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.