The SEC and DOJ filed charges in August 2019 alleging that four former executives of the publicly-traded real estate investment trust (“REIT”) Brixmor Property Group Inc. (“Brixmor”), manipulated the company’s same property net operating income (“SP NOI”) metric to meet consistent growth targets in public filings with the SEC between the third quarter of 2013 and the third quarter of 2015. SP NOI is an industry-specific, non-GAAP measure that is designed to more accurately reflect the profitability of income-generating real estate investments. The SEC filed charges against Brixmor and its former CEO, CFO, chief accounting officer, and senior vice president for management accounting. Brixmor agreed to settle the SEC’s charges by paying a $7 million civil penalty and complying with certain undertakings. The DOJ has also announced parallel criminal charges against the four former executives, two of whom have pleaded guilty.

• Focus on Consistent Earnings – The charges filed by the SEC and DOJ emphasize that Brixmor’s former CEO and CFO touted the company’s steady and consistent SP NOI growth from its inception as a public company, when in reality Brixmor’s actual SP NOI was volatile and fell above or below the company’s publicly issued guidance ranges. To ensure consistency with the company’s guidance, the former executives manipulated the SP NOI growth rate by: (i) using an account referred to internally as a “cookie jar” to improperly delay or accelerate revenue recognition; (ii) including lease termination income in the calculation of SP NOI, contrary to the company’s public disclosures; and (iii) manually reducing the SP NOI in prior periods to make the current period’s SP NOI appear higher. The SEC’s complaint notes that the executives described these adjustments to SP NOI as “mak[ing] the sausage.”
• Parallel Criminal Proceeding – In a parallel proceeding, the U.S. Attorney’s Office for the Southern District of New York also filed criminal charges against the former executives. The company’s former chief accounting officer and senior vice president for management accounting each pleaded guilty to one count of conspiracy to commit securities fraud and make false filings with the SEC, and one count of securities fraud. The company’s former CEO and CFO also face similar criminal charges, to which they pleaded not guilty.
• Non-GAAP Measures in REIT Disclosures – This case illustrates how the use of non-GAAP measures in the REIT industry has recently come under scrutiny. REITs routinely report non-GAAP metrics in their financial statements because they are said to help users of financial statements better understand the REIT’s core operations, often by reflecting only income and expense items that are incurred at the property level. In June 2017, the former CFO of American Realty Capital Partners was convicted on criminal charges stemming from his role in manipulating the company’s adjusted funds from operations (“AFFO”), another common non-GAAP measure used in the REIT industry.

The SEC’s settlement order with Brixmor can be found here.

The SEC’s complaint against the former Brixmor executives can be found here.

The DOJ’s indictment against Brixmor’s former CEO and CFO can be found here.

View the full Accounting & Financial Reporting Enforcement Round-Up.