Was Massive Accounting Fraud Uncovered at Homex? Seems So!

At first glance, this case of massive accounting fraud and unethical business practices might seem to be someone else’s problem; some other country’s problem. However, we not only live in inter-connected times, we also invest globally.  And fraud can happen in any company just ask Homex!

Desarrolladora Homex S.A.B. de C.V. or Homex, for short is a homebuilder based in Mexico. They build homes in Brazil as well as Mexico. Homex stock is traded internationally which is why the SEC cares if the stock is being fairly-traded. Homex is in thousands of stock portfolios in international funds.

The company has just been charged with massive accounting fraud amounting to $3.3 billion. They reported fake revenues on more than 100,000 residences most of which were never built. The fraud occurred over a three-year period.

Satellites Don’t Lie

The SEC, through their security and due-diligence work had a “feeling” that the company had been falsifying their financial reports from 2011 to 2014. The company is listed on the New York Stock Exchange. They were overstating revenues by more than 350 percent, and the number of homes sold by nearly 320 percent. Specifically, they were claiming a major building project in in the Mexican state of Guanajuato and that sales were very strong.

The SEC, not believing the claims, started to do satellite surveillance and found that not only were far fewer homes yielding the revenue results the company had claimed, but ground had not even been broken for the homes the company had claimed were sold.

Stephanie Avakian, the Acting Director of the SEC’s Enforcement Division issued the following statement after the old CEO was placed on unpaid leave in 2016 (after the company had entered bankruptcy protection and a new ownership group took over the operations):

“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…

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.”

The company was selling dirt and they did so without compunction. They did so, I believe, because they were playing the unethical game of “catch us if you can.” They were relying on the fact that greedy investors thousands of miles away were only interested in “financials” and not reality. The SEC was not about to play the game and the satellite evidence clearly convinced them that the company was out to intentionally defraud investors.

What Does This Tell Us?

Ethical lessons abound for us in this case. Hopefully, no one reading this post has learned a bad financial lesson as well. This is not a post about bad Mexican companies or even bad international companies, for there are a great many good companies everywhere. The lesson here is that whether the company is in Maine or Mexico, if unethical behavior is the objective then unethical people will seize opportunities to commit fraud. It is a universal theme.

The key word in the above sentence is “opportunity.” The former CEO, who was previously CFO, saw an opportunity to commit fraud by overstating revenues. In this case, he was claiming sales of a product that did not exist. There is nothing new in this, hundreds of companies have committed this kind of crime over the years.

However, in order for this crime to have been perpetrated, the CEO could not have possibly acted alone. Many other executives and managers were complicit as well as their Board of Directors and the financial community who must have studied and recommended the stock.

What this case tells me is that nowhere in the grand scheme of things do we see ethical training or an ethical code of behavior. What we see is a company intent on committing fraud in order to boost their stock price. There were no checks and balances and even less accountability.

If we were to rewind the clock on Homex we would find that there were subtle and not so subtle warning signs along the way. For example, in 2012 the company sold $400 million in bonds based on financials that were “cooked.” The entire management team was corrupt. Someone, deep inside, blew the whistle.

While it is impossible to know everything about a publicly-traded company, never invest in a company that is being pushed on you and never make rapid decisions when it comes to your finances. If a broker recommends a stock as a “can’t miss opportunity,” take a long look at it. Solid companies will yield solid results.

Ultimately, Homex was more of an ethical failure than a financial failure. This is a prime example of what occurs when bad ethics are allowed to thrive and good people do nothing.

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