The Securities and Exchange Commission has announced that Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. has agreed to settle charges that it reported fake sales of more than 100,000 homes to boost revenues in its financial statements during a three-year period.
The SEC used satellite imagery to help uncover the accounting scheme and illustrate its allegation that Homex had not even broken ground on many of the homes for which it reported revenues. As a Securities Lawyer, I’m sometimes surprised that even the home industry is affected by these types of matter. But they are.
The SEC alleges that Homex, one of the largest homebuilders in Mexico at the time, inflated the number of homes sold during the three-year period by approximately 317 percent and overstated its revenue by 355 percent (approximately $3.3 billion). The SEC’s complaint highlights, for example, that Homex reported revenues from a project site in the Mexican state of Guanajuato where every planned home was purportedly built and sold by Dec. 31, 2011. Satellite images of the project site on March 12, 2012, show it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt.
According to the SEC’s complaint, Homex filed for the Mexican equivalent of bankruptcy protection in April 2014 and emerged in October 2015 under new equity ownership. The company’s then-CEO and then-CFO have been placed on unpaid leave since May 2016. Homex has since undertaken significant remedial efforts and cooperated with the SEC’s investigation. “As alleged in our complaint, Homex deprived its investors of accurate and reliable financial results by reporting key numbers that were almost completely made up,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division. “The settlement takes into account that the fraud occurred entirely under the watch of prior ownership and management, the company’s new leaders provided critical information regarding the full scope of the fraudulent conduct, and the company continues to significantly cooperate with our ongoing investigation.”
Melissa Hodgman, Associate Director of the SEC’s Enforcement Division, added, “We used high-resolution satellite imagery and other innovative investigative techniques to unearth that tens of thousands of purportedly built-and-sold homes were, in fact, nothing but bare soil.” The SEC separately issued a trading suspension in the securities of Homex.
Without admitting or denying the allegations in the SEC’s complaint filed in U.S. District Court for the Southern District of Utah, Homex consented to the entry of a final judgment permanently enjoining the company from violating the antifraud, reporting, and books and records provisions of the federal securities laws, and the company agreed to be prohibited from offering securities in the U.S. markets for at least five years. The settlement is subject to court approval.
SEC POSTED NOTICE OF AVAILABILITY
The Securities and Exchange Commission today published a taxonomy on its website so that foreign private issuers that prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) may submit those reports using XBRL. XBRL is a machine readable data format that allows investors and other data users to more easily access, analyze and compare financial information across reporting periods and across companies.
Foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB may begin immediately to submit their financial statements in XBRL. Otherwise, all such foreign private issuers must submit their financial statements in XBRL for fiscal periods ending on or after December 15, 2017. “Foreign private issuers will use the published IFRS Taxonomy for IFRS financial statements, which will enable the public to take advantage of enhanced data analysis of those financial statements, as they already can with financial statements of issuers that prepare their financial statements in accordance with U.S. accounting standards,” said Acting Chairman Michael Piwowar. In 2009, the Commission adopted requirements for structuring certain foreign private issuer financial statements in XBRL once an IFRS taxonomy was specified on the Commission’s website, SEC.gov.
PENALTIES IN INSIDER TRADING CASE
The Securities and Exchange Commission today announced that three Peruvian traders have agreed to settle a pending case alleging that they traded on nonpublic information prior to the merger of two mining companies.
The SEC filed its complaint in September 2016, and the settlements were approved today in U.S. District Court for the Southern District of Utah.
Nino Coppero del Valle, the alleged tipper who worked at one of the companies, agreed to pay full disgorgement of $53,607.70 plus interest of $5,382.44. His close friend and fellow attorney Julio Antonio Castro Roca agreed to pay full disgorgement of $59,300.02 plus $5,514.97 in interest and a $59,300.02 penalty. The other trader, Ricardo Carrion, agreed without admitting or denying the allegations to pay full disgorgement of $54,144.10 plus $5,820.29 in interest and a $54,144.10 penalty.
“The settlement of these actions for full disgorgement plus penalties on top of that reflects the strength of the evidence gathered in the SEC investigation,” said Andrew M. Calamari. “Overseas traders who violate U.S. insider trading laws can expect to face stiff monetary sanctions to resolve their cases.”
The final judgments also obtain permanent injunctive relief from each of the three defendants.
SEC CHARGES CEO WITH FAILING TO DISCLOSE PERKS
Public companies must properly disclose perks, benefits, and other forms of compensation paid to CEOs and certain other highly compensated executive officers. The Securities and Exchange Commission today announced that the former CEO of a marketing company has agreed to pay $5.5 million to settle charges that his perks were not properly disclosed to shareholders.
According to the SEC’s order, shareholders were informed in annual filings that Miles S. Nadal received an annual perquisite allowance of $500,000 in addition to other benefits as the chairman and CEO of MDC Partners. But the SEC’s investigation found that without disclosing information to investors as required, MDC Partners paid for Nadal’s personal use of private airplanes as well as charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. All total, Nadal improperly obtained an additional $11.285 million in perks beyond his disclosed benefits and $500,000 annual allowances. He has since resigned and returned $11.285 million to the company.
MDC Partners agreed to a $1.5 million settlement earlier this year for its role in the perk disclosure failures.
“Perks paid to corporate executives should be properly disclosed so that investors can make informed decisions,” said G. Jeffrey Boujoukos. “Nadal improperly received and failed to disclose millions of dollars in compensation.”
Nadal consented to the SEC’s order without admitting or denying the findings and agreed to pay $1.85 million in disgorgement plus $150,000 in interest and a $3.5 million penalty. He also agreed to be barred from serving as an officer or director of a public company for five years.
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