Friedman's Hit by SEC Inquiry, Bad Loans

Friedman's, the third largest US jewelry retailer, is facing troubles from all directions. Yesterday it announced that its lenient loan policy to customers is backfiring and is subsequently setting a side an increased sum of money to cover defaulted loans. In addition formal investigations into its bookkeeping are being expanded.

The Security Exchange Commission informed the company that it is opening a formal investigation into the actions of the company, following its informal inquiry reported on September 8 relating to allegations contained in a lawsuit filed against Cosmopolitan Gem and others, including Whitehall Jewelers.

The formal investigation expands the scope of the investigation and also includes a review of the company's accounting and other financial matters and seeks to determine whether Friedman's may have issued false or misleading documents.

SEC wants to know whether there are possible violations of the internal controls and books and records since January 2000. In addition, the company announced that the investigation by the United States Justice Department into the Capital Factors matter has been expanded to include a review of the Company's allowance for doubtful accounts and other financial matters.

Friedman's offers easy terms and instant approval to mostly low- and middle-income consumers and encourages them to make payments at the stores, as a way to generate additional sells.

However the company is finding out the hard way that a difficult economy is hurting customers who often are unable to payoff the loans and the cost of collecting the loans is higher sometimes then the loans themselves.

The company is setting a side 14 – 17 percent of accounts receivable outstanding as of September 27, up from 10.5 percent it did up until now, and this figure is not final as the company is still waiting to hear from its accounting firm.

With all the financial and legal matters hitting the company just ahead of the all important holiday season, Friedman’s has fired its CFO, Victor M. Suglia, saying in a press release they “are considering their alternatives with regard to an interim Chief Financial Officer”

To cap the bad news, company shares tumbled to 40 percent, closing at $7.25 after sinking to  $6.51 during the day.