2ND UPDATE:Beazer CEO Receives Notice Of Possible SEC Action

Shares of home builder Beazer Homes USA (BZH) fell Monday, following a disclosure that Chief Executive Ian J. McCarthy received a Wells notice from the Securities and Exchange Commission that could lead to recovering improperly paid compensation.

The commission's staff has "preliminarily determined to recommend" that the SEC bring a civil action against McCarthy to clawback incentive compensation under a provision of the Sarbanes-Oxley Act, according to a Beazer filing with the SEC. The SEC argues that section of that act allows it to recover compensation paid to senior executives while their companies were misleading investors.

The Wells notice doesn't allege any "lack of due care" by McCarthy in connection with financial statements or other disclosures, according to Beazer's filing. Beazer, the nation's ninth-largest builder by annual closings last year, isn't named.

The SEC didn't comment. Beazer declined to comment further. But its filing notes that the SEC took a similar position in a recently filed civil action against another chief executive. The Beazer filing didn't name the company, but in July the SEC asked a court to order the former chief executive of CSK Auto Corp. to reimburse the company and its shareholders more than $4 million that he received in bonuses and stock-sale profits while CSK was committing alleged accounting fraud, according to an SEC press release. That enforcement action was the first used under the Sarbanes-Oxley clawback provision.

Beazer understated its income between 2000 and 2005 by setting aside a reserve or rainy-day fund for land development and house construction costs, according to the SEC. When home sales slowed in 2006, Beazer tapped into those reserves and improperly boosted its slumping earnings, the agency said. The SEC also said Beazer cut side deals with investors in model homes to evade auditors and book additional profit.

In September 2008, the Atlanta-based builder entered into a settlement with the commission - without admitting or denying wrongdoing - resolving the investigation into the financial-statement matters, according to the filing.

A Wells notice is a notification informing a company or individual that the SEC staff plans to recommend a particular action to the commission. The notice doesn't mean the commission will take that action. Experts say the SEC approves about half of the staff's recommendations for action. Others are settled.

"It signifies that the SEC is seriously contemplating taking action against you," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

McCarthy intends to respond to the notice, according to Beazer's filing. That explanation will be presented to the SEC with the staff's case.

The Wells notice "just seems to be a last-minute, uninspired effort to close the books on this affair. How is this action serving investors now?" said Vicki Bryan, an analyst with Gimme Credit LLC, an independent bond research firm. "Where was the SEC ... after the company had to restate several years of financials?"

The builder also allegedly gave mortgages to people who couldn't afford them, fueling foreclosures, particularly in Charlotte, N.C. In May, it agreed to refund $2.5 million to more than 1,000 Tar Heel borrowers, as part of a settlement over mortgage point fees with the state's Office of the Commissioner of Banks.

"In the last couple of years, they've certainly been under a cloud," said Joe Snider, vice president and senior credit officer with Moody's Investors Service. Beazer has the lowest credit rating of the 13 publicly traded builders the firm covers.

Shares of Beazer recently were down 4.92% at $5.22, compared with a 1.65% gain for the Dow Jones US Home Construction Index.

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com

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