Tired of Ponzi schemes yet? Well, here’s a scheme, albeit less Ponzi than simply preposterous. It has to do with the second-largest homebuilder in the United States, Lennar Corp. According to Rueters:
Shares of Lennar Corp (LEN.N), the second-largest U.S. homebuilder, plummeted on Friday after a letter questioning a late 1990s transaction involving the company surfaced on the Internet.
The letter to the U.S. Securities and Exchange Commission, the FBI and Internal Revenue Service from California pastor Barry Minkow, who served time in jail for stock fraud, concerns a joint venture between Lennar and a private developer to build a high-end housing project and golf course in California.
Here’s Minkow’s Fraud Discovery Institute’s rather dramatic summary of what happened with “Lenn-ron”:
In sum: This report…connects the dots of the public record and other documents to prove that Lennar Corporation has a pattern of behavior over a sustained period of time of knowingly and willfully abusing the legal system to gain an unfair advantage over the less capitalized, smaller entities.
NYSE-listed Lennar Corporation embarked on a joint venture–called HCC Ventures–with a private developer to build an elite housing/golf course project in Rancho Santa Fe, CA, home of innumerable doctors, lawyers, and, formerly, Roy Croc’s widow.
The deal was simple: The predecessor to Briarwood Capital, LLC would contribute the value of his claims which were at the time of the contribution in excess of 50 million dollars and also included claims to the property itself—some 540 acres–while the big public company would, among other things, manage the development on a daily basis. As part of the agreement between the two parties, Lennar assisted in the acquisition of the land for the development of the project.
Both parties signed an operating agreement in August 1997.
…at the closing of this transaction, the smaller developer agreed to contribute the value of his claim and claims to the property itself to the newly formed venture, HCC Investors. In June of 1999 the claims were realized at a sum total of 37.5 million and subsequently wired to the HCC bank accounts per both parties understanding as a capital contribution. And then the unthinkable happened.
Within hours of receiving those funds by wire on June 25, 1999, the big public company…wired out the entire sum by sending out two separate wires…to another one of the public company’s wholly owned subsidiaries, which had nothing whatsoever to do with the project.
What happened next was that over a period of approximately of 5 years, Lennar refused, despite obligations to do so in the operating agreement and numerous written requests, to provide accounting for the wired funds of June 25th, 1999 and the revenue of at the time in excess of 400 million dollars. Accounting was only obtained by court order. And it revealed what happened to the 37.5 million dollars.
The small developer filed suit about the secret wire. Lennar countered that a verbal agreement had been made allowing for the $37.5 million to be wired to “an unaffiliated entity,” even though the operating agreement banned verbal agreements.
Shady. Makes you wonder who’s next.