NEW YORK — The president and chief financial officer of Cosmopolitan Gem Corp., as well as the former cfo of Whitehall Jewelers Inc. pleaded guilty on Tuesday to a $20 million bank and wire fraud conspiracy.

Joshua Kestenbaum, president and owner of Cosmopolitan; Christopher Shaw, Cosmopolitan’s cfo, and Jon Browne, former Whitehall cfo, entered their guilty pleas before U.S. District Court Judge Nina Gershon in Brooklyn. Kestenbaum agreed to pay back $2.5 million to the government.

Whitehall, in a written agreement, accepted responsibility for the illegal conduct of its former executives and agreed both to adopt corporate reforms and continue its cooperation with the government’s ongoing investigation. Whitehall also agreed to pay more than $15 million to compensate Capital Factors for losses.

The defendants had defrauded Capital Factors — Cosmopolitan’s lender — of more than $20 million by overstating Cosmopolitan’s accounts receivable, according to the U.S. Attorney’s office in Brooklyn. Cosmopolitan is a jewelry wholesaler that supplied diamonds and precious metals and jewelry to jewelry retailers.

Browne, the U.S. Attorney’s office said, aided Kestenbaum and Shaw and other co-conspirators by “concealing from Capital millions of dollars in discounts, credits and returns provided by Cosmopolitan to Whitehall that substantially reduced the value of Cosmopolitan’s accounts receivables.”

As part of its agreement with the government in exchange for a promise not to prosecute provided it meets certain obligations, Whitehall will pay more than $15 million to Capital to compensate for losses resulting from the fraud. The jewelry retailer also will pay $350,000 to the U.S. Postal Inspection Service to defray the costs of the investigation. Whitehall also agreed to fire individuals who have engaged in the misconduct, implement a comprehensive compliance program that incorporates a “whistle-blower” protection policy and submit for a period of three years reports to the U.S. Attorney’s office regarding its compliance program.

A civil lawsuit in Manhattan federal court filed last year by Capital accusing Cosmopolitan of fraud, and 13 other defendants including Whitehall of having aided and abetted the alleged fraud, is separate from the Brooklyn criminal matter and is still pending in the court system.

This story first appeared in the September 29, 2004 issue of WWD. Subscribe Today.