Beazer buys its way out of fraud case, as predicted

Update/Summary on Beazer Homes mortgage and securities fraud stories we've followed here on HADD news and the HADD Message Boards. Builder to pay over $50 million over the course of several years to the government and numerous parties for criminal acts, but settlement means there will be no criminal prosecutions of Beazer CEO's or employees. Homeowners who can prove they were defrauded may be able to get some restitution.

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Beazer agrees to pay victims $50 million
Builder admits to charges of encouraging buyers to overstate income
By Kirsten Valle
kvalle@charlotteobserver.com
Thursday, Jul. 02, 2009

ANGRY HOMEBUYERS: The Tingley family – parents Mark and Lea and Mason, 6, (left) and Courtney, 8 – have a Beazer-built home in the Southern Chase subdivision in Concord. “I'm glad they actually admitted to their mistakes,” said Lea Tingley. At a Beazer employee's suggestion, Lea Tingley omitted from her application a monthly car payment of $350.

More Information

* Read the charges against Beazer
* Read Beazer's agreement with prosecutors
* Archive of Beazer stories
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How Beazer did it

According to documents filed in federal court, Beazer used several tactics in a mortgage and accounting fraud scheme that stretched from 2000 to 2007. Among them:

Beazer charged homebuyers for “discount points,” which they were to pay to the lender in exchange for a lower interest rate. But Beazer kept part or all of the money. In some cases, Beazer paid the discount points but then raised the homes' purchase prices to offset the amount paid.

Beazer provided low-income homebuyers with money for a down payment as a “gift,” but then illegally increased the prices of homes sold to offset the cost of the “gift.”

Beazer adopted a strategy of “willful blindness” in originating mortgages, telling some staffers about “the danger of knowing too much about a buyer.” In one division, mortgage loan counselors were provided a script. Instead of asking how much a client made, a loan counselor would say that it would take a certain amount each month in household income to qualify, then ask: “Can you state that you have that much household income?”

Beazer practiced “cookie-jar accounting.” When the company's financial performance was stronger than needed to achieve bonuses and meet market expectations, executives decreased the company's net income by manipulating “reserve” accounts. That left Beazer with excess reserves and balances, with the excess available to “smooth earnings” when times got tougher.

Federal investigators on Wednesday filed mortgage and accounting fraud charges against Beazer Homes USA, but the homebuilder will escape prosecution because it agreed to pay $50 million to victims and accepted responsibility for its actions.

The charges, entered in U.S. District Court in Charlotte, relate to Beazer's participation in a scheme designed to fraudulently increase its mortgage company's profits and sell homes, as well as an accounting scheme designed to “smooth earnings.”

As a result, authorities said, homebuyers defaulted on their loans, and neighborhoods plagued with foreclosures watched home values plummet.

Beazer has been the subject of state and federal investigations since an Observer series in March 2007 found that Beazer, once a major Charlotte-area homebuilder, used aggressive sales tactics that contributed to an unusually high foreclosure rate in many of its local starter-home communities, such as Southern Chase in Cabarrus County.

As part of its settlement agreement with the government, Atlanta-based Beazer “accepts and acknowledges that it is responsible for the criminal acts of its former employees,” according to court documents.

In a statement, Beazer's chief executive, Ian McCarthy, said: “We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture and reinforce our absolute commitment to act according to the highest standards of ethical conduct throughout our organization.”

Although Wednesday's charges settle the two-year investigation into the company, the federal probe is ongoing and could start to turn toward Beazer officials.

Earlier Wednesday, the Securities and Exchange Commission sued Beazer's former chief accounting officer, Michael Rand, in federal court in Georgia, saying he ran a fraudulent earnings management scheme.

Rand's attorney did not return phone calls Wednesday.

The Observer's investigation found that Beazer, which operated as a builder and mortgage broker, arranged larger loans than some buyers could afford.

At the time, Beazer denied any wrongdoing and said its employees were using industry-accepted practices.

