Perhaps not surprisingly, things are worse than first appeared for embattled jeweler Friedman's (NYSE:FRM). The shares were pummeled on November 12 on news that the company would boost its allowance for doubtful accounts, place its CFO on leave, and face a formal SEC investigation. It only got worse six days later when details of the earnings restatement were released.

The company, in short, said its earnings releases and financial statements for fiscal years 2000, 2001 and 2002, as well as the first three quarters of fiscal 2003, "should no longer be relied upon." Auditor Ernst & Young has withdrawn its audit opinions on the financials in question (thanks, fellows). Meanwhile, the company said its estimate for its new allowance for doubtful accounts -- Friedman's was hoping for a ceiling of 17%, compared to its former figure of about 10% -- might be low.

While the company has yet to release updated numbers and may postpone filing its 10-K, what seems certain is that when all is said and done, the revenue and profit growth reported in recent years won't look so impressive -- especially given Friedman's large proportion of credit sales.

Friedman's shares have fallen steadily as class action shareholder suits have piled up -- that is, until today when the shares rose in morning trading on no news. Why the latter is anyone's guess, though the shares have fallen far. Friedman's currently trades well below the value of its inventory, according to its latest (admittedly tainted) balance sheet. Tiffany (NYSE:TIF) and Zale (NYSE:ZLC), unsurprisingly, do not.

But playing around in this darkened diamond mine is risky business. Heavy trading volumes suggest that plugged-in investors are watching Friedman's. The fact that it lost more than half of its market capitalization in days, meanwhile, is a clue that the market considers the company's problems serious. Don't be fooled by signs of "hope" in this morning's trading.

Better just to stay away.

Dave Marino-Nachison owns Tiffany. He can be reached at or talk this all over on our Friedman's discussion boards.