A recent SEC enforcement action caught my attention because it involved defrauding a landlord and miscounting residents. That left me scratching my head over why the Securities and Exchange Commission was involved with a senior living residence.
The SEC Enforcement Division alleges that then-CEO Laurie Bebo and then-CFO John Buono made false disclosures and manipulated internal books and records when it appeared likely that their company, Assisted Living Concepts Inc., would default on financial covenants in a lease agreement. Under the leases for the facilities, ALC was required to maintain occupancy levels as well as debt service coverage levels.
Like lots of fraud, it started off with a small bad act. Bebo and Buono wanted to include ALC employees who stayed overnight at the facilities as occupants. Then it got worse and they started counting employees who never stayed at the facility, family members, friends and people they interviewed for job openings. At the end of the fourth quarter 2011, the SEC alleges that between 45 and 103 reported occupants were non-residents.
The fraud was all directed at the landlord to avoid a default. ALC had publicly traded stock so the landlord fraud turned into public company accounting fraud.
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