CASE 1.10

DHB INDUSTRIES, INC.

Synopsis

David Brooks founded DHB Industries in the early 1990s. Throughout its existence, the principal operating unit of DHB was its Point Blank subsidiary that manufactured bullet-resistant vests for use by law enforcement and military personnel. Sales of protective vests accounted for more than 95 percent of DHB’s revenues each year. DHB and its free-spirited founder were often in the media spotlight. In 2005, a large number of the company’s protective vests were recalled due to alleged “life-threatening flaws.” A few months earlier, Brooks and his top two subordinates, the company’s COO and CFO, were widely criticized when they realized huge stock market gains after selling the majority of their DHB stock. Brooks, alone, realized a stock market gain of more than $180 million when he sold two-thirds of his total ownership interest in DHB, an interest that he had acquired for a small fraction of that amount. In July 2006, Brooks was ousted as DHB’s CEO by the company’s board. Over the following year, a forensic investigation of DHB’s accounting records revealed that the company’s impressive operating results from 2003 through 2005 had been the product of a massive accounting fraud. Brooks and his two subordinates had routinely and blatantly altered DHB’s accounting records to achieve the earnings targets that he had established for the company. The primary account manipulated by the co-conspirators was DHB’s inventory. A major problem faced by the conspirators was concealing their misdeeds from the company’s independent auditors. Accomplishing that objective was made easier by the fact that between 2001 and 2005 the company had four different accounting firms serve as its independent auditors. Frequent clashes between management and the company’s