The Securities and Exchange Commission (SEC) recently used satellite imaging to help reveal an accounting scheme in which a homebuilding company fraudulently boosted its revenue statements by reporting more than 100,000 non-existent home sales.
Over a three-year period, the Mexican-based company, Desarrolladora Homex S.A.B. de C.V., artificially inflated its revenue reported in financial statements by approximately $3.3 billion (355 percent), according to the SEC’s complaint, filed in the U.S. District Court for the Southern District of California.
By using satellite imagery, the SEC successfully illustrated its allegation that Homex had not even broken ground on many of the homes for which it reported revenues.
“The SEC’s complaint highlights, for example, that Homex reported revenues from a project site in the Mexican state of Guanajuato where every planned home was purportedly built and sold by Dec. 31, 2011,” according to an SEC press release. “Satellite images of the project site on March 12, 2012, show it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt.”
In April 2014, Homex filed for the Mexican equivalent of bankruptcy protection, according to the SEC’s complaint, and emerged in October 2015 under new equity ownership. Since May 2016, the company’s then-CEO and then-CFO have been placed on unpaid leave. Homex has since undertaken remedial efforts and cooperated with the SEC’s investigation.
“As alleged in our complaint, Homex deprived its investors of accurate and reliable financial results by reporting key numbers that were almost completely made up,” SEC Enforcement Division Acting Director Stephanie Avakian said in the release. “The settlement takes into account that the fraud occurred entirely under the watch of prior ownership and management, the company’s new leaders provided critical information regarding the full scope of the fraudulent conduct, and the company continues to significantly cooperate with our ongoing investigation.”
SEC Enforcement Division Associate Director Melissa Hodgman said that, in addition to high-resolution satellite imagery, the commission used “other innovative investigative techniques to unearth that tens of thousands of purportedly built-and-sold homes were, in fact, nothing but bare soil.”
The SEC separately issued a trading suspension in Homex’s securities, the release states. The company consented to a final judgment permanently enjoining the company from violating the antifraud, reporting and books and records provisions of the federal securities laws, and the company agreed to be prohibited from offering securities in the U.S. markets for at least five years. The settlement is subject to court approval.