When Consumer Credit Goes Bad...

When consumer debt gets tangled up in fraud, the results can be nasty. How nasty? Consider this: An executive faces up to 25 years in federal prison after being convicted of fraud and conspiracy for trying to conceal his customers' dud credit-card debts.

The case is a cautionary tale for others if the economy slows and consumers find it harder and harder to meet their obligations.

It began when customers who bought — but really couldn't afford — diamonds and watches began defaulting on their debts to Friedman's Jewelers. , company executives scrambled to cover up those losses.

They did so fraudulently, according to a Brooklyn jury, which convicted Bradley Stinn, Friedman's former C.E.O., on securities fraud, mail fraud, and conspiracy.

Stinn, a former managing director of the Morgan Schiff & Co. investment firm, which bought Friedman's in 1990s, had a great run after he became chief executive in 1993.

Friedman soared to become one of the biggest jewelry retailers, with hundreds of stores — as well as those of affiliated Crescent Jewelers — blossoming at strip malls in 22, mostly southeastern, states.

The company chalked up big sales among low and middle-income customers. Management encouraged its sales force to push the company's installment credit program — which was used to finance more than half of Friedman's $400 million annual sales, according to prosecutors.

Stinn was reassuring investors that credit guidelines were being followed — when, in fact, he and other senior executives encouraged routine violations, according to evidence presented at his six-week trial.

To conceal the shortfall, Friedman's reported false earnings, which successfully bolstered its stock price until the end of 2003. In 2005, the company filed for bankruptcy.

Stinn, 48, was ordered to forfeit a little over $1 million. When he is sentenced in July, he faces up to 25 years in prison. Some of his former colleagues already pleaded guilty, and Friedman's and Crescent's forfeited $3 million and agreed to adopt reforms to prevent fraud from recurring.

by Elizabeth Olson