Former Beazer executive Michael Rand returned to federal court in Charlotte on Tuesday to hear a familiar slew of charges – that he illegally hid company profits, concocted phony financial statements and destroyed thousands of emails to hide his tracks.
Rand, the former chief accounting officer for the Atlanta-based developer, was convicted of seven counts of financial fraud, conspiracy, tampering and obstruction in 2011, and faced up to 125 years in prison.
Last year, however, his verdict was overturned. U.S. District Judge Robert Conrad of Charlotte ordered a new trial after learning that two of Rand’s jurors had Googled the term “reasonable doubt” during deliberations. One of the two also admitted reading news stories about the Rand case and how some local communities had been crippled by foreclosures.
Facing a new jury, federal prosecutors repeated many of their old arguments. Rand “lied and cheated” the public, investors and the company’s own auditors with his illegal accounting practices, Assistant U.S. Attorney Kurt Meyers said Tuesday morning.
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In particular, Rand had used a so-called cookie jar scheme to manipulate earnings reported to investors and securities officials, Meyers said. When profits fell off, Rand could jack up reported earnings by raiding what was in the jar.
According to the government’s complaint, when Beazer’s earnings exceeded market expectations, “Rand and others decreased the company’s net income by fraudulently increasing certain expenses.”
That practice “created false book and records ... misstated Beazer’s true financial results ... and defrauded investors nationwide,” the government claimed.
In 2006, as its profits were dropping during the advent of what would be a worldwide economic crash, Beazer used the fraudulent earnings statements to secure a $35 million loan from Wachovia Bank in Charlotte, prosecutors said.
After the government subpoenaed Beazer as part of a sweeping investigation into the homebuilder’s records and practices, Meyers said Rand purged thousands of emails to distance himself from his unlawful practices, then lied about it during the company’s internal investigation. He was fired in 2007.
Last week, prosecutors dropped two counts against him. The Alpharetta, Ga., man still faces a maximum punishment of 85 years in prison and a $1.25 million fine.
Rand’s lead attorney, Brent Gurney of Washington, D.C., likened the government’s case to seeing the world through the grime of a filthy window.
“Open the window. Let the sunshine in, and you will see a different world,” Gurney, himself a former federal prosecutor, said in his opening argument. “Michael Rand did not lie. He did not cheat. He did not steal.”
Instead Rand, as part of his job, built up the company’s reserves during boom times and used that money to bolster Beazer when profits fell, Gurney said. Rand increased Beazer’s reserves not to hide earnings but because the company’s financial safety net was inadequate, the attorney said. By doing so, he reduced the company’s earnings.
“What kind of fraud scheme is that?” Gurney asked. “Only the government sees savings as a bad thing.”
Cookie jar or sound accounting?
Rand was indicted in 2011. The federal investigation that led to the charges began in 2007, when the Observer wrote extensively of Beazer practices that put hundreds of Charlotte-area residents into company-built homes they couldn’t afford.
The resulting flood of foreclosures crippled neighborhoods and worsened the local impact of the nationwide housing collapse.
Despite the damage, only two Beazer figures have faced charges: Rand and Janette Parker, the manager of Beazer’s mortgage office in Charlotte. Parker pleaded guilty to three counts of mortgage fraud in 2011. The company and its two top leaders avoided prosecution by paying back tens of millions of dollars.
Federal officials first subpoenaed Beazer records in March 2007. Prosecutors said Rand began culling thousands of emails – many of them incriminating – around that time.
Along with the “cookie jar” scheme, Meyers homed in on Rand’s alleged role in the sales of the company’s model homes, which violated rules for reporting profits.
Beazer sold the models at reduced prices to an investor who then leased them back to the company. Beazer benefited from the immediate cash and the increase in reported revenue while the investor would later sell the homes at a profit. All of that is legal.
Prosecutors said the problems began because Rand wanted Beazer to get a piece of the markup when the later sales occurred. According to his indictment, Rand was told repeatedly by company auditors that such a move would violate reporting regulations.
So Rand, according to prosecutors, struck a side deal with the investor for Beazer’s share of the future profits that he kept hidden from auditors.
Gurney, who specialized in financial fraud cases as a government prosecutor, said the program generated $117 million for company stockholders and that Rand did nothing wrong.
Rand culled emails in March 2007, Gurney said, because that’s what he always did to manage his messages. What he deleted and what he left “does not show criminal intent. … It’s not consistent with guilt.”
The “cookie jar” scheme outlined by the government was Rand’s good-faith effort to control costs and keep the company profitable, Gurney said.
“There was no loss to investors, no victims, and no money in his pocket.”