Federal prosecutors took the unusual step of dismissing criminal charges against former executives of shopping-center owner
telling a judge they couldn’t prove their claims of accounting fraud.
The move ends the case against Michael Carroll and
Brixmor’s former chief executive officer and former chief financial officer, respectively. Messrs. Carroll and Pappagallo were indicted in July 2019 on claims they manipulated a key earnings metric, same-property net operating income, in order to meet quarterly targets.
But after doing more investigation, prosecutors decided a building block of their fraud theory might not hold water in court, according to a letter they sent Thursday to U.S. District Judge Colleen McMahon in Manhattan. Prosecutors also dismissed cases against two former Brixmor senior accounting officers, Steven Splain and Michael Mortimer, who had earlier agreed to plead guilty.
The outcome is rare and “mildly embarrassing” for the government, said
a professor at Columbia Law School and expert in white-collar-crime enforcement. “Here they are saying, ‘we really don’t think we have the evidence, and as true professionals, we don’t think we can pursue the prosecution,’” Mr. Coffee said.
Brixmor is a real-estate investment trust, or REIT, that owns about 393 shopping centers with tenants such as TJX Cos.,
and Dollar Tree Stores Inc. The company began an internal investigation in 2015 after an employee in its accounting department alleged executives used “cookie-jar” tactics to meet earnings guidance given to Wall Street, according to a 2019 Securities and Exchange Commission order resolving a separate civil-fraud case against Brixmor.
Cookie-jar accounting involves intentionally shifting revenue or expenses out of the period in which they should be recognized, in order to preserve flexibility to meet or beat earnings targets in an upcoming quarter. The earnings metric that Brixmor reported, same-property net operating income, is a customized gauge of income that REITs report to investors. Because such metrics don’t comply with generally accepted accounting principles, they are called non-GAAP metrics.
Brixmor’s internal investigation was flawed and incomplete, while the government’s claims were undercut by the fact that securities analysts and company auditors understood how Brixmor calculated its earnings metrics, said Peter Neiman, a partner at Wilmer Cutler Pickering Hale & Dorr LLP, which represented Mr. Carroll along with Cleary Gottlieb Steen & Hamilton LLP.
“The government’s charges were contrary to the conclusions of both Big Four accounting firms that reviewed the relevant financial statements, and related to tiny alleged errors in a metric with no fixed definition under GAAP that Brixmor warned was not a substitute for its reported GAAP earnings,” Mr. Neiman said.
An attorney for Mr. Pappagallo, Gregory Kehoe, said his client was thankful that prosecutors had responded to information brought forward by the former executives about their innocence. “I laud the U.S. attorney for going back and re-evaluating what happened here, and on behalf of Mr. Pappagallo, we are thankful for the result,” Mr. Kehoe said.
Jerry Bernstein, an attorney for Mr. Mortimer, said: “Mr. Mortimer cooperated with the government from the very beginning of this investigation, and he is obviously very pleased that all of the charges against him have been dismissed.”
An attorney for Mr. Splain didn’t return messages seeking comment. A Brixmor spokeswoman declined to comment. A spokesman for the U.S. attorney’s office in Manhattan declined to comment.
The SEC also sued Messrs. Carroll, Pappagallo, Splain and Mortimer. The SEC’s civil case against them had been put on hold to give priority to the criminal case. The regulator said in a federal court filing this week that it would review why prosecutors dismissed the criminal case and report back to the court.
The SEC has a lower burden of proof in its civil cases than prosecutors face in criminal cases, and thus regulators often bring fraud cases that criminal authorities don’t. Defendants often settle SEC cases because the outcome doesn’t carry the stigma that a criminal indictment or guilty plea does, Mr. Coffee said.
An SEC spokesman declined to comment.
Write to Dave Michaels at email@example.com
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Source: WSJ – US News