RAPAPORT...  A federal jury in Brooklyn convicted Bradley Stinn, the former CEO of Friedman's and Crescent Jewelers, for securities fraud, mail fraud, and conspiracy on March 24. The jury found Stinn guilty of participating in "a massive accounting fraud scheme designed to inflate Friedman’s financial performance," according to the United States Attorney's Office -- Eastern District of New York.

The jury also returned a forfeiture verdict against Stinn for $1.019 million.

United States District Judge Nina Gershon will pass sentence  July 9, 2008. Stinn faces a maximum sentence of 25 years’ imprisonment on the most serious charge. The government’s investigation has also resulted in the guilty pleas of Friedman’s and Crescent’s former chief financial officer and Friedman’s former controller, and the execution of non-prosecution agreements by Friedman’s and Crescent, pursuant to which the companies agreed to forfeit $3 million, cooperate fully with the government’s investigation, and adopt significant corporate reforms to prevent recurrence of the fraud.

The government’s proof at trial established that Friedman’s encouraged its sales personnel to increase sales by inducing customers to finance their jewelry purchases using the company’s installment credit program, which was used to finance more than half of Friedman’s $400 million in annual net sales. A major aspect of the fraud scheme was concealing that Friedman’s was increasingly unable to collect money owed by customers who bought jewelry on credit.

Friedman’s collection problems stemmed from the company’s widespread failure to follow its own credit-granting guidelines – guidelines that Stinn falsely told investors were strictly enforced. In fact, Stinn and other senior executives encouraged routine violations of the guidelines to increase the company’s reported sales.

To cover up the collection problems, Stinn, 47, caused Friedman’s quarterly reported credit statistics to understate the delinquency of its credit portfolio, and caused Friedman’s to report false earnings numbers. In some cases, the false earnings reported by Friedman’s met or exceeded the public estimates of professional stock analysts, and resulted in the artificial inflation of Friedman’s stock price.

Between November 2003 and May 2004, Friedman’s stock price lost more than half its value. On November 11, 2003, the stock closed at $11.99 per share. On May 6, 2004, the New York Stock Exchange halted trading in Friedman’s stock, at which time the stock was trading at $4.97 per share. On January 14, 2005, Friedman’s filed for Chapter 11 bankruptcy, but later emerged as a private comany.

Friedman's filed for Chapter 11 protection again in late January after creditors filed involuntary Chapter 7 against the firm earlier in the month.