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LENNAR A : Lennar provides more data on joint ventures

01/12/2009 | 02:37pm US/Eastern
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No. 2 U.S. homebuilder Lennar Corp again denied on Monday treating its joint ventures like a "Ponzi scheme" and tried to counter the allegation by providing fresh data on those ventures.

By Helen Chernikoff and Scott Malone

The statement came in response to accusations made last week by Barry Minkow, who had served time in prison for stock fraud but now investigates fraud. The accusations were made in a letter to the U.S. Securities and Exchange Commission.

Those charges pounded the Miami-based company's shares down 20 percent on Friday. The shares were down another 7.2 percent at $8.49 during afternoon trading on the New York Stock Exchange on Monday amid a broad decline in homebuilder shares. The Dow Jones U.S. Home Construction Index <.DJUSHB> fell 5.7 percent.

"While it is not Lennar's practice to respond to false and scurrilous allegations in the context of litigation, Lennar has a responsibility to its shareholders and the public to respond to their legitimate requests for information," the company said in a statement.

Lennar denied the allegation by Minkow, a California pastor who now works for The Fraud Discovery Institute, that the builder had used its joint ventures as a "Ponzi scheme," using older ventures to fund new ones. Minkow made his allegations on the Web site www.frauddiscovery.net.

Minkow also claimed Lennar had violated a written agreement and wired one of its subsidiaries $37.5 million from "The Bridges," a high-end California housing and golf joint venture between Lennar and an entity that later become Briarwood Capital LLC.

Lennar denies the charge and counters that Minkow is working for Nicolas Marsch, who contributed the $37.5 million and whose civil litigation against Lennar was recently dismissed by a California Superior Court judge.

On Friday, Lennar said the accusations were "false and inflammatory" and said it was investigating possible wrongdoing by Marsch and Minkow, saying they may have tried to illegally obtain information relating to Marsch's legal proceedings against Lennar.

The company said in its Monday statement that it would take "appropriate action against the responsible parties" but could not be reached to explain what actions it might take, whether they would include a libel suit and against whom.

Minkow also had accused Lennar of improperly giving its chief operating officer, Jon Jaffe, a mortgage and of profiting from the now bankrupt "LandSource" venture while the California Public Retirement Fund (CalPERS) lost about $1 billion.

In its statement, Lennar denied that it gave Jaffe a mortgage and acknowledged that Jaffe did use a line of credit secured by a mortgage to buy Lennar stock.

Minkow's claim that Lennar caused the other LandSource investors and lenders to lose money is false, the company stated.

"The lenders and investors are large institutional entities who conducted their own extensive due diligence with the aid of independent experts," Lennar said.

JOINT VENTURES

Wall Street analysts have long lamented Lennar's extensive use of the joint venture land-buying structure, which requires a relatively low level of official disclosure.

Lennar has investments in 116 such entities, down from 214 on November 30, 2007 but still far more than any of its rivals, said Morningstar analyst Eric Landry.

Landry deemed Minkow's report "flimsy," and said it did not cause him to worry that he had missed signs of outright fraud on Lennar's part; but he does think Lennar has used the joint venture structure too much for its own good.

"Investors will tolerate the opaque nature of the joint venture structure when land prices are going up," Landry said. "But when land prices are going down, the company loses the benefit of the doubt."

In its Monday statement, Lennar also disclosed information about its joint ventures in advance of the publication of its annual report and said it would be working to provide more information to analysts and investors in the coming weeks.

J.P. Morgan analyst Michael Rehaut noted approvingly that Lennar has reduced its exposure to joint ventures and in particular has cut its recourse debt, in which lenders can hold Lennar responsible for failure to repay, to $520 million from $1.03 billion at the end of 2007.

Rehaut rates Lennar's shares "relative overweight" and sees the builder outperforming its peers in the next year.

Like most U.S. homebuilders -- which are two years into a sharp downturn -- Lennar's shares are well off their 2005 highs. Over the past 12 months, they have lost 34 percent of their value, a steeper decline than the Dow Jones U.S. home construction index's <.DJUSHB> 10.6 percent decline.

(Reporting by Scott Malone and Helen Chernikoff, editing by Dave Zimmerman and Gerald E. McCormick)

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