SEC Claims 3 Ex-Directors Aided Looting of Body-Armor Maker

Three former directors of a military contractor whose cofounder was convicted of looting the firm were sued by the U.S. Securities and Exchange Commission over claims they were “willfully blind” to the accounting fraud.

Jerome Krantz, Cary Chasin and Gary Nadelman aided and abetted “pervasive accounting and disclosure fraud” at DHB Industries Inc. while serving on the audit committee from at least 2003 through 2005, the SEC said today in a lawsuit filed at federal court in Florida. The suit aims to recover ill-gotten profits, impose fines and bar the three from serving on boards.

David H. Brooks, a co-founder who served as chief executive officer, was convicted last year of committing a $185 million fraud along with Sandra Hatfield, the firm’s former chief operating officer. Krantz, Chasin and Nadelman failed to carry out their responsibilities as independent directors of the Pompano Beach, Florida-based firm, the SEC said.

“This massive accounting fraud permeated throughout an entire company and was facilitated by the egregious, wholesale failure of the company’s board to act in the face of mounting red flags,” Eric Bustillo, head of the SEC’s regional office in Miami, said in a statement.

Nadelman “did not willfully or knowingly do anything to justify today’s SEC action,” his attorney, Robert Gottlieb, said in a telephone interview. Amy Millard, attorney for Chasin at Clayman & Rosenberg LLP in New York, said her client “faithfully” carried out his role and “looks forward to a resolution of this matter,” said.

Inventory Questions

A call to Gerald Russello, Krantz’s attorney, wasn’t immediately returned. Nancy Gunberg, lawyer for the company, declined to comment.

Prosecutors contend Brooks and other company insiders lied about the value of the firm’s inventory of combat vests and used other financial manipulations to artificially inflate the value of the company and divert funds from it, according to court filings.

Krantz, Nadelman and Chasin ignored repeated warnings from auditors that the company’s inventory figures were questionable and employees’ complaints about Brooks’ use of a company run by his wife as one of the firm’s vendors, regulators said in the 41-page complaint.

They noted a decision by Point Blank’s auditors at Grant Thornton LLP to step down over questions about inventory figures didn’t prompt any action by the trio, who served as the company’s independent directors.

‘Extreme Recklessness’

“Kranz, Chasin and Nadelman, knowingly or with severe or extreme recklessness, provided substantial assistance to” Brooks in connection with his violations of federal law, regulators said in the suit.

The military body-armor maker, now known as Point Blank Solutions Inc., agreed to a permanent injunction from future violations to settle related SEC claims. The company filed bankruptcy in April.

Point Blank wants to sell new shares in the reorganized company to generate as much as $25 million in cash, according to a summary of its restructuring plan filed in U.S. Bankruptcy Court in Wilmington, Delaware.

Unsecured creditors, owed as much as $57 million, and equity holders who owned Point Blank shares prior to bankruptcy can participate in the rights offering, according to the court filing. Point Blank will seek court approval of the plan’s disclosure statement March 3.

The case is SEC v. Jerome Krantz, Cary Chasin and Gary Nadelman, 11-CV-60432-WPD, U.S. District Court for the Southern District of Miami (Florida). The company’s Chapter 11 bankruptcy case is In re Point Blank Solutions Inc., 10-11255, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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