Shareholder Suits Filed Against Friedman’s

No fewer than 15 law firms have filed class-action suits on behalf of shareholders who have owned Friedman’s Inc. stock during the past three years.

All the suits allege that Friedman’s violated generally accepted accounting principles by improperly understating the allowance for doubtful accounts for credit program receivables. This had the effect of materially overstating revenue and income, the lawsuits allege.

The majority of the lawsuits have been filed in Federal Court in the Northern District of Georgia, but some suits have been filed in Georgia’s Southern District and in the Southern District of New York. Several of the lawsuits also name Friedman’s officials Victor M. Suglia, chief financial officer, who was placed on leave of absence; Bradley J. Stinn, the former chief executive officer, who resigned Dec. 2; Sterling Brinkley, chairman; and Douglas Anderson, president and chief operating officer, as defendants.

On Nov. 17, the Savannah, Ga.-based operator of 877 Friedman’s and affiliated Crescent Jewelers stores said in a statement that it would have to restate its financial results for fiscal years 2000, 2001, 2002, and the first three quarters of 2003 over its accounting of bad debt. The company’s auditor, Ernst & Young, withdrew its audit opinion on past earnings.

“These financial statements and the related public filings with the SEC should no longer be relied upon,” the company said in a statement.

Friedman’s originally announced that its allowance for doubtful accounts was expected to be 10.5%, of accounts receivable. On Nov. 11, the company estimated doubtful accounts to be in the range of 14% to 17%, “pending further review.” But after continued analysis, the company said it believes the bad debt could exceed 17%.

On Nov. 11, Friedman’s disclosed that the Securities and Exchange Commission and the Justice Department had expanded a fraud investigation to include a review of the doubtful-accounts allowance. In the same announcement, the company said it placed chief financial officer Victor M. Suglia on a leave of absence in light of the expanded probe. The next day, the company’s stock fell nearly 40%, reaching a 52-week low.

The company also said it would delay its 10-K annual filing with the Securities and Exchange Commission for the fiscal year ended Sept. 27.

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 Friedman’s. 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 Dec. 2, the firm’s board of directors elected Robert Cruikshank non-executive chairman of the company and Richard Cartoon as interim financial consultant. The two men, together with Anderson, are overseeing day-to-day operations of the company.