David Brooks, former head of DHB Industries, outside of federal...

David Brooks, former head of DHB Industries, outside of federal court in Central Islip. (June 3, 2008) Credit: James Carbone

A federal prosecutor and a university professor jousted Monday over whether the actions of body armor magnate David Brooks illegally earned him $185 million in a stock-fraud scheme.

Federal prosecutors have charged that Brooks made the money by manipulating the books of his then Westbury-based company, DHB Industries, and then dumping the stock whose value had been fraudulently inflated.

But Jaime Zender, a professor of finance at the University of Colorado, who was called as an expert witness by Brooks' defense, maintained that his studies of the stock market show that the principal reason for stocks to go up or down is the amount of cash flow moving into and out of a company.

Prosecutors pointed out that cash flow is not normally reported to the public. Zender replied that given the information in company reports, an investor could figure it out.

The sparring between federal prosecutor Richard Lunger and professor Zender in U.S. District Court in Central Islip was not academic.

To convict Brooks of a host of crimes, the government has to convince a jury he committed illegal actions that moved the stock artificially upward and then pocketed the resulting illegal windfall, before the actual nature of DHB finances were known.

If the jury believes Brooks' actions did not significantly influence DHB stock price then it could not convict him on charges including securities fraud, conspiracy to commit securities fraud and insider trading.

That would still leave a number of other charges in the 17-count Brooks indictment, including mail and wire fraud, conspiracy to obstruct justice and material misstatements to auditors.

Prosecutors also have alleged, for example, that Brooks treated DHB as his private piggy bank, illegally taking $6 million for personal expenses. If Brooks were to be convicted on other charges he could still face a stiff jail sentence.

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