Barry Minkow and the Fraud Discovery Institute have just released a new report on Lennar Corporation (NYSE: LEN) by a Wall Street expert. Their press release summarizes the opinions of the expert:

The Fraud Discovery Institute, Inc. released late this afternoon a new 16 page report completed by Wall Street analyst Reggie Middleton. Mr. Middleton was the analyst who predicted in 2007 that Lennar Corporation (NYSE:LEN) was in serious financial trouble because of the way they handled their off-balance sheet transactions.

The Fraud Discovery Institute, Inc. retained Mr. Middleton to update his original research through February of 2009. His conclusions are devastating, and he has a specific track record of accurate predictions. “Not only does Mr. Middleton conclude in his February 2009 report that Lennar has a 72% chance of bankruptcy within 2 years, but he also makes note of another critical fact that cannot be overlooked,” said Barry Minkow, co-founder of the Fraud Discovery Institute, Inc.

Mr. Minkow went on to say: “Lennar’s inventory valuation impairment charges were less in 2008 than they were in 2007, which is simply untenable. How does a company in this extreme economy take a smaller impairment charge in the catastrophic real estate market of 2008?”

Lennar recorded asset impairments of $2.445 billion in a difficult 2007. Yet in 2008, a much worse year for real estate and the economy as a whole, the asset impairment charge was only $340.5 million. That’s an 86% decrease from the 2007 charge, a year in which conditions were not nearly as bad as 2008. Why is there such an unusual relationship between these numbers? Minkow says, “I can suggest at least one reason: To artificially stay within loan covenants.”

The Fraud Discovery Institute, Inc. also looked back to their original Top 10 Red Flags for Fraud at Lennar report and did an update:

1. Red Flag One – Lennar profited handsomely from the LandSource deal despite denying it. This was confirmed in the 2008 10-K recently filed by the company.
2. Red Flag Two – The company had hopelessly inadequate legal disclosures. Following the release of the FDI report Lennar made major changes in their legal disclosures in the 2008 10-K filing.
3. Red Flag Three – Lennar used Chinese drywall in homes it built. Despite an initial blanket denial of allegations after our original report, Lennar later accepted responsibility for the drywall, then blamed subcontractors.
4. Red Flag Four – Lennar COO Jonathan Jaffe’s home was not worth $10 million at the time he received a loan encumbering the house to the tune of over $10 million. According to an appraisal review analysis done by an independent professional, the house was never worth $10 million.
5. Red Flag Five – Voodoo accounting was used to hide debt to artificially comply with loan covenants. This is proven by the unreasonable level of 2008 inventory valuation impairments recorded, when compared to the much higher impairments in 2007, a year that was not nearly as bad for the real estate market.

“I used to think it would take at least until trial to objectively substantiate all 10 red flags from the initial report,” said Minkow. “But at this rate we may beat the tax filing deadline of April 15


  1. Robert Gupt 03/23/2009 at 1:36 pm - Reply

    I hope you go down, for what you did to innocent people! Lennar Corporation should go out of business!

  2. GlennC 08/01/2009 at 9:50 pm - Reply

    I do agree with Minkow that Lennar is doing some very unethical things. But I think that the 72% chance of bankruptcy figure provided by the analyst is quite silly.

    Lennar is clearly ruthless, but this helps them make money. They have an amazing ability to do deals and rip other people off. I don’t think it’s quite so easy to say that their chance of heading into bankruptcy is “72%”, based on some theoretical model. Out of all the homebuilders, Lennar is arguably the best managed. They may manage to wheel and deal their way out of their troubles.

    They have raised more equity, and have continued to make deals like picking apart Landsource’s corpse in bankruptcy court. They have also used their various political connections to land contracts with municipalities for various buildings.

    While it would likely be a good thing for many people for Lennar to cease operations, it may be unlikely.

    2- Regarding defective drywall (which is xenophobically dubbed Chinese drywall, as if American corporations like Lennar didn’t build a home that electrocuted a man to death), Lennar probably did not know that it was defective. They are ruthless but they are not dumb. At best, fighting off the class action lawsuits would make intentional use of defective drywall unprofitable.

    Lennar is actually proactive about replacing defective drywall at their expense, though they are bullying homeowners into signing away any further liability on Lennar’s part (e.g. replacing wiring and appliances that may be damaged, unknown health side effects) according to a media report.

    3- Michael Morgan (he works in the real estate business) used to run a website critical of Lennar. This site is now no longer operational (but check on

    While he thinks that Lennar is evil, even he recommends possibly going long on Lennar (as long as the defective drywall issue doesn’t sink them).

    More info:

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