Executives of Assisted Living Concepts Charged with Fraud
On December 3, 2014, the Securities and Exchange Commission (the “SEC”) announced securities fraud charges against Laurie Bebo and John Buono two executives at an assisted living facility accused of listing fake occupants to meet the requirements to operate the facilities.
The SEC Enforcement Division alleges that then-CEO Laurie Bebo and then-CFO John Buono devised the securities fraud scheme involving false disclosures and manipulation of internal books and records when it appeared likely that their company Assisted Living Concepts Inc. would default on covenants in a lease agreement with a real estate investment trust called Ventas Inc., which owned the facilities.
The financial covenants required Assisted Living Concepts to maintain minimum occupancy rates and coverage ratios while operating the facilities, and failure to meet the covenants constituted a default on the lease. A default would have required Assisted Living Concepts to pay the remaining rent amount due for the full term of the lease, which amounted to tens of millions of dollars at the time.
The SEC Enforcement Division alleges that Bebo and Buono directed Assisted Living Concepts accounting personnel calculating the occupancy rates and coverage ratios to include phony occupants in the calculations in order to meet the numbers required in the covenants. The identities of the fake occupants were determined by Bebo and included her family members and friends as well as Assisted Living Concepts current and former employees among others who did not reside at the senior residences. One of the purported senior residents was just seven years old. The SEC Enforcement Division alleges that without including these non-residents in the calculations, Assisted Living Concepts would have missed the covenant requirements by significant margins for several consecutive quarters. Bebo and Buono allegedly certified Assisted Living Concepts’s annual and quarterly reports that fraudulently represented that the company was in compliance with the occupancy and coverage ratio covenants included in the lease. Coverage ratio was defined in the lease as cash flow at the facilities divided by the rent payments owed by Assisted Living Concepts to Ventas.
According to the SEC’s order instituting litigated administrative proceedings, Assisted Living Concepts was based in suburban Milwaukee and has since been sold to a private equity firm. At the time of the alleged securities fraud that began in 2009 and continued into 2012, Assisted Living Concepts operated more than 200 senior living residences in the U.S. comprising more than 9,000 units. In early 2008, Assisted Living Concepts began operating eight facilities owned by Ventas. The SEC Enforcement Division alleges that while Bebo was a strong proponent of entering into the lease to operate these Ventas facilities, certain Assisted Living Concepts officers and directors advocated against it due to disadvantageous provisions including the financial covenants related to occupancy and coverage ratios. Bebo assured the directors that she was confident that Assisted Living Concepts could meet the financial covenants.
The SEC Enforcement Division alleges that less than a year after entering the Ventas lease, Bebo and Buono realized that a financial covenant default was likely. Bebo initially devised a plan to include Assisted Living Concepts workers who spent the night at a facility in the covenant calculations. Bebo sought the advice of Assisted Living Concepts ’s general counsel who advised that Assisted Living Concepts needed to fully disclose the practice to Ventas and obtain written approval for it to be permissible under the lease. The SEC Enforcement Division alleges that Assisted Living Concepts never obtained this approval to include employees in the covenant calculations and did not disclose the practice to Ventas.
The SEC Enforcement Division alleges that occupancy at the facilities in early 2009 had declined to the point where Assisted Living Concepts was violating certain financial covenants. But rather than report the defaults to Ventas or Assisted Living Concepts ’s board of directors and shareholders, Bebo directed Buono and his staff to include additional non-residents in the covenant calculations. The SEC Enforcement Division alleges that among those who were included as fake occupants at these senior residences were Bebo’s parents and other family members and employees.
The SEC Enforcement Division further alleges that some Assisted Living Concepts employees who occasionally stayed at the facilities were included in the covenant calculations but beyond the periods when they actually stayed there. Some Assisted Living Concepts employees and other individuals were listed as occupants of multiple facilities during the same time period. From the third quarter of 2009 to the fourth quarter of 2011, Assisted Living Concepts allegedly included between 45 and 103 non-residents in the covenant calculations. Bebo and Buono directed Assisted Living Concepts personnel to record journal entries increasing revenue associated with the fabricated occupancy in the accounts for the leased facilities. Assisted Living Concepts made a corresponding journal entry decreasing revenue in a corporate revenue account to mask the fraud. To establish the number of fake occupants to include in the covenant calculations, Bebo and Buono directed Assisted Living Concepts personnel to reverse-engineer the requisite number of phony occupants needed to meet the covenants. Shortly after the end of each quarter, Assisted Living Concepts allegedly provided Ventas with covenant calculations including the fake occupants and the associated revenue, thus falsely showing that Assisted Living Concepts was meeting the covenants.
The SEC Enforcement Division alleges that Bebo and Buono violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c), 13a-14, 13b2-1 and 13b2-2. The Enforcement Division further alleges that they caused and/or aided and abetted Assisted Living Concepts ’s violations of Sections 10(b), 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c), 12b-20, 13a-1 and 13a-13. The case will be litigated before an administrative law judge.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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