The Securities and Exchange Commission has filed an action against Beazer Homes CEO Ian J. McCarthy, forcing him to return nearly $6.5 million in bonuses, stock options and other compensation he received while the Atlanta-based homebuilder was committing accounting fraud.
The enforcement action filed by the SEC on Thursday charges McCarthy with violations of Section 304 of the Sarbanes-Oxley Act of 2002. Section 304 requires reimbursement by chief executive officers and chief financial officers of certain compensation and stock sale profits they earned while their companies were in material non-compliance with financial reporting requirements due to misconduct, as well as profits from stock sales during that same period.
According to the SEC’s complaint against McCarthy, Beazer was required to prepare accounting restatements for the fiscal year ended Sept. 30, 2006 and the first three quarters of fiscal 2006 due to its fraudulent misconduct. This misconduct consisted of a manipulation of Beazer’s land development and house cost-to-complete accounts to increase income, and the improper recording of certain model home financing transactions as sales, again to increase Beazer’s income. McCarthy was not charged with the underlying misconduct or alleged to have otherwise violated the federal securities laws.
Without admitting or denying the Commission’s allegations, McCarthy agreed to reimburse Beazer $6,479,281 in cash, 40,103 restricted stock units (or its equivalent), and 78,763 shares of restricted stock (or its equivalent). This reimbursement represents McCarthy’s entire fiscal year 2006 incentive bonus ($5,706,949 in cash and 40,103 in restricted stock units), $772,332 in stock sale profits, and 78,763 shares of restricted stock granted in 2006. The settlement with McCarthy is subject to court approval.
This is the third enforcement action in the SEC's investigation into Beazer’s accounting misconduct. In September 2008, the Commission issued an order that instituted cease-and-desist proceedings and found that in certain periods between 2000 and 2007, Beazer fraudulently misstated its financial statements for the purpose of improperly managing its quarterly and annual earnings. The order stated that Beazer managed its earnings during the period through the use of improper land inventory and housing accruals or reserves, and, beginning in fiscal 2006, improperly recognized income from certain model home financing transactions. Beazer consented to the issuance of the order without admitting or denying any of the findings.
In July 2009, the SEC filed a civil injunctive action against Michael T. Rand, Beazer’s former chief accounting officer, for conducting the fraudulent earnings management scheme and for misleading Beazer’s outside auditors and internal Beazer accountants in order to conceal his wrongdoing. Litigation in that matter is ongoing (see Beazer’s Former Chief Accounting Officer Indicted).
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