On Wednesday, July 1st, the SEC filed a civil suit against the former chief accounting officer of Beazer Homes USA, Inc. The complaint alleges that from 2000 to 2007, Michael Rand manipulated Beazer’s reported quarterly and annual income in order to meet EPS projections and analyst expectations, as well as to maximize bonuses for company officers and senior staff. The complaint also alleges that Rand took affirmative steps to conceal the fraud from Beazer’s auditors.
The SEC first alleges that during the housing boom from 2000 to 2005, Rand caused Beazer to under report its net income by a total of $63 million through the recording of improper operating expenses which created false accounting reserves and liabilities in Beazer’s books and records. Next, during 2006 and 2007, when the housing market began to slow, Rand is alleged to have caused the improper reserves to be reversed, thereby inflating Beazer’s income by approximately $47 million. The SEC also alleges that during 2006 and 2007, Beazer improperly recognized revenue from the sale and leaseback of model homes, when in fact no revenue should have been recognized from such transactions.
In May 2008, Beazer restated its financial statements to reflect adjustments for fiscal years 1998 through 2006, and the first half of fiscal year 2007. The SEC is seeking a permanent injunction against future violations, disgorgement if ill-gotten gains, civil penalties and a D&O ban against Rand.
Also on July 1st, Beazer Homes USA, Inc. reached a settlement with the U.S. DOJ to pay up to $53 million to resolve allegations that the company violated the False Claims Act. Specifically, the government alleged that when the mortgage division of Beazer Homes made FHA insured loans, it 1) required purchasers to pay "interest discount points" at closing, but then kept the cash and failed to reduce interest rates; 2) provided cash "gifts" to home purchasers through certain charities, so purchasers could provide down payments, with assurances the "gifts" would not have to be repaid, and then increased home purchase prices to offset the amount of the gifts; 3) obscured which of its branches made defaulting mortgage loans to avoid FHA detection of excessive default rates, and; 4) ignored "stated income" requirements in making loans to unqualified purchasers.
To resolve these allegations, Beazer agreed to pay the United States $5 million, plus contingent payments of up to $48 million dollars to be shared with Beazer homeowners impacted by the above allegations. Please refer to the Department of Justice press release regarding the Beazer Homes settlement for additional details.