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Press Release

Former Chief Executive Officer And Chief Financial Officer Of Publicly Traded Company Charged With Accounting Fraud

For Immediate Release
U.S. Attorney's Office, Southern District of New York
Former Chief Accounting Officer and Senior Vice President of Company, a Real Estate Investment Trust, Have Pled Guilty and Are Cooperating with the Government’s Investigation

Audrey Strauss, Attorney for the United States acting under authority conferred by 28 U.S.C. § 515 for the Southern District of New York, and Philip R. Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (“USPIS”), announced today the unsealing of an Indictment in Manhattan federal court charging MICHAEL CARROLL and MICHAEL PAPPAGALLO, the respective former chief executive officer and chief financial officer of Brixmor Property Group (“Brixmor”), a publicly traded real estate investment trust (“REIT”), with fraud.  Specifically, CARROLL and PAPPAGALLO were charged with securities fraud in connection with their participation in a scheme to fraudulently “smooth” a key metric reported in Brixmor’s public filings and used by the investing public to evaluate the financial performance of publicly traded REITs such as Brixmor.  The case is assigned to U.S. District Judge Colleen McMahon.

MICHAEL CARROLL and MICHAEL PAPPAGALLO are expected to be presented later today before Judge McMahon in Manhattan federal court.

Deputy U.S. Attorney Audrey Strauss said:  “As alleged, the most senior executives at Brixmor engaged in a years-long scheme to cook the books and deceive the investing public.  When executives allegedly lie to the investing public about their company’s performance and thereby harm the integrity of the market, they must be held accountable.”

USPIS Inspector-in-Charge Philip R. Bartlett said:  “By devising schemes to make Brixmor more appealing to the investing public, Carroll and Pappagallo not only committed criminal acts, their actions led them down a path of distrust from shareholders.  The investing public depends on the veracity of information released by publicly traded companies and the U.S. Postal Inspection Service is devoted in protecting the integrity of this information.”

According to the allegations contained in the Indictment[1] unsealed today in Manhattan federal court and statements made in related court filings and proceedings:

Brixmor is a publicly-traded REIT headquartered in New York, New York.  At all relevant times, Brixmor owned and operated hundreds of commercial shopping centers located in cities around the United States.  From the time of its initial public offering in 2013 until 2015, MICHAEL CARROLL served as Brixmor’s chief executive officer, MICHAEL PAPPAGALLO served as Brixmor’s chief financial officer, Steven Splain served as Brixmor’s chief accounting officer, and Michael Mortimer served as a senior vice president for management accounting.  As a publicly traded company, Brixmor was required to file, and filed, quarterly and annual reports with the U.S. Securities and Exchange Commission (the “SEC”) that were also available to the investing public.  These reports contained important information regarding Brixmor’s financial performance for the relevant reporting period.  As the respective CEO and CFO of the company, CARROLL and PAPPAGALLO were required to sign these reports and file certifications entitled “Certification of Periodic Report Under Section 302 of the Sarbanes-Oxley Act of 2002” that attested to, among other things, the veracity of Brixmor’s SEC filings.  Brixmor, like many public companies, also filed, and otherwise released to the investing public, supplemental documents along with their periodic filings that provided additional representations regarding Brixmor’s performance and financial condition.

In addition to financial metrics governed by Generally Accepted Accounting Principles (“GAAP”), Brixmor, like many REITs, reported a non-GAAP metric related to its financial performance known as Same Store Net Operating Income (“SS-NOI”).  SS-NOI measures the amount of income derived from a set group of properties (the “Property Pool”).  In addition to SS-NOI, Brixmor also reported a metric that tracked the increase (or decrease) in SS-NOI (“SS-NOI Growth”) for a set group of properties between one period and the same period in the prior year.  More specifically, SS-NOI Growth is derived from comparing SS-NOI in a particular reporting period (the “Current Period”) with SS-NOI in a past period, for example, the same quarter in the prior year, (the “Comparison Period”) for the same Property Pool.  SS-NOI Growth was a key performance metric utilized by investors when assessing investments in publicly traded REITs such as Brixmor.  Because of the importance of this metric, Brixmor also provided forecasts to the investing public on what it expected SS-NOI Growth to be for each annual reporting period, often narrowing that guidance over the course of a given year.    

From 2013 through 2015, CARROLL and PAPPAGALLO regularly touted Brixmor’s consistent SS-NOI Growth from quarter to quarter and understood that the investing public paid significant attention to this metric.  For example, on August 6, 2014, CARROLL stated during a quarterly earnings call for the second quarter of 2014 that Brixmor had “a steady state portfolio with a large same property pool that is delivering consistent organic growth. . . . As I said, we are consistent, transparent and easy to understand.”  Similarly, on September 17, 2015, PAPPAGALLO spoke publicly at an industry conference in New York, New York, stating that “[S]ame-property NOI, which is certainly a metric which is looked at very, very carefully by REIT investors, it’s been at or above 3.4% for 12 quarters.  Very consistent same-property NOI growth coming from our primary drivers.”  CARROLL and PAPPAGALLO also understood that the investing public paid careful attention to whether Brixmor’s SS-NOI Growth fell within previously forecasted guidance for the year.  For every quarter between the fourth quarter of 2013 and the third quarter of 2015, Brixmor’s reported SS-NOI that fell squarely within its forecasted guidance for the year. 

