SEC Probes Zales

The Securities and Exchange Commission is investigating Zale Corp., the company announced recently.

The SEC asked Zale for a variety of documents relating to its accounting for extended service agreements, leases, and accrued payroll.

“Subpoenas issued in connection with the investigation request materials relating to these accounting matters as well as to executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments,” Zale said in a statement.

“We really don’t know anything more [about the investigation],” David Sternblitz, the company’s vice president and treasurer, told JCK. “The SEC hasn’t been specific about what they are focusing on. At this point, we are just pulling documents and cooperating with the SEC. We do feel that all of our accounting is appropriate and we complied with general accounting principles.”

Still, shortly after the investigation was announced, the company put senior vice president and chief financial officer Mark Lenz on “indefinite administrative leave” until further notice.

The company made the decision after discussions with its outside auditors, involving what it called Lenz’s “failure to timely disclose … that vendor payments scheduled to be made during the last two weeks of the Company’s fiscal year ended July 2005 were delayed until the first week of August 2005.”

The delay did not affect reported revenues or earnings, the company said, but did increase cash flow. It added it believes both cash and accounts payable were properly reflected on the balance sheet, and has reported the matter to the SEC. In the meantime, George Mihalko, former vice chairman of the Sports Authority, has been appointed acting chief administrative officer and CFO.

Another Blow

The news is another blow for the beleaguered company, which has been struggling with lukewarm sales and profits and recently forced the resignation of chief executive officer Mary Forte. In addition, longtime employee Sue Gove, former chief operating officer, has left the company.

Zale is still searching for a new CEO. Betsy Burton, a board member, is serving in that capacity in the interim. Sternblitz said the company has a “short list” of candidates, and that, when the new CEO is chosen, that person will fill out the management team.

In press accounts, analysts suggested that the comings and goings in the executive suite may have sparked regulator interest. But Sternblitz called that “speculation.”

Adding to Zale’s woes, a class-action firm called Kahn Gauthier Swick recently put up a notice that it is investigating the financial losses suffered by Zale’s employees and former employees who participated in the company’s 401(k) plan.

The statement says, “Zale Corp. and its plan administrators may have violated the law … by [weighing it] too heavily with Zale stock … resulting in excessive losses for Zale employees.”

The firm did not return a call from JCK for comment.