Professor Adams' Lecture Materials

DHB Industries, Inc.'s Inventory Valuation Fraud

DHB Industries, Inc.'s main operating unit was Point Blank Body Armor.

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Background

The "DHB" in DHB Industries, Inc. stood for "David H. Brooks" who founded the company and served as its CEO.
DHB Industries made body armor for the military and law enforcement organizations.
David wasn't always in the body armor business. From the mid-1980s to the early 1990s, he ran a brokerage business with his brother.

"...in 1992, [David] ran afoul of the Securities and Exchange Commission (SEC) when one of [his] subordinates was charged with insider trading. The SEC alleged that [David] had failed to establish proper control procedures to prevent [his] subordinates from improperly using material non-public information obtained from their clients."

- Knapp and Knapp 2013a, 132

Brooks then bought a small body armor business - Point Blank Body Armor - that was close to bankruptcy for $2 million and the business became the principal operating unit of David's new firm, DHB Industries, Inc (Knapp and Knapp 2013a)
Following the September 11, 2001 attacks in New York City and Washington, D.C. the US entered the Second Gulf War (Operation Iraqi Freedom).
David and his new body armor firm, DHB Industries, Inc., lobbied for and secured a contract with the US military for DHB to be the exclusive provider of body armor issued to every US soldier serving in the war.
Sales for DHB increased dramatically in the early 2000s.
This contract alone resulted in David's total compensation increasing from $525,000 in 2001 to $70,000,000 in 2004 (Anderson 2006).

David's management style

David "ruled DHB with a dictatorial and intimidating management style..." (Knapp and Knapp 2013b).
David also had confrontations with his company's independent auditor and switched auditors three times between 2001 and 2005.
At the conclusion of its 2005 audit, Weiser LLP, refused to issue an audit report.

"...if she [the audit partner] were not careful, she would be wearing cement blocks on her feet in the Atlantic Ocean."

- David Brooks as quoted in SEC 2007

" 'someone should . . . put a bullet' in the brain of the partner who worked on DHB's 2004 audit."

- David Brooks as quoted in SEC 2007

Business difficulties

Because DHB Industries was the exclusive provider of body armor to the military, there was a bottleneck in the delivery of armor.
Many troops did not receive proper body armor until 9 months after the war began (Anderson 2006).
In 2005, the Marines and Army issued a product recall on 23,000 vests manufactured by DHB (Anderson 2006).
The Marine Corps Times investigation revealed that the DHB body armor could not stop 9MM bullets (Anderson 2006).

What happened to David H. Brooks?

In 2010, David received a 17 year prison sentence.
In 2016, he passed away while serving his sentence at the age of 61.

References

Abelson, R. 2016. David H. Brooks, 61, dies serving time for insider trading. New York Times, November 1, 2016.

Anderson, S. 2006. US: The rise and fall of a war profiteer. Corpwatch, July 13, 2006. Available at: Link.

Knapp, M.C. and C.A. Knapp. 2013a. Of hurricanes and harness racing: The accounting fraud at DHB Industries, Inc. Issues in Accounting Education 28 (1): 131-152.

Knapp, M.C. and C.A. Knapp. 2013b. Teaching Notes - Of hurricanes and harness racing: The accounting fraud at DHB Industries, Inc. Issues in Accounting Education - Teaching Notes 28 (1): 26-35.

Moss, M. 2006. Pentagon study links fatalities to body armor: Says many hit in torso could have survived. New York Times, January 7, 2006.

SEC. 2007. Securities and Exchange Commission v. David H. Brooks, US District Court, Southern District of Florida, Case No. 07-61526. Avaialbe at: Link.

SEC. 2011. Securities and Exchange Commission (Plaintiff) v. DHB Industries, Inc., n/k/a Point Blank Solutions, Inc (Defendant): Complaint for injunctive and other relief. Available at: Link.

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