After months of work, consisting of interviews with 37 individuals, including past and current employees, and the review of more than 2.5 million electronic and hard copy documents, the Special Independent Committee of the board of Sunrise Senior Living has found no evidence of backdating of stock options, no evidence of an intention to reach an inappropriate accounting result with respect to two accounting errors, and no evidence that any director or officer traded in the company’s stock based on prior knowledge of non-public information.  These were some of the allegations in a complaint filed by the SEIU, a shareholder of Sunrise. 

The findings of the Committee’s initial report are not surprising, but there was one new revelation that was unexpected.  Apparently, the investigation is continuing with respect to certain other categories of the restatement, primarily dealing with certain accruals and reserves, which “may produce material adjustments to the Company’s historical financial statements in addition to those previously disclosed.”  What this says to me is that the accounting restatement may be even more significant than previously disclosed, and we assume that means in the wrong direction.  Since this would impact GAAP profits and not cash flow, it may not affect ongoing discussions with potential buyers of the company, but any buyer has got to stop and wonder what may be next.  The Committee expects to complete its review by December 15…….of this year.  Shares of Sunrise immediately jumped by almost $2.00 per share, but lost a little of that as the news was digested, as investors assumed the table was getting cleared for a sale.

Meanwhile, Sunrise’s former CFO, Brad Rush, filed a $13 million lawsuit against the company in late September, alleging that he was railroaded out of the company in retaliation for his discovery and disclosure of Sunrise’s “improper, and in some cases fraudulent, accounting practices,” among other things.  The company’s response was that the claims were all “nonsense” and will be vigorously defended.  Still, this is not what management wanted while negotiating a sale of the company.  We have to assume that the lawsuit will be settled prior to any potential sale, but we had assumed that Sunrise would not have let him go in the first place without a “shut-up” payment.  Live and learn.