‘Paradise Lost’ Now Found by SEC Following Accounting Fraud

The Securities and Exchange Commission has wound up a settlement with the former chief financial officer of Beazer Homes USA to retrieve his bonus compensation and stock sale profits generated when the Atlanta-based homebuilder was defrauding its reports.

Section 304 of the Sarbanes-Oxley Act requires James O’Leary to reimburse Beazer more than $1.4 million that he got after Beazer filed for accounting fraud detected during fiscal year 2006, according to the SEC’s complaint filed in federal court in Atlanta.

However, it stated that James O’Leary is not personally charged with misconduct. The SEC’s settlement with O’Leary is subject to court approval.

Under Section 304 of the Sarbanes-Oxley Act, senior corporate executives are required to reimburse certain compensation and stock sale profits received while their companies do not comply with financial reporting requirements due to misconduct. This can include an individual who has not been personally charged with the underlying misconduct or alleged to have otherwise violated the federal securities laws.

O’Leary did not admit or deny the allegations, but agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006.

The settlement amount also includes $274,525 in stock sale profits.

Last March, the SEC reached a settlement with Beazer CEO Ian McCarthy to recover several million dollars in bonus compensation and stock profits that he received while the company was committingaccounting fraud.

Robert Khuzami, Director of the SEC’s Division of Enforcement, said then: “This provides an important incentive for senior executives to be vigilant in preventing misconduct and ensuring that companies comply with financial reporting requirements.”

In September 2008, Beazer settled an SEC enforcement action, and in July 2009, the SEC charged its former chief accounting officer Michael Rand in July 2009.

The SEC complaint filed in U.S. District Court for the Northern District of Georgia, stated that Rand “fraudulently decreased Beazer’s reported net income by recording improper accounting reserves during certain periods between 2000 and 2005 in order to meet or exceed analysts’ expectations for Beazer’s diluted earnings per share (EPS) and maximize yearly officer and senior employee bonuses.”

Rand began reversing these improper reserves starting first quarter of fiscal year 2006 in order to offset Beazer’s declining financial performance.

The litigation against Rand, who was charged of committing the fraud, is ongoing.

“Section 304 of the Sarbanes-Oxley Act encourages senior management to take affirmative steps to prevent fraudulent accounting schemes from occurring on their watch,” said Rhea Kemble Dignam, Director of the SEC’s Atlanta Regional Office.

“O’Leary received substantial incentive compensation and stock sale profits while Beazer was misleading investors and fraudulently overstating its income.”