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From Securities Regulation Daily, March 3, 2017

Mexican homebuilder settles accounting fraud charges after images show minimal construction

By Amy Leisinger, J.D.

The SEC charged a Mexico-based real estate developer with reporting fake sales of more than 100,000 homes on which the company had not even broken ground to boost revenues in its financial statements over a three-year period. Using satellite imagery to help uncover the scheme, the SEC found that the company inflated the number of homes sold by approximately 317 percent and improperly recognized billions of dollars of revenue. Without admitting or denying the allegations, the developer consented to a permanent injunction against further violations and a bar on offering securities in the U.S. markets (SEC v. Desarrolladora Homex, S.A.B. de C.V., March 3, 2017).

"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 Acting Enforcement Director Stephanie Avakian. The settlement takes into account current management’s cooperation with the investigation and its lack of involvement in the scheme, she noted.

Accounting fraud. From approximately 2004 through 2014, the stock of Desarrolladora Homex S.A.B. de C.V., formerly one of the largest homebuilders in Mexico, was listed on the NYSE in the form of American Depositary Shares. The SEC alleged that Homex reported revenues from a project site in Mexico where every planned home was purportedly built and sold by December 2011. Satellite images of the site in March 2012, however, showed the area was still largely undeveloped and the vast majority of the supposedly sold homes remained unbuilt.

Under Homex’s own disclosures and internal policies and procedures, a home had to be substantially constructed before the company could potentially recognize revenue for its sale.

However, according to the SEC, Homex, through its senior officers and employees, systematically and fraudulently reported billions of dollars in revenue from the sale of these unbuilt homes by manually entering false information into its internal accounting and financial systems. Homex overstated its revenue by 355 percent, approximately $3.3 billion, and U.S.-based individuals and entities invested hundreds of millions of dollars in the company, the Commission alleged. The stock was eventually suspended and delisted from the NYSE, and the U.S.-based facility for Homex’s ADS was terminated.

By this conduct, the SEC alleged, Homex violated the antifraud provisions of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder. In addition, the company failed to ensure that statements made to the SEC were not misleading, that books and records kept accurately reflected transactions and assets, and that internal accounting controls remained sufficient to prevent violations.

Sanctions. To settle the matter, Homex consented to the entry of a final judgment permanently enjoining it from violating the antifraud, reporting, and books and records provisions of the federal securities laws and agreed to a prohibition from offering securities in the U.S. markets for at least five years. The SEC separately issued a trading suspension in the securities of Homex.

The settlement remains subject to court approval.

The case is No. 3:17-cv-00432-L-WVG.

Attorneys: Richard Hong for the SEC.

Companies: Desarrolladora Homex, S.A.B. de CV

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