The U.S. Court of Appeals for the Second Circuit overturned the $32.5 million Shareholder settlement against DHB Industries because the agreement improperly released, under the Sarbanes-Oxley Act, the body-armor maker’s former CEO and CFO from liability. The case involves a shareholder complaint that was filed against DHB and a number of executives in 2005.
Company officers agreed to settle but only on the condition that CFO Dawn M. Schlegel and ex-CEO CEO David H. Brooks be released from liability. A district judge approved the settlement, but then the government objected on the grounds that only the Securities and Exchange Commission can “exempt” executives from requirements under Sarbanes-Oxley. The three-judge panel agreed.
Judge Peter Hall wrote that allowing the settlement to move forward would be “flying in the face of” lawmakers and their efforts to hold senior corporate officers of public companies directly liable for their actions that have “caused material noncompliance with financial reporting requirements.”
Last month, a jury found Brooks and former DHB Industries COO Sandra Hatfield guilty of insider trading, obstruction of justice, and fraud. Brooks was also found guilty of lying to auditors. The two defendants were accused of conspiring to loot DHB for personal gain, falsely inflating inventory at a subsidiary so that reported profits could be artificially boosted, lying to auditors, concealing Brooks’ control of a related company that would then funnel funds toward his thoroughbred horse-racing business, and accounting fraud. The Justice Department say the defendants reaped close to $200 million.
Related Web Resources:
Court Tosses $35.2 Million Body-Armor Settlement, Courthouse News Service, September 30, 2010
David H. Brooks, Founder and Former Chief Executive Officer of DHB Industries, Inc. and Sandra Hatfield, Former Chief Operating Officer, Convicted of Insider Trading, Fraud, and Obstruction of Justice, FBI, September 14, 2010
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