SEC Claims Fraud Involving a REIT and Bogus Senior Resident Occupants

The U.S. Securities and Exchange Commission claims that two ex-executives at Assisted Living Concepts Inc. committed fraud by listing bogus occupants at certain senior residences to satisfy the lease requirements to run the facilities. The regulator is accusing former CFO John Buono and previous CEO Laurie Bebo of coming up with a scam that included bogus disclosures and manipulation of records and books when it started to look as if Wisconsin-based assisted living provider was going to default on covenants in a lease agreement with Ventas Inc., which is a real estate investment trust.

Per the covenants, ALC was obligated to keep up minimum occupancy rates and coverage rations while running the facilities or otherwise default on the lease. A default would have obligated the company to pay whatever rent was due for the lease’s remainder of term, which would have been tens of millions of dollars.

According to the SEC Enforcement Division, to meet covenant requirements Buono and Bebo told accounting personnel to work out coverage ratios and occupancy rates by factoring in phony occupants. These nonexistent occupants included Bebo’s relatives and friends, in addition to previous and former ALC employees (including some who had been fired and who hadn’t yet been officially hired), as well as a seven-year-old “senior resident.” Without this false information, contends the agency, ALC would have not met convenant requirements by substantial margins for several quarters in a row.

Buono is accused of certifying ALC’s quarterly and yearly reports even though they fraudulently represented that the company had complied with the required covenant. At the time of the purported fraud from 2009 into 2012, ALC, which now belongs to a private equity firm, ran over 200 residences made up of thousands of units. When Bebo sought to go into a lease to run eight Ventas-owned facilities in 2008, a number of company directors and officers opposed the move because of the covenant provisions.

Read the SEC Order (PDF)

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