Former Executives of Defense Contractor D.h.b. Industries, Inc. Charged with Securities Fraud and Insider Trading

Two former executives of D.H.B. Industries, Inc. (“DHB”), a publicly-held defense contractor and leading supplier of body armor to the U.S. military and law enforcement agencies, were arrested today and charged for their roles in a scheme to fraudulently manipulate the books and records of DHB and reap millions of dollars of profits through insider trading. DAWN SCHLEGEL, the former Chief Financial Officer of DHB, and SANDRA HATFIELD, DHB’s former Chief Operating Officer, allegedly inflated the company’s earnings and profit margins between 2003 and 2005 by millions of dollars and in order to meet the 27 to 28 percent gross profit margin expectation set by professional stock analysts, and sold several hundred thousand shares of their DHB stock based on inside information, netting a profit of over $8 million.¹

HATFIELD and SCHLEGEL, who resigned from DHB in late 2005 and early 2006, respectively, are charged with securities fraud, insider trading, and conspiracy. DHB was headquartered in Westbury, New York until approximately two months ago, when the company relocated to Pompano Beach, Florida. Its stock was traded on the American Stock Exchange until trading was suspended on May 28, 2006.

The charges were announced by Roslynn R. Mauskopf, United States Attorney for the Eastern District of New York, Mark J. Mershon, Assistant Director-in-Charge of the Federal Bureau of Investigation, New York Field Office, and Susan Lynn, New York Resident Agent-in-Charge of the Defense Criminal Investigative Service. The indictment follows an investigation conducted with the assistance of the United States Securities and Exchange Commission (“SEC”). The SEC filed a related civil complaint today against SCHLEGEL and HATFIELD in the United States District Court for the Southern District of Florida, charging violations of the Securities and Exchange Act of 1934.

The indictment unsealed this morning alleges that SCHLEGEL and HATFIELD (1) used fraudulent journal entries to reclassify over $20 million in expenses associated with the cost of producing goods as being related to expenses that did not impact DHB’s gross profit margin, such as research and development or distribution of sample products, thereby fraudulently inflating DHB’s publicly reported gross profit margin; (2) overvalued DHB’s inventory of the principal body armor product DHB sold to the U.S. military – the Interceptor vest – by over $6 million in 2003 and by over $13 million in 2004, thereby inflating both DHB’s earnings and gross profit margin; and (3) created fraudulent entries in DHB’s corporate books and records that accounted for $14 million worth of non-existent inventory in 2004 and 2005, further inflating DHB’s earnings and gross profit margin. The defendants’ fraudulent manipulation of DHB’s expenses and inventory calculations inflated DHB’s pre-tax earnings by over $6 million in 2003 and $13 million in 2004, and the scheme inflated DHB’s gross profit margin by over $30 million between 2003 and 2005. The bogus financial results were reported to the investing public through quarterly and annual reports filed by DHB with the SEC.

 The indictment further alleges that in the midst of their fraud scheme, after DHB’s stock price had risen from under $2 in early 2003 to nearly $20 in late 2004, the defendants sold several hundred thousand shares of DHB stock, generating $2.9 million in profits for SCHLEGEL and more than $5 million for HATFIELD. DHB’s stock price declined steadily after these sales, dropping to approximately $5 on March 31, 2006, when the company disclosed in a form 8-K filed with the SEC that it anticipated material restatements of financial results for the first three quarters of 2005 due to “inaccurate inventory records,” and then hit a three-year low of $1.57 in June 2006, before the American Stock Exchange suspended trading in the stock.

“As a result of the fraud scheme, the investing public lost millions of dollars while the defendants lined their own pockets with a fortune in ill-gotten gains,” stated United States Attorney Mauskopf. “Corporate executives who manipulate financial results and exploit their positions of trust will be prosecuted to the full extent of the law.” Ms. Mauskopf added that the investigation is continuing.

“This case is about high level executives who are privileged with confidential corporate information and allegedly manipulated that information to reap profits and feed their greed. In vigorously enforcing our laws against securities fraud and insider trading, we are upholding the fairness and integrity of the market system for the good of the honest investor,” stated FBI Assistant Director-in-Charge Mershon.

DCIS New York Resident Agent-in-Charge Lynn stated, “This case is a good example of how vigorously law enforcement will investigate those who supply products to U.S. soldiers to ensure they operate within the law.”

The defendants are scheduled to be arraigned later today before United States Magistrate Judge William D. Wall, at the United States Courthouse in Central Islip, New York. The case has been assigned to United States District Judge Arthur D. Spatt.

 The charges contained in the indictment carry the following maximum sentences: as to each securities fraud and conspiracy to commit securities fraud count, 25 years’ imprisonment, three years’ supervised release, a $250,000 fine (or twice the gross gain or loss as a result of the offense), and an order of restitution. The indictment also seeks forfeiture of approximately $8 million in assets belonging to the defendants, which represent the collective profits from their insider trading

The government’s case is being prosecuted by Assistant United States Attorneys John G. Martin and Denise McGinn.

The Defendants:

Name: DAWN SCHLEGEL
DOB: 2/5/69

Name: SANDRA HATFIELD
DOB: 1/6/54

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¹The charges contained in the indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty.