Investors were lead to believe that the company financials were healthier than they actually were, as evidenced by the changes noted when the financial statements had to be restated. As a result of doing this, investors who were under the impression of a healthier position, continued to invest in an organization that was essentially doing nothing more than stealing their money; money which could have been invested into a different enterprise rather than padding the pockets of executives that didn’t earn it.
As a result of having to restate financial statements, the per share price of Beazer Homes dropped from the $35/share price level in may, to approximately $11/share by the end of July. This is a significant loss in wealth for investors. In addition to the allegations against Mr. Rand for possible accounting fraud, allegations were also brought against Beazer Homes for mortgage fraud. To address the question as to which is a more serious offense, it would be our opinion that both would carry an equal weight of seriousness.
On the one hand, investors were misled, as noted above, and this led to a significant loss of wealth for many, especially those individuals and/or institutions that may have held a large position. On the other hand, to address the issue of mortgage fraud, new homeowners were oftentimes cheated out of money that they paid to Beazer Homes. A example of this is when Beazer Homes would require purchasers to pay a fee for “interest discount points” at closing. Then Beazer Homes would keep the cash received and not lower the interest rate.
This is just one example, but it can be an extremely costly one when you look at how much a . 25 percent or . 5 percent reduction in an interest rate can be over the life of a 20 or 30 year fixed rate mortgage; that’s if Beazer Homes wasn’t trying to convince people that an adjustable rate or hybrid mortgage would be better for their situation. Additionally, Beazer Homes ignored income requirements when making loans to unqualified purchasers, which not only put the purchaser in jeopardy of having the income needed to make their ayments, but in the event of default or foreclosure, it can have a significant impact on the home values of the neighborhood. As a result of these legal issues with Beazer Homes, the SEC issued a notice to the Beazer Homes CEO called the Wells notice. The Wells notice was created under the Sarbanes-Oxley Act of 2002, which states that if a firm has to restate their financial statements, the SEC can require the CEO and CFO to return any and all bonuses that were received during the period of restated financial statements.
Additionally, the CEO and CFO do not need to have any knowledge of errors. The SEC issued the Wells notice to the Beazer Homes CEO, Ian J. McCarthy, on 13 November 2009, indicating that the SEC would be brining a civil case against him to collect incentive compensation. In the notice issued to the CEO, there was no indication or allegations of cover-up, or misconduct, on the part of Mr. McCarthy with respect to the financial statements or other disclosures that were published during the period in question.