Mexican homebuilder, Homex, which was listed in Mexico and on the NYSE, fabricated substantial amounts of revenue from the sale of homes that had neither been built nor sold. The company sought to hide the fraud by factoring fictitious account receivable. This is a confirmed fraud.
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Desarrolladora Homex, S.A.B. de C.V. (Homex) is a Mexican construction and real estate company engaged in the development, construction and sale of affordable entry-level, middle-income and tourism housing in Mexico and Brazil. Founded in Culiacán in 1989, the company is headquartered in Culiacán.
In June 2004, Homex started trading, in a dual IPO, on both the New York Stock Exchange (NYSE) and the Mexican stock exchange, Bolsa Mexicana de Valores (BMV). The NYSE IPO raised US$140.79m and the managers of the offering were Citigroup Global Markets Inc (Left Lead) and Merrill Lynch & Co. The BMV IPO raised MXN760.69m and the managers of the offering were Acciones Y Valores De Mexico, Citigroup Global Markets Inc, Ixe Casa de Bolsa and Merrill Lynch & Co.
Additional share offerings in June 2006 raised US$198.22m on the NYSE and MXN670.17m on the BMV.
On 28 February 2014, Homex announced a delay in the release of the 2013 fourth quarter results. It was as a result of the challenging environment affecting the company’s operations and that Homex had recently been focused on a process of reassessment of its business model and a possible financing an operative restructuring process. Trading of the company's shares was suspended on the BMV.
On 3 March 2014, Homex announced that, on 3rd of January, it changed auditors. Salles, Saínz-Grant Thornton, S.C replaced Ernest & Young International (Mancera S.C.). The reason given was the change the company’s efforts to keep its obligations, as a public company, with a smaller budget.
On 30 April 2014, the company announced a delay in publishing its 2013 annual report and the 2014 1Q results. The reason given for the delay was, again, the financing an operative restructuring process. Homex also filed for bankruptcy protection in a Mexican court on the same day.
On 2 May 2014, a press release was issued announcing that NYSE was immediately suspending the trading of Homex’s ADSs and that it had instituted proceedings to delist them from the NYSE. The NYSE believed that the company was no longer suitable for listing due to the bankruptcy protection hearing and the delay in fling of its 2013 annual report.
On 23 June 2014, Homex was delisted from the NYSE.
On 23 October 2015, the trading suspension on the BMV was lifted following the completion of its restructuring.
On 5 May 2016, Homex announced that the United States Securities and Exchange Commission (SEC) had issued Wells notices to the company on 25th April and to two of its directors on the 26th April. The SEC intended to bring charges following a review of accounting treatment of revenues related to home sales during the period of 2010 through 2012. The directors, CFO, Carlos Moctezuma and CEO, Gerardo de Nicolás said they would take voluntary leave of absence so that they could devote their energies to respond. Homex added that it would review the 2010 to 2012 financials and that these financial statements should not be relied upon.
On 3 March 2017, the SEC announced that it had issued charges and reached a settlement with Homex. The SEC alleged that Homex inflated the number of homes sold, during the three-year period, by approximately 100,000 (317%) and overstated its revenue by 355% (approximately US$3.3bn). The SEC's complaint highlighted, for example, that Homex reported revenues from a project site in the Mexican state of Guanajuato, where every planned home was purportedly built and sold by 31 December 2011. Satellite images of the project site on 12 March 2012, showed it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt. Without admitting or denying the allegations, Homex agreed to be prohibited from offering securities in the U.S. markets for at least five years.
On 11 October, 2017, the SEC announced charges against former CEO, Gerardo de Nicolás, forrner CFO, Carlos Moctezuma, former controller, Ramon Lafarga and former operations manager, Noe Corrales. The complaint alleged that Homex's annual reports for 2010 through 2012 portrayed the company as productive and financially sound, and that de Nicolas and Moctezuma certified them when they knew Homex was in a dire financial state. The SEC's complaint also alleged that de Nicolas and Moctezuma entered into loan agreements with at least 13 Mexican banks, which Homex was able to repay only by additional bank borrowing, in check-kiting fashion. De Nicolas and Moctezuma hid the true nature of these loans from Homex's investors and mischaracterised them to Homex's auditors. Lafarga directed Corrales to create a false second set of books, through which the fraud was perpetrated.
On 17 December 2020, Homex's former auditors Mancera S.C., the Mexican member firm of Ernst & Young Global, and two partners agreed to settle SEC charges of audit violations and improper professional conduct. SEC said that Mancera's audits failed to comply with auditing standards. The partners, Valdez and Corral failed to adequately train and supervise audit team members in the performance of visits to Homex construction sites throughout Mexico and failed to document an inconsistency discovered during construction site visits indicating that Homex recognized revenue on homes that were not substantially constructed. SEC also found that Valdez and Corral failed to properly evaluate responses to certain bank confirmations, and failed to properly test and document journal entries in certain Homex entities to identify material misstatements due to fraud. Without admitting or denying the findings, Mancera S.C. paid US$1.5m and Valdez and Corral each agreed to be suspended from practicing before the SEC as an accountant for five years and two years, respectively.
On 29 June 2021, a U.S. District Court entered final judgments against the four former Homes officers who were charged for their role in the accounting fraud. The judgments included officer-and-director bars for de Nicolas, Moctezuma and Lafarga. De Nicolas was ordered to pay disgorgement of US$851k plus prejudgment interest of US$302k and a civil penalty of US$12m. Moctezuma, Lafarga, and Corrales were each ordered to pay a civil penalty of US$160k.
COMMENT: Homex inflated unit sales and revenue by 315% and 355% in the three year period FY10-FY12. It used manual entries to fake revenue and costs, and partially hid the fraud through factoring fake receivables. The company was rated as very high accounting risk by our A&G Screen at YE12 because of very high receivables and weak operating cash flow. It also triggered Beneish's M-Score partly due to rising receivables.
Desarrolladora Homex: Delay in 4Q 2013 results, 28 Feb 2014
Bloomberg: Homex Bonds Climb After Builder Files for Bankruptcy Protection, 1 May 2014
Intercontinental Exchange: NYSE to Suspend Trading Immediately and Commence Delisting, 2 May 2014
Desarrolladora Homex: SEC issues Wells notice, 5 May 2016
Bloomberg: Homex Sinks to 12-Year Low as Mexican Builder Says SEC May Act, 6 May 2016
US SEC: Charges Mexico-Based Homebuilder In $3.3 Billion Accounting Fraud, 3 Mar 2017
US Court: SEC v Homex – Complaint, 3 Mar 2017
FT: Mexican homebuilder settles SEC ‘fake homes’ fraud charges, 4 Mar 2017
US Court: Class Action Complaint, 14 Mar 2017
US SEC: Charges Former Top Executives for Role in $3.3bn Accounting Fraud, 11 Oct 2017
US Court: SEC v Homex Execs – Complaint, 11 Oct 2017
SEC ACTIONS: SEC Files Financial Fraud Action “Caught on Camera”, 11 Oct 2017
US SEC: Charges E&Y and 2 Individuals with Auditing Violations and Improper Professional Conduct, 17 Dec 2020
US SEC: Obtains Default Judgments Against Former Top Executives, 2 Jul 2021
GMT Research: Desarrolladora Homex AGS – FY 2012
Desarrolladora Homex: 3Q Report, PE Sep. 2013
Desarrolladora Homex: Annual Report, YE Dec. 2012
Desarrolladora Homex: Annual Report, YE Dec. 2011
Desarrolladora Homex: Annual Report, YE Dec. 2010
US SEC: Desarrolladora Homex filings