Mills Ignored Accounting Alerts,
Former CEO Contends in Lawsuit
Mills Corp. received warnings from its auditor as early as 2002 and from an anonymous letter distributed to its audit committee last year saying that its accounting practices were flawed, according to a lawsuit filed by the shopping-mall developer's founder and former chief executive.
In a complaint alleging that Mills's accounting problems cost him millions of dollars, Herbert S. Miller said Mills "consciously and intentionally disregarded numerous warnings" as early as February 2002 from its auditor Ernst & Young.
The suit also said an anonymous letter to the Securities and Exchange Commission was delivered to members of the board's audit committee Oct. 13, 2005. The letter laid out eight problematic accounting areas, including treatment of partnership income, according to the lawsuit.
Mills announced Oct. 31 that it would delay its third-quarter earnings call by eight days because of accounting issues and that results would be "substantially below expectations." On Nov. 9, the Chevy Chase, Md., real-estate investment trust reported its funds from operations -- a key REIT measure -- dropped 54% from a year earlier but said it wouldn't need to restate. Two months later, the company said it would restate its accounting back to 2000 and wrote off 10 development projects.
Mills declined to comment. A spokesman for Ernst & Young said the firm couldn't comment on client matters.
The lawsuit, which was reported earlier in the Washington Post, was filed in Delaware Chancery Court late last month. Many details of the Ernst & Young warnings in the lawsuit were redacted from the public filings by Mills, according to Kenneth A. Freeling, one of Mr. Miller's attorneys.
The lawsuit reports four letters to management from 2002 to 2005 from Ernst & Young that the suit says warned of accounting deficiencies. Mills provided those letters to Mr. Miller's counsel as part of the lawsuit's discovery process, said Mr. Freeling.
Mr. Miller got into mall development in the 1970s and created the first Mills-type mall, an outlet center/mall hybrid called Potomac Mills near Washington, D.C. Mills Corp. went public in 1994 with him at the helm. He left the CEO spot in 1995 and left the board of directors in 1997. Mr. Miller is president of developer Western Development Corp., of Washington, D.C., and is trying to build an entertainment complex around the Washington Nationals baseball park.
The SEC launched a formal inquiry into Mills's accounting in March. The company hasn't filed earnings since the third quarter of 2005 and has said its financial reports dating back to 2000 can't be relied upon.
Mills disclosed in an SEC filing two weeks ago that Ernst & Young is raising questions about whether Mills can continue as a "going concern" and gave some details about problems in eight separate accounting areas, including incorrectly capitalized predevelopment costs.
Mills sold three of its non-U.S. malls earlier this month for about $500 million and said it would write down as much as $315 million in shareholder equity. It has also signed a letter of intent that would allow it to extricate itself from the huge Meadowlands Xanadu shopping-mall project in New Jersey. All these steps are part of its bid to reposition itself for a sale or another "strategic alternative."
Mills's shares are down 68% from a year ago, at $18.70 in 4 p.m. New York Stock Exchange composite trading.
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