the company through fraudulent transactions with a related entity he controlled. By ignoring the numerous red flags, the three outside directors also facilitated DHB’s improper payment of millions of dollars in personal expenses for Brooks. These expenses included such items as luxury cars, jewelry, art, real estate, extravagant vacations, and prostitution services. As a result of this misconduct, DHB’s SEC filings and press releases contained materially false and misleading financial and other information. Despite being confronted with numerous, significant, and compounding red flags indicating fraud, Krantz, Chasin, and Nadelman approved and/or signed DHB’s false and misleading filings.
The SEC’s complaint against DHB charges it with violating Sections 10(b), 13(a), 13(b)(2)(A),13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
The complaint against Krantz, Chasin, and Nadelman charges them with violating Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5 and 14a-9 thereunder, and with aiding and abetting DHB’s violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and also charges Nadelman with violating Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder.
DHB has agreed to settle with the SEC and agreed to a permanent injunction from future violations. The proposed settlement took into account the remedial measures already taken by the company in this regard. The company is currently in bankruptcy and its settlement with the SEC is pending the approval of the bankruptcy court. Krantz, Chasin, and Nadelman have not settled to the charges and the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and officer and director bars against them.
The SEC previously filed civil fraud charges in federal district court against David Brooks and two other DHB senior officers – former chief operating officer Sandra Hatfield and former chief financial officer Dawn Schlegel – for their roles in this fraud. The U.S. Attorney’s Office for the Eastern District of New York also previously filed criminal charges against Brooks, Hatfield, and Schlegel based on the same conduct that led to the SEC’s action against them. On September 14, 2010, a jury convicted Brooks and Hatfield of, among other things, multiple counts of securities fraud, insider trading, and obstruction of justice, including obstructing the SEC’s investigation. Brooks and Hatfield are awaiting sentencing. Schlegel previously pled guilty to criminal charges pursuant to a plea agreement. The SEC’s civil actions against Brooks, Hatfield, and Schlegel are stayed pending the full resolution of the criminal actions.