Friedman's Inc. - The Late 1990s and Eventual Bankruptcy

The Late 1990s and Eventual Bankruptcy

In the year that ended September 30, 1997, Friedman's opened a staggering 83 locations. By then it had become the third-largest jewelry retailer in the country, and in the seven months between the end of the 1997's fiscal year and an April 1998 interview with Stinn in Jewelers Circular Keystone, the company had added 40 more locations while net income rose by a phenomenal 39 percent. However, the company's rapid expansion came with a pricetag. The company had over 650 stores by 2000. When the dotcom bubble burst, and the economy worsened, Friedman's loans became illiquid. The over demanding presence of Morgan Schiff led management believe that they could be fired the first mistake they made. Not wanting to face the repercussions of over leveraging bad loans, Brad Stinn and his CFO lied to Schiff and the public about the liquidity of their consumer loans.

The government said Stinn and others filed financial reports and made public statements that misrepresented the operation of the company's installment credit program, the delinquency and collectability of its outstanding credit accounts, and its earnings, As a result, the company's stock price was artificially inflated.

As an example, prosecutors reportedly alleged that Stinn and other executives learned in June 2002 that, due to a computer error, certain credit accounts totaling about $7.9 million had not aged properly. The files became known secretly in the company by a couple of names, including the "X-files."

Prosecutors alleged that Stinn and others working at his direction deliberately concealed the existence and financial effect of these accounts, instead of charging them off as required under the company's publicly disclosed credit policies. As a result, the company materially overstated its currency percentage and materially understated its delinquency percentage for fiscal year 2002.