Friedman’s removes CFO as SEC starts formal probe of fraud claims

Friedman’s Inc., the country’s third largest retailer jewelry, on Nov. 12 announced it has put its chief financial officer on a leave of absence and that the U.S. Securities and Exchange Commission (SEC) and Justice Department have expanded their probes of fraud allegations against the company.

Friedman’s also said its “allowance for doubtful accounts” (i.e., percent of accounts receivables that might not be collectible) for the year (ended Sept. 27) will top the 10.5% previously announced. The company now estimates that figure will be 14%-17%, though that’s “subject to further adjustment,” based on ongoing review and completion of an audit of its finances.

The Nov. 12 announcements caused Friedman’s stock—which had reached a year-high of $17.50 on Sept. 3—to tumble to a 52-week low of $6.77 on Nov. 13.

The SEC, Justice Department, and internal-audit investigations are related to an Aug. 13 lawsuit filed against Friedman’s Inc., Crescent Jewelers, Whitehall Jewellers, and several other companies by receivables factoring company Capital Factors for alleged misrepresentation of the accounts receivable of Cosmopolitan Gem Corp., a Bangkok jewelry maker and a former vendor of theirs. Because of that, claims Capital Factors, it continued to advance funds to Cosmopolitan. Capital Factors also alleged they improperly made payments on accounts with Cosmopolitan directly to Cosmopolitan. Capital Factors is suing for at least $30 million and punitive damages. At the time, Friedman’s said it would “vigorously” defend itself and would cooperate with the investigations.

On Nov. 12, Friedman’s said that its board of directors had put chief financial officer Victor M. Suglia on a leave of absence and “management and the board are considering their alternatives with regard to an interim chief financial officer.” It gave no specific reasons for Suglia’s removal, and Brad Stinn, chief executive officer, when contacted by JCK, declined to discuss the issue.

The same Friedman’s Inc. statement noted the company has been informed by the SEC that it will formally investigate Friedman’s, expanding an informal inquiry the SEC began Sept. 8 into Capital Factors’ allegations. The upgraded inquiry will review Friedman’s “allowance for doubtful accounts” and other financial matters, to determine whether it issued “materially false or misleading disclosures” and whether there are possible violations of regulations governing internal controls, books, and records from Jan. 1, 2000, to the present.

On Nov. 6, Whitehall Jewelers said it had received a subpoena from the Securities and Exchange Commission, part of a formal investigation of Whitehall by the SEC. The subpoena sought documents from the Chicago jewelry retailer related to allegations made in Capital Factors’ lawsuit.

In addition, the U.S. Justice Department also has informed Friedman’s that it has expanded its own investigation into the Capital Factors matter and also will review Friedman’s “allowance for doubtful accounts” and other financial matters.

Stinn declined to comment on any aspect of the investigations, and said the company hasn’t been told when the investigations will be completed.

These investigations are affecting Friedman’s own reporting procedures. It had scheduled release of the financial results for its fourth quarter and full year (ended Sept. 27) for Nov. 11, 2003. However, it has “rescheduled” the release of the information—though no date has been set—because of “the diversion of company resources necessary to fulfill information requests” from the Justice Department, the SEC, and its own Audit Committee looking into Capital Factors’ allegations and other matters.