In reality, however, Brixmor’s SS-NOI Growth was not as steady and consistent quarter over quarter as represented to the public, and instead fluctuated significantly – often outside the bounds of what Brixmor’s guidance was for the relevant year.   From 2013 through 2015, however, CARROLL, PAPPAGALLO, Splain, and Mortimer engaged in a scheme to hide that volatility from the investing public and instead report SS-NOI Growth numbers each quarter that showed even growth and that always fell in line within the annual guidance.  Rather than report the true results of their operations, CARROLL and PAPPAGALLO dictated where Brixmor’s reported SS-NOI Growth should land each quarter, and others, including Splain and Mortimer, carried out the necessary manipulation to reach those results. 

CARROLL, PAPPAGALLO, Splain, and Mortimer engaged in this manipulation of SS-NOI Growth through three primary means.  First, in quarters in which Brixmor generated more than enough income to meet the bottom, or in some cases middle, of its guidance range, it illicitly “stored” reportable income instead of immediately recognizing it, a deceptive practice often referred to as “cookie jar” accounting.  In fact, certain Brixmor employees frequently referred to a particular account that was used to hold such income as the “cookie jar.”  Brixmor employees then utilized that income in later quarters as necessary to inflate SS-NOI Growth in order to report the desired steady and smooth SS-NOI Growth to the investing public.  For example, on April 6, 2015, PAPPAGALLO emailed Splain, Mortimer, and others to schedule a meeting “regarding same property NOI planning” the “objective” of which was “to try to make decisions on 1Q number – push a little or squirrel away stuff for 2Q & 3Q.” 

Second, Brixmor reported in all of its public filings that it did not take lease termination income (“LSI”) into account when calculating SS-NOI.  LSI is money that a tenant pays as a lump sum payment upon the early termination of a lease.  Notwithstanding these representations, CARROLL, PAPPAGALLO, Splain, and Mortimer included some portion of LSI within SS-NOI when doing so helped show steady SS-NOI Growth or to meet guidance. 

Third, CARROLL, PAPPAGALLO, Splain, and Mortimer at times removed payments that had been included in SS-NOI in a prior Comparison Period in order to the boost SS-NOI Growth for the current period.  Because SS-NOI Growth effectively measures the SS-NOI change from one period to another, retroactively reducing the SS-NOI for a prior Comparison Period has the effect of creating a bigger spread to SS-NOI in the current period, thereby increasing the SS-NOI Growth metric for the current period.  For example, after the close of the third quarter of 2015 but before reporting SS-NOI Growth for that period, CARROLL instructed certain Brixmor employees as to what SS-NOI Growth figures he wanted the company to show for the third and fourth quarters of the year.  CARROLL, PAPPAGALLO, Splain, Mortimer, and others then went to work manipulating Brixmor’s SS-NOI Growth number for the third quarter, including by making multiple changes to the Comparison Period, in order to report the SS-NOI Growth number that had been pre-determined by CARROLL – a number that showed consistent growth over the year and was within guidance.  Toward the end of these discussions, on October 6, 2015, PAPPAGALLO sent an email to Splain and Mortimer, stating “[Splain] and [Mortimer] LLC Bratwurst at its Finest,” to which Mortimer responded with an image of a man holding a batch of sausage.

As a result of these manipulations, Brixmor reported steady quarter-by-quarter SS-NOI Growth between 2013 and 2015 that consistently fell within the company’s public annual guidance.  The below chart shows Brixmor’s reported SS-NOI Growth as compared to reported guidance:

Chart 1


The below chart shows the actual SS-NOI Growth figures absent manipulation:

Chart 2


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MICHAEL CARROLL, 51, of New York, New York, and MICHAEL PAPPAGALLO, 60, of Trumbull, Connecticut, were each charged in the Indictment with conspiracy to commit securities fraud and other offenses (Count One), securities fraud (Count Two), making false statements in filings with the SEC (Counts Three and Four); and filing false certifications (Counts Five and Six).  The securities fraud, false filings charges, and false certification charges each carry a maximum prison term of 20 years.  The charge of conspiracy carries a maximum prison term of five years.

Steven Splain, 57, of Cheshire, Connecticut, pled guilty on July 16, 2019, before United States District Judge Vernon S. Broderick to one count of conspiracy to commit securities fraud and to make false filings with the SEC, and one count of securities fraud.  The conspiracy charge carries a maximum prison term of five years and the securities fraud charge carries a maximum prison term of 20 years.

Michael Mortimer, 49, of Yardley, Pennsylvania, pled guilty on July 10, 2019, before United States District Judge Valerie E. Caproni to one count of conspiracy to commit securities fraud and to make false filings with the SEC, and one count of securities fraud.  The conspiracy charge carries a maximum prison term of five years and the securities fraud charge carries a maximum prison term of 20 years.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencings of the defendants will be determined by the judge.

Ms. Strauss praised the investigative work of the U.S. Postal Inspection Service, and thanked the Federal Bureau of Investigation for its assistance.  She also thanked the Securities and Exchange Commission, which has brought a civil action against the defendants.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorneys Martin S. Bell, Daniel M. Tracer, and Rebecca Mermelstein are in charge of the prosecution.  


[1] As the introductory phrase signifies, the entirety of the text of the Indictment and the descriptions of the Indictment constitute only allegations, and every fact described should be treated as an allegation.

Updated August 1, 2019

Securities, Commodities, & Investment Fraud
Press Release Number: 19-244