SAN DIEGO (CN) – Mexico’s former largest homebuilder agreed Friday to settle SEC fraud claims that it over-reported its revenue by $3.3 billion for homes it never built.
Desarrolladora Homex’s Achilles heel was satellite photos showing it “had not even broken ground on many of the homes for which it reported revenues,” the SEC said in a statement.
The SEC said in its March 3 lawsuit that the Culiacan-based company committed massive accounting fraud between 2010 and 2013, reporting sales of more than 100,000 homes it had not built.
U.S. citizens invested millions of dollars in Homex on the New York Stock Exchange, including a $400 million bond issuance that Homex made directly to U.S. investors in Feb. 2012, according to the SEC complaint.
Desarrolladora Homex means Homex Developer. Culiacan, in the state of Sinaloa, is also a major drug trafficking center.
Mexico’s stock exchange suspended trading in Homex’s common shares in February 2014 due to unusual stock price movements and its failure to timely file a required quarterly financial statement. A few months later, Homex filed for bankruptcy, and its securities were delisted from the New York Stock Exchange.
The company went through a reorganization in 2015 and its top executives were replaced.
The SEC said Homex employees used an internal accounting system called the Sistema Integral de Administración, or SIA system, which tracked revenue from home sales only at the projected level and did not keep data concerning sales of specific homes. Access to the system’s treasury module was limited to higher-ups, including its then-CEO, CFO, controller and some subordinates.
Homex used an additional financial and accounting system called Contpaq, to process accounting information and consolidate financial statements.
Contrary to the company’s internal controls, Homex’s financial accounting personnel did not upload into Contpaq or use information accurately captured within SIA’s modules. Instead, its personnel manually entered false revenue into the SIA system, with that false information being uploaded to Contpaq, according to the lawsuit.
Finance staff maintained a spreadsheet that tracked the fictitious home sales which were manually entered into the SIA system. The spreadsheet was maintained outside Homex’s internal systems to ensure the false revenue figures from manually entered home sales was not double-booked.
Homex staff concealed the fraudulent figures by manually entering corresponding cost-of-sales inventory information into the Contpaq system, according to the complaint.
For instance, Homex reported revenue from a projected site in the state of Guanajuato where every home was reportedly built and sold by Dec. 31, 2011. But satellite photos taken of the site on March 12, 2012 showed it was still undeveloped and most of the supposedly sold homes had not been built.
“We used high-resolution satellite imagery and other innovative investigative techniques to unearth that tens of thousands of purportedly built and sold homes were, in fact, nothing but bare soil,” SEC Enforcement Division associate director Melissa Hodgman said in a statement.
Homex did not admit or deny the allegations in the settlement. It permanently enjoins the company from violating antifraud, reporting and books and records provisions of federal securities laws. Homex also agreed to being barred from offering securities in U.S. markets for at least five years.
The final settlement agreement awaits approval by U.S. District Judge James Lorenz.