Whitehall Jewellers Inc. has made a deal to avoid prosecution over a scheme in which the lender of a now-defunct Manhattan jewelry supplier was defrauded of more than $20 million, prosecutors said Tuesday, The Associated Press reports.

The U.S. Attorney’s Office in Brooklyn Tuesday reportedly said the Chicago jeweler, in a written agreement with the government, accepted responsibility for improper conduct by former executives and adopted significant corporate reforms to prevent similar conduct in the future.

Prosecutors say Jon Browne, Whitehall’s former chief financial officer, aided executives at Cosmopolitan Gem Corp., a former Manhattan jewelry supplier that ceased operations in 2003, in overstating the value of Cosmopolitan’s accounts receivables to Capital Factors Inc., Cosmopolitan’s lender.

As a result of the deception, Capital Factors was defrauded of more than $20 million, the government said.

Browne reportedly pleaded guilty Tuesday in Brooklyn to bank and wire fraud conspiracy along with Joshua Kestenbaum, who was president of Cosmopolitan Gem Corp.; and Christopher Shaw, Cosmopolitan’s CFO.

They each face up to 30 years in prison and a maximum fine of $1 million. Kestenbaum also agreed to forfeit $2.5 million as part of his plea, the AP reports.

Whitehall reportedly said Tuesday that it had agreed to pay restitution to Capital Factors of $10.8 million and to pay $350,000 to the government, which prosecutors said will be used to defray costs of an investigation by postal inspectors.

Whitehall also said that it has separately settled with Capital Factors, International Diamonds Ltd., and Astra Diamonds Manufacturers Inc. to end litigation claims, the AP reports. International Diamonds and its Astra Diamonds affiliate will together receive $1.93 million from Whitehall.

Whitehall said it had previously recorded litigation accruals of $9.2 million related to the Cosmopolitan matter, the AP reports. The company said it will record an additional accrual of $120,000 pretax in its fiscal third quarter.

“We are pleased that we have reached agreements in these matters,” said Hugh M. Patinkin, Whitehall’s chairman and chief executive.

In addition to the U.S. Attorney’s investigation, the Securities and Exchange Commission initiated a formal inquiry in September 2003 related to the Capital Factors litigation. Whitehall says it has cooperated with the SEC probe.

Whitehall also has taken a number of remedial steps to ensure similar activity doesn’t take place in the future, including terminating employees who engaged in misconduct; restructuring its management; adopting a comprehensive compliance program and adding two additional independent directors to its board, the AP reports.

Under the cooperation agreement, Whitehall must submit reports to the U.S. Attorney’s office for the next three years detailing its compliance efforts and any “material” violations of those policies, the AP reports. Whitehall will be subject to prosecution if it fails to live up to the terms of the agreement.

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