Beazer Homes USA has agreed to settle a group of lawsuits filed by shareholders two years ago in the wake of government investigations into the company’s lending practices.

The lawsuits, which were filed separately in March 2007 and later combined into one case, accused the company and some of its officers of issuing false and misleading statements regarding the company’s business prospects and not disclosing facts the defendants knew related to alleged improper lending practices in its mortgage origination business. They sought class-action status for those who owned company stock between July 27, 2006, and March 27, 2007.
Under the terms of the settlement, the case will be dismissed with prejudice, eliminating the possibility of it being filed again. In return, Beazer’s insurance company will make a $30.5 million settlement payment if the agreement is approved by the court.
“The company denies any liability in connection with the litigation and denies the claims asserted by the plaintiffs in the complaint,” a Beazer news release stated. “However, the company believes this settlement is in the best interest of the company and its stakeholders, as it eliminates the uncertainties, burden, and future expense associated with this litigation.”
Ever since the Charlotte Observer newspaper wrote a series about unusually high foreclosures in some Beazer-built neighborhoods in North Carolina in early 2007, the company has been on the defensive.
The series launched investigations by the U.S. Attorney's Office in the Western District of North Carolina and other state and federal agencies. Proactively, Beazer hired outsiders to perform an independent investigation into the company’s lending practices.
The investigators determined that its mortgage company's employees violated regulations governing downpayment assistance programs for Federal Housing Administration (FHA) loans. The company promptly got out of the mortgage business and began negotiating settlements with government investigators. That was in October 2007.
Those negotiations are ongoing, company spokeswoman Leslie Kratcoski told BIG BUILDER on Tuesday afternoon. “We continue to cooperate with them and hope for a resolution soon.”
In addition to the shareholders’ lawsuits, the holders of $1.5 billion of its bond debt sued Beazer in fall 2007, alleging the company was violating covenants because it had not filed a quarterly report in June of that year. The company’s internal investigators had uncovered some accounting irregularities that required a painstaking review of the company’s finances for several years.
That lawsuit was resolved after the majority of the bondholders agreed to give the company an extension on filing its reports in return for $18.3 million.

Last September, Beazer settled another investigation by the Securities and Exchange Commission (SEC) without having to pay a monetary penalty or admitting wrongdoing. It did, however, agree to "a cease and desist order requiring future compliance with certain provisions of the federal securities laws and regulations," the company's announcement said.

The discovery of the accounting irregularities triggered that investigation. At the time, Kit Addleman, regional director of the SEC's Atlanta office, said Beazer had used accounting to "smooth" its earnings, essentially under-reporting earnings in good years and over-reporting earnings in less prosperous years to flatten earnings’ peaks and valleys.

During 2000 to 2005, "the company was making more money than being projected, but nobody knew that. … They were putting it in their rainy day fund so that if something happened in the future they would have it," she said.

Then, as the market declined, the company pulled the money out and put it into earnings so it made it seem as though the company was doing better than it was, effectively somewhat leveling peaks and valleys in its earnings, Addleman said.

Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.

Learn more about markets featured in this article: Atlanta, GA, Charlotte, NC.