Former Chief Executive Officer of Friedman's Inc. and Crescent Jewelers Indicted in Accounting Fraud Scheme
An indictment was unsealed this morning in federal court in Brooklyn charging BRADLEY STINN, the former chief executive officer at Friedman’s, Inc. and its affiliate, Crescent Jewelers, for his participation in a massive accounting fraud scheme. According to the indictment, STINN and his co-conspirators repeatedly lied to shareholders and the investing public about Friedman’s financial performance for the purpose of making Friedman’s reported financial data appear substantially better than actual results.1 The disclosure of the government’s investigation prompted the resignation of STINN and Friedman’s chief financial officer, and Friedman’s announcement in November 2003 that its previously filed financial statements for its fiscal years 2000, 2001, and 2002, and the first three quarters of its fiscal year 2003, would be restated. To date, the government’s investigation has resulted in the guilty pleas of Friedman’s and Crescent’s former chief financial officer and Friedman’s former controller, and the execution of non-prosecution agreements by Friedman’s and Crescent, pursuant to which the companies agreed to forfeit $3 million, cooperate fully with the government’s investigation, and adopt significant corporate reforms to prevent recurrence of the fraud.
STINN is scheduled to be arraigned this afternoon before United States Magistrate Judge Marilyn D. Go at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York. The charges were announced by Roslynn R. Mauskopf, United States Attorney for the Eastern District of New York, and Ron Walker, Inspector-in-Charge, U.S. Postal Inspection Service.
During the period of the conspiracy, Friedman’s was the third largest specialty retailer of fine jewelry in the United States, operating 686 stores in 20 states. Friedman’s encouraged its sales personnel to increase sales by inducing customers to finance their jewelry purchases using the company’s installment credit program, which Friedman’s described in publicly filed reports as an “integral part” of its business strategy. In fact, more than half of Friedman’s $400 million in annual net sales were made on credit.
As alleged in the indictment, a major aspect of the scheme was to cover up the fact that, over time, Friedman’s was increasingly unable to collect money owed by customers who bought jewelry on credit. Friedman’s collection problems stemmed from the company’s widespread failure to follow its own credit-granting guidelines – guidelines which STINN falsely told investors were strictly enforced. In fact, STINN and other senior executives encouraged routine violations of the guidelines to increase the company’s reported sales. While these violations enabled Friedman’s to meet internal sales quotas in the short term, it led to the company not being able to collect on a rapidly growing percentage of its credit sales.
Instead of disclosing Friedman’s collection problems, STINN and others falsified the company’s accounting data to conceal these problems from the investing public. Among other things, STINN caused Friedman’s quarterly reported credit statistics to understate the delinquency of Friedman’s credit portfolio, which gave investors the false impression that Friedman’s credit accounts were more collectible than they in fact were. STINN also caused Friedman’s to report false earnings numbers, which did not fully take into account the impact of the collection problems. In some cases, the false earnings reported by Friedman’s met or exceeded the public estimates of professional stock analysts, even though STINN knew that Friedman’s actual results fell below these estimates. The misleading portrayal of Friedman’s financial condition resulted in the artificial inflation of Friedman’s stock price.
Between November 2003 and May 2004, Friedman’s stock price lost more than half its value. On November 11, 2003, the stock closed at $11.99 per share. On May 6, 2004, the New York Stock Exchange halted trading in Friedman’s stock, at which time the stock was trading at $4.97 per share. On January 14, 2005, Friedman’s filed for Chapter 11 bankruptcy.
“The public relies on corporate filings and reports to make informed investment decisions,” stated United States Attorney Mauskopf. “When corporate executives fraudulently manipulate their companies’ reported performance, they not only breach their trust, they defraud their investors. This investigation reflects the shared commitment of this Office and our partners in the President’s Corporate Fraud Task Force to aggressively prosecute corporate crime.” Ms. Mauskopf thanked the Securities and Exchange Commission for its assistance and added that the investigation is continuing.
Postal Inspector-in-Charge Walker stated, “Like knowingly selling a flawed diamond as perfect, the defendant misled investors through cloudy and deceptive accounting practices. Eventually his brilliant scheme not only caused his company to fail, but, thanks to the diligence and teamwork of postal inspectors, the SEC, and the USAO, a new setting might be waiting for him… jail.”
If convicted of the most serious charge – conspiracy to commit securities fraud, mail fraud and wire fraud – STINN faces a maximum sentence of 30 years’ imprisonment.
The government’s case is being prosecuted by Assistant United States Attorneys Scott Klugman, Taryn Merkl, Cynthia Monaco, and Laura Mantell.
Name: BRADLEY STINN
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