More bad news from the diamond district: Chicago-based Whitehall Jewellers (NYSE:JWL) today said the company axed on-leave Chief Financial Officer Jon Brown, and John Desjardins will remain interim CFO. Whitehall also said it won't release fiscal Q3 (ended Oct. 30) financial results until it files its quarterly report with the Securities and Exchange Commission -- and that's unlikely to happen by Dec. 15 as currently scheduled.
The picture continues to blur for Whitehall, which operates 384 stores across the U.S. under the Whitehall, Lundstrom, and Marks Bros. names. A lawsuit filed on Aug. 13 by Capital Factors, a Union Planters (NYSE:UPC) company that funds companies with cash in exchange for receivables, essentially alleges that Whitehall (and other companies) conspired to help Cosmopolitan Gem Corp. defraud Capital Factors by misrepresenting Cosmopolitan's finances and the state of its business.
The suit caught the SEC's eye, making matters worse. The government is looking at Whitehall (and, again, other entities) in connection with the matter, and a formal probe was revealed last month. Sound familiar? Georgia jeweler Friedman's (NYSE:FRM) got in hot water of its own in connection with the Capital Factors suit. Perhaps not coincidentally, that company replaced its own on-leave CFO with a new man, Richard Cartoon, earlier this week.
Whitehall investors are taking this matter seriously, as the company's shares have been driven down in recent weeks after performing well for much of 2003. The stock fell more than 6% in morning trading as the latest news spread.
It's difficult to put a price tag on the potential damage these legal issues could do to Whitehall. SEC filings say Capital Factors is looking for damages of $30 million, as well as unspecified punitive damages. That figure could triple should they succeed in proving racketeering, though any damages would be shared among 14 defendants. Legal fees will no doubt add up as this story unfolds. And this doesn't cover whatever action the SEC might take.
All told, this looks like another story most investors would probably do well to stay away from. The legal uncertainty, on top of "inventory violations" discovered while investigating the Capital Factors claims internally -- and which resulted in another key exec going on leave -- and the delay in reporting Q3 results suggest that too much is going on beyond the average observer's view for much of a margin of safety.
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Dave Marino-Nachison can be reached at [email protected].
