SEC BRINGS CHARGES AGAINST EXECUTIVES AT ASSISTED LIVING PROVIDER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against two former top executives at a Wisconsin-based assisted living provider accused of listing fake occupants at some senior residences in order to meet the requirements of a lease to operate the facilities.

The SEC Enforcement Division alleges that then-CEO Laurie Bebo and then-CFO John Buono devised a scheme involving false disclosures and manipulation of internal books and records when it appeared likely that their company Assisted Living Concepts Inc. (ALC) would default on financial promises known as covenants in a lease agreement with a Chicago-based real estate investment trust called Ventas Inc., which owned the facilities.  The financial covenants required ALC 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 ALC 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 ALC 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 ALC 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, ALC would have missed the covenant requirements by significant margins for several consecutive quarters.  Bebo and Buono allegedly certified ALC’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 ALC to Ventas.

“Rather than come clean with their landlord and investors, these executives falsely portrayed family and friends as senior housing occupants and certified misleading company filings,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “False filings threaten the integrity of financial reporting in our markets and will be pursued vigorously.”

According to the SEC’s order instituting litigated administrative proceedings, ALC was based in suburban Milwaukee and has since been sold to a private equity firm.  At the time of the alleged fraud that began in 2009 and continued into 2012, ALC operated more than 200 senior living residences in the U.S. comprising more than 9,000 units.  In early 2008, ALC began operating eight facilities owned by Ventas.  These facilities had a total of 540 units and were located in Alabama, Florida, Georgia, and South Carolina.  The SEC Enforcement Division alleges that while Bebo was a strong proponent of entering into the lease to operate these Ventas facilities, certain ALC 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 ALC 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 ALC workers who spent the night at a facility in the covenant calculations.  Bebo sought the advice of ALC’s general counsel who advised that ALC 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 ALC 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 ALC was violating certain financial covenants.  But rather than report the defaults to Ventas or ALC’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 family members including her parents and her husband.
• Bebo’s friends and their family members, including one friend’s seven-year-old nephew.
• ALC employees who worked at the facilities but lived nearby and did not stay overnight.
• ALC employees who did not stay at these facilities or travel to them.
• Former ALC employees who had been fired.
• Impending ALC employees who had not yet been officially hired.

The SEC Enforcement Division further alleges that some ALC employees who occasionally stayed at the facilities were included in the covenant calculations but beyond the periods when they actually stayed there.  Some ALC 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, ALC allegedly included between 45 and 103 non-residents in the covenant calculations.  Bebo and Buono directed ALC personnel to record journal entries increasing revenue associated with the fabricated occupancy in the accounts for the leased facilities.  ALC 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 ALC personnel to reverse-engineer the requisite number of phony occupants needed to meet the covenants.  Shortly after the end of each quarter, ALC allegedly provided Ventas with covenant calculations including the fake occupants and the associated revenue, thus falsely showing that ALC 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 ALC’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.

The SEC Enforcement Division’s investigation, which is continuing, has been conducted by Scott Tandy, Jean Javorski, Tom Vincus, and C.J. Kerstetter of the Chicago Regional Office.  The SEC’s litigation will be led by Ben Hanauer and Eric Phillips.  The case is being supervised by Robert Burson.