NEW YORK — Bankrupt jewelry retailer Friedman’s Inc. has agreed to pay $2 million into the U.S. Postal Inspection Service’s Consumer Fraud Fund to settle securities fraud charges.
The U.S. Attorney’s Office in Brooklyn said the firm will not face criminal prosecution.
The retailer, which filed for bankruptcy court protection in January in a federal district court in Brooklyn, was alleged by the Securities and Exchange Commission to have “systematically inflated earnings” in order to meet Wall Street’s expectations from 2001 to 2003.
Friedman’s was the subject of a criminal investigation by the U.S. Attorney’s office on whether any of its executives or employees “conspired with and/or aided or abetted” Cosmopolitan Gem Inc. to defraud Cosmopolitan’s lender, Capital Factors. Cosmopolitan was a wholesaler that supplied diamonds to Friedman’s.
The U.S. Attorney’s office, in its statement regarding Wednesday’s settlement terms, said it determined that Friedman’s and its executives and employees did engage in a securities fraud scheme that defrauded Capital. Settlement terms include internal corporate reforms at the retailer, which is still mired in bankruptcy court proceedings.
The SEC and the Justice Department, which had a parallel investigation into the retailer, also filed court documents in a Brooklyn federal court indicating that a settlement had been reached. The SEC will not impose any fine.
An agreement of facts, or stipulation, that is part of the non-prosecution agreement, indicated that a majority of sales, or 53 percent of net sales, for the year ended Sept. 30, 2002 was made on credit. However, it was credit to low-income customers who also had a higher credit risk profile. Yet, Friedman’s in its public filings touted the success of its credit program, as well as the strictness of its credit granting policies, the stipulation said.