WASHINGTON—The former chief executive officer of shopping-center owner Brixmor Property Group Inc. and his finance chief were charged with accounting fraud for allegedly manipulating a widely used metric of profitability.
Michael Carroll, Brixmor’s former CEO, and Michael Pappagallo, its former chief financial officer, were each charged by a grand jury indictment made public Thursday with criminal securities fraud, conspiracy to commit fraud, and making false statements in federal securities filings. The Securities and Exchange Commission also sued the former executives. Brixmor, a publicly traded real-estate investment trust, agreed to pay $7 million to settle the SEC’s claims of civil securities fraud and other violations without admitting or denying the allegations.
The alleged manipulation allowed Brixmor to hit quarterly growth targets from 2013 to 2015 that were closely watched by investors, according to the SEC, which said Brixmor executives described the scheme as “making the sausage.” The defendants used what is called cookie jar accounting to underreport income in certain quarters, which could be used in later periods when earnings growth would have been disappointing, the SEC said.
Brixmor, which is based in New York and operates shopping centers that include retailers such as
disclosed the likely settlement to shareholders in February. The company has a market capitalization of $5.6 billion, according to FactSet.
The company said Thursday that its board of directors and current management team “are committed to maintaining best-in-class internal controls and financial reporting and corporate governance practices.” Brixmor also agreed to hire an outside consultant to review its policies for ensuring the accuracy of certain accounting metrics that are closely watched by investors but don’t comply with U.S. accounting rules.
Prosecutors said Messrs. Carroll and Pappagallo cooked the books for years to deceive investors about Brixmor’s performance. The indictment was unsealed Thursday in the Southern District of New York. The SEC also sued the former executives in Manhattan federal court, seeking civil fines and a bar from serving as a public-company officer or director.
Mr. Carroll’s attorneys at Wilmer Cutler Pickering Hale and Dorr LLP said the former CEO will defend himself against the charges. “Mike Carroll has always acted with integrity and honesty, including during his time at Brixmor,” Mr. Carroll’s lawyers said in an emailed statement.
Gregory Kehoe, an attorney for Mr. Pappagallo, said the former CFO will contest both the criminal charges and civil allegations.
The disputed metric was the growth rate for same-property net operating income, a customized measure of profitability for a group of properties owned by Brixmor. The measure compares performance in one quarter to the same quarter one year prior. The SEC’s order said percentage growth was more volatile than the company reported in its earnings results, and actually frequently fell above or below the range disclosed by the company as guidance.
In one quarter in 2014, the growth rate was overstated by 50%, the SEC’s order alleged. In another period in 2013, it was reported as 39% higher than it actually was, the SEC’s order says.
Like many customized income measures, Brixmor said the metric stripped out revenues and costs that it deemed less relevant to judging performance over time. But the company sometimes included income that was supposed to have been excluded to meet quarterly growth targets, the SEC’s order said.
The SEC has questioned such numbers, known as non-GAAP metrics, warning they don’t comply with generally accepted accounting principles. Public companies are allowed to report non-GAAP measures, but aren’t supposed to give them greater prominence on earnings reports than profit measures that comply with accounting rules.
Write to Dave Michaels at email@example.com
Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8