Sunday, January 22, 2006

Defense contracting for fun and profit.

Tucked away in the business section, the NY Times has an interesting look at the world of defense contracting, in particular DHB Industries, which makes armored vests.
When the Iraq war began in early 2003, analysts say, the American military hadn't stocked up on body armor because the White House did not intend to send a large occupational force. The White House game plan called for lightning strikes led by lithe, technologically adept forces that would snare a quick victory. A light deployment of troops and a harmonious occupation were to follow, with the Pentagon anticipating relatively little hand-to-hand or house-to-house fighting. But as the breadth and duration of the Iraqi occupation grew, the war became a series of perilous, unpredictable street fights in Baghdad and other cities, leaving soldiers exposed to sniper fire and close-quarters combat - and in urgent need of hundreds of thousands of bulletproof vests.

In the world of military contractors, times like these - when a sudden, pressing need intersects with a limited number of suppliers - have all the makings of full-blown financial windfalls. For small vendors, the effect can be even more seismic than it is for their larger brethren, turning anonymous businesses into beehives of production and causing their sales to skyrocket. DHB Industries, based in Westbury, N.Y., whose Point Blank subsidiary in Pompano Beach, Fla., is a leading manufacturer of bulletproof vests, found itself occupying this lucrative turf when the military awarded it hundreds of millions of dollars in body armor contracts in 2003 and 2004.

With sales of just $340 million last year, DHB is a small fry amid giant military suppliers like Lockheed Martin, Boeing and Halliburton. But DHB offers a case study of the complexities of military contracting - and of the riches and responsibilities that accompany it. DHB's dealings also offer a peek into the vagaries of internal controls and executive compensation that continue to challenge companies of all stripes, the individuals and institutions that invest in them, and a public that relies on them for goods and services.
If the name seems familiaer, it might be because it is run by this man.
Mr. Brooks, who, along with his wife and children, cashed in DHB stock worth about $186 million in late 2004, has also courted attention and controversy. In November, Mr. Brooks held a bat mitzvah party for his daughter atop Rockefeller Center in New York, which an article in The Daily News said had cost $10 million. Mr. Rubin characterized the figure as exaggerated. He declined to comment on other elements of the article, which said that Mr. Brooks had used his company's jet to fetch a clutch of rock and hip-hop stars, ranging from Don Henley to 50 Cent, to perform at the celebration; that he changed out of an all-leather, metal-studded suit into a hot-pink suede suit as the party heated up; and that he supplied guests with goody bags stuffed with $1,000 worth of merchandise.

The $186 million stock sale occurred four months before reports surfaced of possible problems with vests in Iraq, and reduced Mr. Brooks's stake in DHB to 15 percent from 48 percent in 2003. It also preceded DHB's announcement last fall that it would take a $60 million charge to reserve for a potential class-action settlement and replacement costs related to legal disputes surrounding vests the company had sold to police departments nationwide. Those events helped DHB's shares to plunge 76 percent last year, but a lawyer representing Mr. Brooks said that none of his client's stock sales were based on nonpublic information.
Of course not, CEO's never have nonpublic information. Not even when they are experienced at using such information.
Nonetheless, the Securities and Exchange Commission is currently investigating aspects of Mr. Brooks' compensation and other corporate transactions, according to the company's securities filings. Mr. Brooks and the company declined to comment on the investigation, as did the S.E.C.

This is not the first time that regulators have examined Mr. Brooks' activities. In 1992, the S.E.C. fined him heavily and barred him from the brokerage business for five years for improprieties related to an insider trading scandal. That aspect of Mr. Brooks' résumé appeared in the company's public filings until the late 1990's, and then disappeared.
It goes on to get worse. But then, war profiteering is never pretty.

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