Several federal agencies have settled a two-year investigation against Beazer Homes USA, agreeing they won't prosecute the company for criminal mortgage and securities fraud if it meets certain conditions and pays between $48 million and $50 million in restitution over the next 60 months.
For two years, Beazer has been under investigation for fraudulent mortgage practices designed to increase the profit margin for its mortgage subsidiary and to sell its houses as well as for accounting practices designed to "smooth earnings, through cookie-jar accounting," the Department of Justice said July 1.
Beazer's cooperation in the investigation, its admissions of guilt after its own internal investigation discovered the improprieties, the closing of its mortgage subsidiary, and the adoption of remedial measures including the firing of executives and employees it identified as responsible were factors that netted the company leniency, investigators said.
And the government felt a bit sorry for Beazer because of its financial situation as well, it seems. "The recognition that the imposition of additional criminal penalties or the requirement of additional payment at this time would jeopardize the solvency of Beazer and put at risk the employment of approximately 15,000 employees and full-time contractors not involved in the criminal wrongdoing," the Department of Justice release said.Beazer said it was sorry again as well.
"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," said Ian J. McCarthy, Beazer's president and CEO, in a statement issued late Wednesday. "We are pleased that the governmental authorities recognized our cooperation and remedial measures."
Under the settlement, Beazer has agreed to pay $10 million immediately as restitution for victimized home buyers and additional money, up to $50 million, as the company "recovers financially," the Department of Justice release said. The $10 million includes the $2.5 million Beazer recently paid to the North Carolina Commissioner of Banks as restitution for North Carolina home buyers. The rest will be paid to a national restitution fund established to compensate Beazer customers who can demonstrate they were injured by some of Beazer's mortgage practices.
In fiscal year 2010, Beazer will contribute either $1 million or 4% of the company's 2010 adjusted earnings before EBITDA. For the years thereafter through part of 2014, the company will continue to pay 4% of EBITDA up to $50 million.
If the company hasn't put $48 million into the restitution fund by the end of 60 months, the company will be required to keep contributing 4% of EBITDA until it reaches $48 million.
Also under the agreement, Beazer is required to pay $4 million to the Department of Housing and Urban Development (HUD) to resolve civil and administrative investigations by that agency. A year later, it is required to make another $1 million payment to HUD.
McCarthy and company COO Michael Furlow will contribute the after-tax proceeds of their 2008 bonuses into the fund to help defray the impact on the company's balance sheet.
The attendee list at the settlement announcement revealed just how many government agencies were involved in the investigation. In addition to the acting U.S. attorney of the Western District of North Carolina, HUD Secretary Shaun Donovan attended, as did high-level officials from the FBI, IRS, U.S. Postal Inspection Service, Office of the Inspector General of HUD, the North Carolina Commissioner of Banks, and the North Carolina Real Estate Commission. And five of them submitted stern statements praising the settlement for restoring money to the victims and making it clear that they will crack down on those who violate the law and hold the guilty accountable.
Federal prosecutors filed a "bill of information" detailing their case against Beazer with the agreement. The document offers the first detailed picture of what the company was accused of. In short they are divided into two categories, fraud related to mortgages and that related to accounting. The U.S. attorney of the Western District of North Carolina said that between 2000 and 2007, Beazer Mortgage, a since disbanded entity of Beazer Homes, and "certain co-conspirators" designed a scheme to increase the mortgage entity's profits and to sell more homes. The allegations include:
* Discount Point Fraud: One part of that scheme was to charge home buyers fees in return for a better interest rate on loans and then pocketing some of those fees to increase profit margins. In other cases, the price of the home was increased to offset the amount paid for the "illusory" discount points. In other cases when discount points were charged and kept, Beazer Mortgage gave its employees an "overage" incentive bonus of a few hundred dollars for exceeding the mortgage subsidiary's profit margin on that loan.
* Down-Payment Assistance Fraud: In North Carolina and some other markets, Beazer used a standard program to help provide low-income buyers with the then-required 3% down payment by paying a charity the required down-payment funds plus an additional $300 "donation fee," which the charity would then "gift" to the home buyer at closing. Under HUD rules the down payment must be a true gift and the price of the house may not be increased to make up for the cost of the down-payment assistance. Nevertheless, the bill of information says, "Beazer and Beazer Mortgage on certain occasions fraudulently increased the prices of homes sold to down-payment assistance beneficiaries in order to offset the cost of the down-payment assistance, thereby fraudulently increasing the loan amount ot be repaid by the home buyer."
* HUD Licensing Fraud: When the default rate on Beazer's HUD loans started to trigger HUD's watchdog programs, the company's employees devised ways to thwart detection. When HUD's credit watch program noted that a branch's default was approaching 200% of its peers, Beazer Mortgage would instruct loan originators at the at-risk branch to use the HUD license number from another branch that was not at risk to escape detection. It also would terminate branch identification numbers for at-risk branches and then apply for a new HUD license number for the originators at that branch. To keep the scheme from being detected, some Beazer Mortgage company employees lied to HUD.
* Stated Income Fraud: When issuing stated income loans, since dubbed "liar loans," some division employees were warned the dangers of "knowing too much about a buyer." In one division, for instance, the bill of information says that mortgage loan counselors were provided a script in which it was suggested that instead of asking "How much do you make?" they should ask "It is going to take $X,XXX a month in household income to qualify for this home. Can you state that you have that much household income?" As evidence of the mortgage fraud allegations, the bill of information offers a number of e-mails.
* Accounting Fraud: The accounting fraud scheme Beazer is accused of is said to have lasted between 2000 and 2007. During the company's high-profit years, between about 2000 and 2006, the company downplayed the profit by squirreling away money in a variety of "reserve" accounts, including the company's legal and warranty reserves, land inventory accounts, and cost-to complete accounts. The diversion of profits into these reserve accounts occurred after earnings exceeded key executive bonus triggers and analyst expectations. "The 'cookie jar accounting' materially misstated Beazer's true financial results, net income, and earnings per share in filings with the Securities and Exchange Commission (SEC) and other investor disclosures." The SEC already reached a settlement with Beazer for those charges. In a separate announcement Wednesday, the SEC filed a civil lawsuit against Michael T. Rand, Beazer's chief accounting officer until he was fired in June 2007. Rand could also face criminal prosecution.