SEC fines property company $7m over accounting fraud
The US Securities and Exchange Commission (SEC) has charged Brixmor Property Group, a publicly-traded real estate investment trust, and four former senior executives with fraud
7 Aug 2019
The claims related to a scheme to manipulate a key non-GAAP metric, used to evaluate the company's financial performance. This involved adjusting Brixmor's same property net operating income (SP NOI) in order to report quarterly numbers that hit the company’s publicly-issued growth targets. The allegations related to a two-year period from 2013 to 2015.
The SEC's complaint involved four senior Brixmor executives including CEO Michael Carroll, chief financial officer Michael Pappagallo, chief accounting officer Steven Splain and senior VP of accounting Michael Mortimer.
The SEC’s complaint charge, which was filed in the US District Court for the Southern District of New York, claimed that certain of the defendants described their manipulation of the non-GAAP measure as ‘mak[ing] the sausage’. This involved selectively recognising income from a ‘cookie jar’ account, incorporating certain income that the company had represented as excluded, and lowering the prior year's SP NOI to give the appearance of stronger growth in the current year.
‘We allege that these senior executives intentionally manipulated a key metric to mislead investors about Brixmor's ability to hit its targets,’ said Marc P Berger, director of the SEC's New York office. ‘A company that chooses to publicly present non-GAAP financial measures must do so truthfully.’
The SEC sought permanent injunctions, disgorgement plus interest and penalties, and officer-and-director bars against the individuals. Splain and Mortimer have agreed to the entry of partial judgments against them in which they consent to injunctive relief with other monetary relief and bars to be determined by the court in the future. These settlements are subject to court approval.
Brixmor has agreed to settle the SEC's charges and pay a $7m (£6m) penalty without admitting or denying the allegations. It will also comply with certain undertakings, including retaining an independent consultant to review and assess controls relating to the calculation and presentation of non-GAAP measures including SP NOI.
The SEC's settled order on Brixmor found that the company violated the antifraud provision of the federal securities laws and Rule 100(b) of Regulation G, and filed false and misleading annual, quarterly, and current reports with the SEC.
In a parallel action, the US Attorney's Office for the Southern District of New York announced criminal charges against Carroll, Pappagallo, Splain, and Mortimer on 1 August. Splain and Mortimer pleaded guilty to those charges.