Within days of the Observer series, an FBI spokesman said the agency's Charlotte office had launched a joint investigation with the Department of Housing and Urban Development and the Internal Revenue Service. The N.C. Real Estate Commission also began investigating Beazer in 2007.

Since then, foreclosures have climbed and homebuilding has dried up in the region. Beazer pulled out of the Charlotte market last year, about the time it stopped mortgage lending, and is suffering financially, like a number of other homebuilders.

Under the agreement with the U.S. Attorney's office, the homebuilder accepts responsibility for fraudulent practices and will pay $10 million immediately toward restitution for victimized homebuyers, plus additional money up to a total of $50 million as the company recovers financially. The U.S. Attorney's office has agreed not to prosecute the company as long as it satisfies its obligations in the next five years.

Court documents filed Wednesday say imposing payments above that amount “would jeopardize the solvency of Beazer” and put its employees and contractors at risk of losing their jobs.

The $10 million includes a $2.5 million settlement Beazer paid to the N.C. Commissioner of Banks in May to compensate homebuyers. The rest will be paid into a national restitution fund, as will any additional payments.

In May, the builder said in its earnings report it would set aside $13 million to potentially settle an ongoing federal investigation into its lending practices, and it estimated the payment could eventually total $50 million.

Shortly before that, Beazer agreed to pay $30.5 million to settle a class-action lawsuit over its lending practices.

Beazer said Wednesday it has also reached a settlement agreement with the Department of Housing and Urban Development and the Department of Justice. Several of Beazer's subsidiaries have entered into a settlement agreement with the N.C. Real Estate Commission.

“I'm glad they actually admitted to their mistakes,” said Lea Tingley, who along with her husband, Mark, filed a lawsuit against Beazer in 2007 alleging the builder's actions caused property values to fall in Southern Chase. “… I don't think they're being punished enough.”

A federal judge dismissed the lawsuit last year, saying the neighborhood's troubles couldn't be directly connected to Beazer.

The Tingleys bought their home in 2001 with down payment help from Beazer and loans based on misstated figures, according to documents provided by the Tingleys for the Observer's investigation. Among other things, Lea Tingley omitted from her application, at a Beazer employee's suggestion, a monthly car payment of $350.

The U.S. Attorney's office charged Beazer Wednesday with mortgage fraud and accounting fraud. As part of the alleged mortgage fraud scheme, employees used fraudulently inflated home prices to offset down-payment “gifts” and encouraged homebuyers to overstate income to qualify for loans, court filings say.

Leasa Wright, who bought a Beazer home in the Oak Hill neighborhood in 2003, said she received down-payment help from Beazer. She also paid $1,000 in exchange for a lower interest rate; still, her 6.5 percent mortgage rate was more than one point above the market average at the time, she said.

“They sold houses to people who couldn't afford it,” she said. “They could've told me at first that I didn't qualify. I might have done something different.”

Wright still lives in her home – “for now,” she said – but struggles to make payments. Asked if she regretted purchasing the house, she said: “Yes, I really do.”

The charges also say Beazer misled investors by using “cookie-jar accounting” – understating its income when business was booming and then using those reserves to “smooth earnings” when times got tighter.

In September, the company reached a settlement with the SEC over claims it fraudulently misstated its earnings. It agreed to stop violating federal securities laws and regulations, though it did not have to pay a fine.

Beazer built about 2,900 homes in Mecklenburg County between 1997 and 2006. About 400 foreclosed, a 13 percent rate, the highest among the county's most prolific builders.

With the downturn in the housing market and homebuilding, authorities have started taking a closer look at companies that may have had a role in putting people in houses they couldn't afford.

Last year, FBI officials said they were conducting criminal investigations of 16 real-estate related companies, while SEC investigators were probing nearly two dozen more, The Washington Post reported. The investigations targeted homebuilders, lenders, credit-rating agencies and banks.

Permits for single-family homes in Mecklenburg fell 47 percent in May from May 2008. The county's home construction peaked in 2006, and permits have logged double-digit declines every month since February 2007.

