SEC Enforcement: Man of Many Aliases Charged With Stock Fraud

The covenants required minimum occupancy rates and coverage ratios of the company operating the facilities; failure to meet these minimums would constitute a default on the lease. A default would have required ALC to pay the remaining rent amount due for the full term of the lease, which amounted to tens of millions of dollars at the time.

ALC, which has since been sold to a private equity firm, operated more than 200 senior living residences in the U.S. comprising more than 9,000 units. In early 2008, ALC began operating eight facilities owned by Ventas. These facilities had a total of 540 units and were located in Alabama, Florida, Georgia and South Carolina.

Bebo was eager to enter into the lease to operate these Ventas facilities, but certain ALC officers and directors opposed it due to disadvantageous provisions including the financial covenants related to occupancy and coverage ratios. Bebo, however, assured the directors that she was confident that ALC could meet the financial covenants.

But it was less than a year until Bebo realized a financial covenant default was likely. The fraud began in 2009 and continued into 2012. First Bebo came up with the idea of including ALC workers who spent the night at a facility in the covenant calculations. When she asked ALC’s general counsel about it, she was advised that ALC needed to fully disclose the practice to Ventas and obtain written approval for it to be permissible under the lease.

But that was never done. Instead, Bebo and Buono directed ALC accounting personnel calculating the occupancy rates and coverage ratios to include phony occupants in the calculations so the company could meet the numbers required in the covenants. The fake occupants’ identities were determined by Bebo, and included her family members and friends, as well as ALC current and former employees, among others, who did not reside at the senior residences. One of the purported senior residents was just 7 years old. Not only were these fake residents, but some were listed as residents of multiple facilities at the same time. From the third quarter of 2009 to the fourth quarter of 2011, ALC allegedly included between 45 and 103 nonresidents in the covenant calculations.

If Bebo and Buono hadn’t dreamed up the scheme to include fake occupants, the company would have missed the covenant by a significant margin for several consecutive quarters. Instead, Bebo and Buono allegedly certified ALC’s annual and quarterly reports that fraudulently represented that the company was in compliance with the occupancy and coverage ratio covenants included in the lease. Coverage ratio was defined in the lease as cash flow at the facilities divided by the rent payments owed by ALC to Ventas.

The investigation is continuing.

SEC Charges Montana Man in Pump-and-Dump Scheme

Penny stock promoter Matthew Carley of Bozeman, Montana, was charged by the SEC with orchestrating a fraudulent pump-and-dump scheme involving the stock of a Northern Virginia-based company that claims to be in the airport security business.

According to the agency, Carley engineered a reverse merger and gained control of free-trading shares of Red Branch Technologies, located in Ashburn, Virginia. He then orchestrated two blast e-mail campaigns promoting Red Branch stock, timing the e-mails to coincide with the dissemination of materially false and misleading company press releases touting technology related to airport security and homeland security.

Carley knew, however, that Red Branch had no true business operations and no sales revenue. The phony promotions resulted in dramatic boosts in Red Branch’s sale price and trading volume, which Carley immediately took advantage of. He immediately sold several million Red Branch shares for $789,478 in unlawful profits.

Carley agreed to settle with the SEC, which sought to bar him from participating in any future penny stock offering and permanently enjoin him from future violations of the antifraud provisions. Pending court approval, he is liable for disgorgement and prejudgment interest of $921,232 that he is anticipated to pay as part of his obligations in the parallel criminal case announced by the U.S. Attorney’s Office for the Eastern District of Virginia.

The SEC’s investigation is continuing.

— Check out SEC Enforcement: HSBC to Pay $12M Over Cross-Border Breaches on ThinkAdvisor.