On January 7, 2009, Barry Minkow and the Fraud Discovery Institute issued an initial report on Lennar Corporation (NYSE:LEN), citing 10 Red Flags of Fraud. Lennar immediately came forward and called FDI and its investigators liars, saying in one press release:
Today convicted felon Barry Minkow, acting as an agent for a disgruntled litigant, Nicolas Marsch III, posted false and inflammatory accusations concerning Lennar.
And in another press release:
The dissemination of false statements about our company last Friday resulted in the selling of an unprecedented 58 million shares of Lennar Corp. (NYSE: LEN; LEN.B) stock and a 20 percent decline in our stock price. This has prompted numerous inquiries from investors, analysts and the media.
One of the issues discussed in the original report was Chinese drywall. The report (which I helped prepare in part and edit) stated:
Red Flag #7 In the dispute over the Chinese drywall, Lennar misses the real issue. In a statement released on December 23, 2008, Lennar said that it was not the fault of Lennar (those darn sub contractors just can’t be trusted), that the Chinese drywall was not authorized to be used in Lennar homes, but that the problem was not widespread enough to be deemed material.
Darin McMurray, Lennar’s Southwest Florida division president,43 stated:
So far, our investigation in Southwest Florida shows that independent subcontractors installed Chinese drywall in a very small percentage of Lennar homes built between November 2005 and November 2006…
This statement is problematic, first, because the investigation is not complete. Further, the issue is not how many (or how few) homes have been built with the faulty and unauthorized Chinese drywall. The real issue is that this is an apparent pattern of behavior seen across multiple divisions of Lennar.
This incident indicates an attitude of “cut costs no matter how it might hurt the victim homebuyer, joint venture partner, etc.” In other words, Lennar is a company with a track record of doing business in a manner that always seeks to place their interests ahead of the customers and stockholders. We therefore expect to find evidence of that behavior in multiple areas, and when one takes a closer look at the company, that does appear to be the case.
Lennar called us liars, but on January 23, 2009 the Business Journal reported:
Miami-based homebuilder Lennar Corp. said it has identified about 80 homes in Southwest Florida that are believed to have been built using Chinese drywall. The nation’s second-largest homebuilder (NYSE: LEN) said it has set up a special task force to address homeowners’ concerns and fix the problem.
80 homes and a “special task force” doesn’t sound like a small problem. And now there’s further proof that the Lennar Chinese drywall problem is indeed massive. The Herald Tribune in Sarasota, FL reports:
Lennar started remediating homes more than a year ago — saying it had already figured out what needed to be done to fix the problem. One of the first affected communities the Herald-Tribune reported on in early 2009 was Lennar’s Heritage Harbour development in East Manatee County, where several dozen homes were built with tainted Chinese drywall.
Back then, Lennar said its research and that of its environmental consultant, Environ, showed that insulated wiring within the walls was not affected. Therefore, it could snip off exposed ends of the copper wires and continue to use the rest of them.
There is just one problem: They were wrong.
The story goes on to say:
During the trial, scientists presented case after case of documented instances in which insulated wiring had been damaged in homes. The testimony went beyond scientists hired by the attorneys themselves. Two representatives of national builder Beazer Homes, including one of the company’s vice presidents, testified that the insulated wiring was not immune to the drywall’s corrosive gases.
Ray Phillips, Beazer’s Florida vice president, said the effect on insulated wiring was “a surprise” compared with what the builder originally thought it would discover in the homes. But the revelation meant Beazer now removes all wiring and the entire electrical system from Chinese drywall-laden homes.
Lennar appears to have reached a similar conclusion sometime last year, as its protocol has changed — it now takes out all wiring, too.
But a fundamental question remains: What about those early homes in Heritage Harbour and elsewhere where the wiring was left behind? If that wiring is now known to be affected, representing a serious safety hazard, what will be done?
Lennar did not respond to questions from the Herald-Tribune on these issues.
So let’s recap. The initial report by FDI over a year ago pointed out that Lennar’s statement that the Chinese drywall problem was minor shouldn’t be trusted. First, it shouldn’t be trusted because the company hadn’t even completed its investigation so management couldn’t possibly know if the issue was material or not. Second, the statement shouldn’t be trusted because Lennar has a track record of blaming others in an attempt to deflect attention away from the company’s problems.
Lennar promptly came out and publicly called Barry Minkow a liar, apparently trying to capitalize on his past as a convicted felon, and trying to deflect attention from Minkow’s present as a fraud investigator who has uncovered at least $2 billion in fraud.
And now an outside source …. well actually, apparently several sources… has/have confirmed that this Chinese drywall is a huge problem:
- The fix is running about $100,000 per home.
- Lennar has a dilemma because of all the homes Lennar “fixed” before they realized all the wiring had to be redone. Lennar now apparently re-wires all homes in which it’s fixing the drywall, but what about the homes that were done previous to this protocol?
- Other builders are also adding another step to their remediation process, pressure washing homes after the drywall and wiring has been completely removed to make sure there isn’t a problem with toxic particles in the air. Lennar has rejected this step and instead only vacuums.
Do you think Lennar will issue a press release indicating that FDI and Barry Minkow were right about the Chinese drywall issue?