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U.S. Securities and Exchange Commission


Litigation Release No. 19477 / November 30, 2005

Accounting and Auditing Enforcement
Release No. 2351 / November 30, 2005


Civil Action No. CV 05-5516 (J. W.) (E.D.N.Y.)


The Securities and Exchange Commission announced today that on Monday, it filed a settled enforcement action in the United States District Court for the Eastern District of New York charging Friedman’s Inc. (“Friedman’s”) with securities fraud and violating related books and records provisions of the securities laws.

The Complaint alleges that from at least fiscal year-ended 2001 through September 2003, at the direction of Friedman’s’ former senior management, Friedman’s systematically inflated earnings to meet Wall Street’s expectations, while concealing the fact that a growing percentage of its credit accounts receivable were likely not collectible. The Commission alleges that Friedman’s made material misrepresentations concerning its credit program and its write-off policy, and systematically under-reserved for bad debts using various non-GAAP accounting practices. The Complaint further alleges that from at least fiscal year-ended 2001 through September 2003, Friedman’s used certain “one-off” actions to manipulate its earnings and improve the appearance of its balance sheet, including, among others: (i) prematurely recognizing as a reduction in its cost of sales merchandise discounts that Friedman’s received from its suppliers; (ii) failing to account properly for the sale of receivables that Friedman’s had written off; and (iii) using certain related party transactions to capitalize expenses that Friedman’s should have recognized immediately.

The complaint charges Friedman’s with violating Section 17 (a) of the Securities Act of 1933, and Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.

Friedman’s, which filed for bankruptcy on January 14, 2005, has agreed to settle the Commission’s charges by consenting to a permanent injunction against future violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. In its settlement of the Justice Department’s parallel investigation, Friedman’s has agreed to pay $2 million to the United States Postal Inspection Service’s Consumer Fraud Fund and will make certain reforms to its corporate governance and financial accounting controls.

The Commission expresses its appreciation to the United States Attorney’s Office for the Eastern District of New York and the United States Postal Inspection Service for their assistance in the investigation of this matter.

SEC Complaint in this matter



Modified: 11/30/2005