Beazer has taken a financial hit in recent months as the recession deepened. It reported closings on 814 homes in the second quarter this year, down nearly 40 percent in markets where the company maintains a presence.

In May, it reported a fiscal second-quarter loss of $114.9 million, or $2.97 per share. The company used insurance money to cover its class-action payment, but Beazer will cover the cost of the U.S. attorney settlement, it has said.

Beazer's stock price was at $1.83 Wednesday, down from $5.39 a year ago. Staff writer Peter St. Onge and staff researcher Maria David contributed.

Kirsten Valle: 704-358-5248

To read the full article w/sidebar material, such as "How Beazer did it," background material, etc: http://www.charlotteobserver.com/408/story/812090.html

The series that launched the investigation was the Charlotte Observer's "Sold A Nightmare" multi-part report that began in about 2006. Part of that series was an article, no longer online last we looked, reporting that Beazer had also offered customers $100 for a positive review.

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[Other sources for the story, (please also see HADD's news archives and message boards for more background on this and the other cases and complaints going on.)]

Atlanta Journal Constitution, Beazer must pay $55 million

Prosecution halted amid restitution terms. Former executive faces SEC civil complaint over moves to boost sales.

By Michelle E. Shaw

The Atlanta Journal-Constitution

Thursday, July 02, 2009

Beazer Homes USA said Wednesday it has agreed to pay up to $55 million in restitution and expenses related to a mortgage fraud scheme in North Carolina. Federal authorities agreed not to prosecute the company as long as terms are met.

Separately on Wednesday, the Securities and Exchange Commission filed a civil complaint against a former Beazer executive, alleging he was responsible for earnings fraud that led to bonuses and profits on stock sales.

Atlanta-based Beazer said it reached agreements on the mortgage fraud case with the U.S. Attorney’s Office for the Western District of North Carolina and the U.S. Department of Housing and Urban Development. The investigation has mainly involved Beazer developments in the Charlotte area.

Federal investigators say the company’s mortgage origination business used a range of illicit lending practices to boost sales.

The SEC complaint said Michael T. Rand, Beazer’s former chief accounting officer, ran a “fraudulent earnings management scheme” and misled internal and external Beazer auditors in the process.

The SEC, which filed its complaint in federal court in Atlanta, is asking for restitution of money Rand made as a result of the fraudulent activity, along with other penalties, said Katherine S. Addleman, regional director of the Atlanta office.

“In this case that would be the stock sale proceeds and bonuses,” she said. “We can tell you that the total gross proceeds from the stock sale were more than $3 million and his bonuses were more than $1.7 million, but we can’t estimate what the court might impose in terms of a penalty number.”

Rand, who was fired by Beazer in June 2007, did not respond to a phone message at his home Wednesday.

In the mortgage fraud case, money paid to the government by Beazer is to be shared with certain North Carolina homeowners who can prove they were victimized in the fraud scheme perpetrated through Beazer Mortgage Corp., a Beazer news release said.

Beazer, which has struggled amid the housing slump and the federal probes of its business practices, has since shut down the mortgage unit.

“We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture and reinforce our absolute commitment to act according to the highest standards of ethical conduct throughout our organization,” Beazer Chief Executive Ian McCarthy said in a statement.

The company entered a “deferred prosecution” agreement with the North Carolina U.S. Attorney’s office, which agreed not to prosecute Beazer as long as all terms are met.

The company must contribute $7.5 million to a restitution fund before its 2009 fiscal year is over. After that, for the next three years and a portion of the 2014 fiscal year, it will contribute $1 million or up to 4 percent of pre-tax profit, whichever is greater. If at the end of five years restitution does not reach $48 million, the period will be extended until it does.

The agreement with HUD involves an immediate payment of $4 million, which is to be used to “resolve civil and administrative investigations,” according to the news release. Beazer will also be required to pay $1 million on the first anniversary of the agreement.

http://www.ajc.com/services/content/printedition/2009/07/02/beazer0702.html
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News & Observer, $50 million will end Beazer's fraud case: http://www.newsobserver.com/business/nc/story/1592041.html