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Lennar’s Stock Falls as Troubles Mount over Accusations of Ponzi Scheme
Saturday, 10 January 2009

Not Zzzz Best Day For Lennar
Minkow claimed that the dealings between Lennar and Briarwood, as described in his letter, are part of a larger pattern in which Lennar treats its joint ventures "like a Ponzi scheme, pledging older joint venture interests to leverage themselves into newer joint venture relationships."

Not Zzzz Best Day For Lennar


Homebuilder's shares lose 20% after fraud hunter Minkow levels accusation.
Miriam Marcus, 01.09.09,

In addition to a moribund housing market and skittish economy that offers little hope of a near-term revival, homebuilder Lennar got a new headache on Friday: felon-turned-fraud-fighter Barry Minkow alleged the company engaged in accounting shenanigans with joint ventures.

Lennar's share price dropped 19.9% Friday after Minkow's Fraud Discovery Institute accused the Miami-based homebuilder of unethical business practices

A report published online by Minkow, who served more than seven years in jail for stock fraud at his own former company ZZZZ Best, concerned a deal between Lennar and developer Briarwood Capital to build a housing project and golf course in California. The letter accused Lennar of wiring Briarwood's predecessor firm's $37.5 million contribution to the project to a Lennar subsidiary without getting the required written permission.

Minkow claimed that the dealings between Lennar and Briarwood, as described in his letter, are part of a larger pattern in which Lennar treats its joint ventures "like a Ponzi scheme, pledging older joint venture interests to leverage themselves into newer joint venture relationships."

With reports of Bernard Madoff's Ponzi scheme and a bunch of copycats all over the news, Minkow's use of the phrase was bound to attract attention. (See "Everything's Coming Up Ponzi." )

Emergence of the letter drove down Lennar's shares sharply lower, said Jon Najarian, a founder of the website optionmonster.com. He said the comments on Minkow's website seemed to be "the catalyst for this harsh sell-off in Lennar shares and where 61,000 puts changed hands in the first hour of trading."

Investors buy puts either to hedge equity positions they hold or to be on future declines in stock prices.

Lennar said the accusations were "false and inflammatory" and that Minkow had been acting in concert with Nicholas Marsch III, who had sued the homebuilder in a California state court but whose case it said had been dismissed.

The company refused to tell Forbes what Marsch's suit was about. Neither Minkow nor Marsch were available for comment, and details of the civil suit did not appear in a preliminary search of judicial databases. Marsch and Lennar, however, were involved in the creation of a golf-and-housing community called the Bridges in southern California in the late 1990s, and that is likely the property involved in Minkow's allegations.

Lennar maintained that "this Internet posting was hurriedly made only after evidence surfaced this week in litigation that Marsch and Minkow may have attempted to illegally obtain information relating to Marsch's legal proceedings against Lennar. Lennar continues to investigate acts of wrongdoing by Marsch and Minkow."

Minkow responded by saying his institute did not short Lennar shares and that they had not bought put options on Lennar, Reuters reported.

Investors took note of the allegations nonetheless, pushing the stock down 19.9%, or $2.27, to close at $9.15, in trading in New York. A $67 stock in the summer of 2005, Lennar has been punished along with the rest of the U.S. homebuilders as a result of the subprime mortgage crisis.

Minkow's allegations were “likely less than credible,” Citibank analyst Josh Levin wrote in a note to clients. He said Lennar's management had a reputation for being tough and shrewd negotiators, but he had never heard that it was dishonest. Nevertheless, he advised shareholders to stay on the sidelines as Lennar's joint ventures were a “black box.”

"The consequences of being wrong could be severe," said Levin, who rates Lennar's shares "hold/speculative."

On Thursday, J.P. Morgan analyst Michael Rehaut raised his rating on Lennar to “overweight” from “'neutral,” citing his expectation that Lennar's book value will take a smaller hit than most of its peers in 2009, and as a result, its shares will suffer less.

Shares in a number of major homebuilders had been up on Thursday after mortgage rates fell again and Freddie Mac (nyse: FRE - news - people ) and Fannie Mae (nyse: FNM - news - people ) said they were extending the suspension of foreclosure sales and evictions from single-family homes through the end of January. (See “Is It Time To Refinance Your Mortgage?”)

But Rehaut’s note to investors forecast stocks for eight builders would slide an average of 27.0% this year. He singled out Centex (nyse: CTX - news - people ), KB Home (nyse: KBH - news - people ), Pulte Homes (nyse: PHM - news - people ), Toll Brothers (nyse: TOL - news - people ), MDC Holdings (nyse: MDC - news - people ), D.R. Horton (nyse: DHI - news - people ), Ryland Group (nyse: RYL - news - people ) and Lennar as builders that will take large impairment charges in 2009 which may reduce their book values.

"We continue to believe that demand will remain weak well into 2009, due to rising unemployment, weak consumer confidence, tight credit conditions, and rising delinquency trends, which should keep inventory levels highly elevated and result in further home price declines," Rehaut wrote.

iShares Dow Jones U.S. Home Construction (nyse: ITB - news - people ), an exchange-traded fund that tracks the performance of the home construction sector, was down 4.4%, or 48 cents.

http://www.forbes.com/markets/2009/01/09/lennar-construction-fraud-markets-equity-cx_mlm_0109markets18.html?feed=rss_markets

 
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