Federal prosecutors, David Brooks' defense attorneys and the financial experts for both sides have been clashing all week over whether the convicted body-armor manufacturer has to forfeit as much as $138 million or as little as nothing of the $185.9 million he gained based on insider trading of his company's stock.
The hearing, which began Monday in federal court in Central Islip, was called by U.S. District Judge Joanna Seybert, who is deciding on the amount of forfeiture. The forfeiture amount is being debated because Seybert ruled that the stock Brooks sold may have had intrinsic value aside from its inflated value caused by financial frauds by Brooks, the former head of DHB Industries, which was based in Westbury.
Federal prosecutors Kathleen Nandan and James Knapp say that all the money should be forfeited because Brooks made the $185.9 million not only through insider trading, but also as part of an overall conspiracy to inflate company earnings and profit margins with his co-defendant, Sandra Hatfield, who committed separate crimes.
The government also wants $5.3 million from Hatfield, who was DHB's chief operating officer and who was convicted, along with Brooks, of conspiracy, fraud and insider trading.
In addition to deciding how much Brooks and Hatfield have to forfeit to the government, Seybert has said that the stockholders victimized by the scheme may also be entitled to restitution. On those grounds, Seybert, who will also decide on restitution, has refused to release any of the $185.9 million to Brooks or the $5.3 million to Hatfield.
The government's expert witness, Lawrence Harris, a professor of finance at the University of Southern California and former chief economist for the Securities and Exchange Commission, initially said that, using four accounting methods, he calculated Brooks had to forfeit between $85 million to $138 million. Weighting the reliability of the various methods, Harris calculated that Brooks had to forfeit $95.8 million.
But under a lengthy cross-examination by Judd Burstein, one of Brooks' defense attorneys, Harris conceded that he had a made a number of mathematical errors. One of them involved including an accounting fraud that Hatfield had performed in 2005, of which Brooks could not have had inside information on when he sold all his stock in 2004.
Recalculating, Harris said Brooks actually owed between $22.9 million and $138 million, for a weighted average of $58 million in forfeiture.
Brooks financial expert Jaime Zender, a professor of finance at the University of Colorado, argued that his studies showed the value of the stock Brooks sold was inflated by his insider trading by, at most, $2.9 million or not at all.
Zender argued that the value of the stock was based on several factors, including the large-scale government contracts DHB had. Subsequent revelations about Brooks' crimes did not significantly cause sharp drops in the stock's value from the high point at which he and Hatfield sold their shares, and could be attributed to market fluctuations and other non-criminal factors, Zender said.
Noting the relatively low number that even the government's witness calculated for Brooks' forfeiture, Burstein said of the government's case: "They may not like it, but this is an adversary system. They have an obligation to put the proof in. They didn't do it."
Earlier in the week and scoffing at the idea that financial experts could claim that the stock Brooks sold would have had any great value if investors knew about his frauds, a former DHB attorney, David Cohen, said: "They're only talking about the nose of the elephant, not its entire body." Cohen, who was a spectator in the courtroom, is suing Brooks for $588,000.