Two former executives of DHB Industries Inc., a major supplier of body armor to the U.S. military and police forces, were arrested on Thursday on insider trading charges, authorities said.
Federal prosecutors in Brooklyn accused former Chief Financial Officer Dawn Schlegel and former Chief Operating Officer Sandra Hatfield of inflating the company’s earnings and profit margins by millions of dollars between 2003 and 2005, then selling their own stock for an $8 million profit.
Before they left DHB Industries last year, a survey listed Schlegel, 37, of Eastport, N.Y., and Hatfield, 52, Pompano Beach, Fla., as among the highest paid female executives for publicly held companies based on Long Island. Schlegel topped the list for 2005 by making $1.5 million; Hatfield was fourth at $975,000.
The company recently shifted its operation to Pompano Beach, the headquarters of a subsidiary, Point Blank Body Armor Inc., following the resignation of its founder.
Schlegel and Hatfield pleaded not guilty on Long Island to charges of securities fraud, insider trading and conspiracy. They were released on $1 million bond each.
Defense attorney Steven Kobre later said that Schlegel was determined to fight the charges, adding, “DHB has done a lot of good for this country.” A call to Hatfield’s lawyer was not immediately returned.
An indictment alleges the defendants falsely inflated the value of the inventory of DHB’s top product, the Interceptor vest, to help meet profit-margin projections. The company was producing the vest, designed to withstand rifle fire and shrapnel, for the Marine Corps and other branches of the military.
When an employee identified only as “John Doe” confronted Hatfield in late 2004 with evidence that the inventory of vests was overvalued by up to $8 million, she told him the company “could not ’take a hit’ of reducing the valuation to the correct amount,” the indictment said. In February 2005, the employee resigned over the conflict and later testified before a grand jury, the court papers added.
Authorities allege the scheme propelled the company’s stock from $2 a share in early 2003 to nearly $20 in late 2004. During that period, the defendants allegedly sold thousands of shares of their own stock — making $2.9 million for Schlegel and $5 million for Hatfield — before prices took a dive on news of accounting irregularities.
“As a result of this fraud scheme, the investing public lost millions of dollars while the defendants lined their own pockets with a fortune in ill-gotten gains,” U.S. Attorney Roslynn Mauskopf said in statement.
The Securities and Exchange Commission filed related civil charges on Thursday against Schlegel and Hatfield in federal court in Miami, seeking unspecified civil fines and restitution, and a ban against them serving as officers or directors of any public company.
The two “showed wanton disregard for DHB’s investors and the federal securities laws,” David Nelson, director of the SEC’s Miami office, said in a statement.
Last month, DHB founder David Brooks agreed to resign as the company’s chairman and chief executive as part of a deal to settle shareholder lawsuits against the company. The company said Brooks would help fund the $34.9 million cash and 3.1-million share settlement.
At the time, DHB said it will adopt new standards to improve controls and enhance business practices, including internal controls on financial and performance reporting. Brooks has not been charged.
If convicted, the defendants face up to 25 years in prison.