Thursday, March 23, 2006
The Mills Corporation, a real estate investment trust (REIT) specializing in shopping centers, disclosed that the SEC bumpted the Enforcement Division's inquiry of the company's accounting up to a formal investigation, which means the Commission staff has subpoena power to compel the production of records and the appearance of witnesses. Mills buried its announcement about the status of the SEC investigation in an 8-K filing (here) that includes a long description of its employment agreement with the president of its operating division, and then the following terse entry: "On March 20, 2006, the Securities and Exchange Commission (the 'SEC') advised the Company that it has commenced a formal investigation of the Company. The Company previously announced in a Current Report on Form 8-K filed on January 12, 2006 that the SEC had commenced an informal inquiry. The Company has fully cooperated, and intends to continue to fully cooperate, with the SEC." In an earlier filing regarding the reasons why the company cannot make a timely filing of its annual 10-K, it noted (here) that the internal investigation has expanded so that "among the areas under review are revenue recognition, cost capitalization, lease accounting, accounting for sales of real estate and purchase price allocations to acquired operating properties." Gibson Dunn and Ernst & Young are conducting the internal investigation and audit.
Mills identified an awful lot of accounting issues, and the review seems to cover a significant amount of its financial reporting. The REIT industry has been largely free from the accounting problems that have enveloped other sectors in the past few years, such as food distribution, pharmaceuticals, and the automobile suppliers and manufacturers. If significant problems crop up at Mills, the SEC may take a proactive approach in looking at other REITs to see if similar problems exist. Check your portfolio. (ph)