# Initial Decision Release No. 1401

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A5fd8e7bf4d936281

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Initial Decision Release No. 1401
Administrative Proceeding
File No. 3-16293
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

In the Matter of
Laurie Bebo and
John Buono, CPA
Appearances:

Initial Decision
as to Laurie Bebo
August 13, 2020

Benjamin Hanauer, Eric M. Phillips, Daniel J. Hayes,
Timothy Stockwell, and Scott B. Tandy for the Division of
Enforcement, Securities and Exchange Commission
Mark A. Cameli, Ryan Stippich, Jennifer L. Naeger, and
Alexander B. Handelsman, Reinhart Boerner Van Deuren
s.c., for Respondent Laurie Bebo

Before:

Jason S. Patil, Administrative Law Judge

Introduction
Respondent Laurie Bebo was the chief executive officer (CEO) of Assisted
Living Concepts, Inc. (ALC), a publicly traded assisted living company that
operated residences for seniors. For several years, she engaged in an elaborate
scheme to hide that ALC was not meeting occupancy and financial covenants
in its lease with Ventas, Inc., the landlord of eight facilities operated by ALC.
To make it appear that the facilities had sufficient occupants to meet the
covenant requirements each quarter, Bebo directed ALC personnel to include
individuals who did not reside at the facilities. The false occupants included
current and former ALC employees, people who never visited or stayed at the
facilities, individuals listed as occupants at multiple different facilities on the
same day, and family members that were not employed by ALC. Bebo did not
disclose her scheme to Ventas or obtain Ventas’s agreement.

To further her scheme, Bebo falsified company records, directed ALC
employees to create journal entries reflecting inflated revenues, submitted
fraudulent financial information to Ventas, and lied to and hid information
from ALC’s auditors. Through Bebo’s misconduct, ALC falsely represented, in
its periodic reports publicly filed with the Securities and Exchange
Commission, that the company was in compliance with the covenants and that
it did not believe that there was a reasonably likely degree of risk of breach.
The company did not disclose that it failed to meet the covenant requirements.
Bebo certified the company’s public filings as accurate when she knew they
were not and caused ALC to violate its reporting obligations.
Because of her misconduct, Bebo violated the antifraud provisions of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; Exchange
Act Rule 13a-14’s certification requirements; Exchange Act Section 13(b)(5)’s
books-and-records and internal control provisions; Exchange Act Rule 13b2-1’s
prohibition against falsifying books, records, or accounts; and Exchange Act
Rule 13b2-2’s prohibition against company executives making false and
misleading statements. Also, she caused ALC’s violations of Exchange Act
Section 10(b) and Rule 10b-5, Exchange Act Section 13(a) and Rules 13a-1 and
13a-13’s requirement that an issuer file accurate reports, Exchange Act Rule
12b-20’s requirement that an issuer provide further material information to
make its reports not misleading, and Exchange Act Sections 13(b)(2)(A) and
(B)’s books-and-records and internal control provisions.
Significant sanctions are warranted. A cease-and-desist order, an officerand-director bar with the right to reapply after six years, and civil money
penalties totaling $1,050,000 will be imposed.
Procedural History and Alternative Procedures
On December 3, 2014, the Commission issued an order instituting
proceedings (OIP) against Bebo under Exchange Act Section 21C. The OIP
alleges that Bebo engaged in misconduct and violated the securities laws
summarized above. The Commission also instituted this proceeding against
John Buono, CPA, but later settled the proceeding as to him. Laurie Bebo,
Exchange Act Release No. 74177, 2015 WL 366000 (Jan. 29, 2015).
Bebo answered the charges by generally denying the allegations and
asserting affirmative defenses. See Answer (Ex. 375) (dated Dec. 31, 2014). The
affirmative defenses mostly consist of assertions against the elements of the
allegations, but also include defenses relating to the statute of limitations,
alleged constitutional violations, and reliance on professionals. Id. at 10–13.

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The hearing took place before another administrative law judge in
Milwaukee, Wisconsin, over nineteen days in 2015. The judge issued an initial
decision finding that Bebo violated the securities laws and imposed sanctions.
Laurie Bebo, Initial Decision Release No. 893, 2015 WL 5769700 (ALJ Oct. 2,
2015). During the pendency of Bebo’s petition for review with the Commission,
and after the Supreme Court decided Lucia v. SEC, 138 S. Ct. 2044 (2018), the
Commission remanded the proceeding and directed that Bebo be given the
opportunity for a new hearing before a judge who had not previously
participated in the matter, unless the parties expressly agreed to alternative
procedures. Pending Admin. Proc., Securities Act of 1933 Release No. 10536,
2018 WL 4003609, at *1, *6 (Aug. 22, 2018).
On remand, the proceeding was reassigned to a different judge, who
adopted the parties’ agreement to alternative procedures instead of a new
evidentiary hearing. See Bebo, Admin. Proc. Rulings Release No. 6412, 2018
SEC LEXIS 3561 (ALJ Dec. 18, 2018). Under that agreement, the judge would
decide the matter de novo on the existing record with the opportunity for Bebo
to seek further discovery. See id. at *2–8. Later, the judge adopted the parties’
supplemental procedures and denied Bebo’s motion for summary disposition
that raised constitutional and statute-of-limitations defenses. See Bebo,
Admin. Proc. Rulings Release Nos. 6571, 2019 SEC LEXIS 1094 (ALJ May 10,
2019) (denying motion for summary disposition), and 6642, 2019 SEC LEXIS
1836 (ALJ Jul. 24, 2019) (adopting parties’ supplemental term sheet).
The proceeding was reassigned to me in September 2019. Bebo, Admin.
Proc. Rulings Release No. 6684, 2019 SEC LEXIS 3365 (ALJ Sept. 27, 2019). I
held a closing oral argument on February 6, 2020, and then admitted into
evidence, as Joint Supplemental Exhibit No. 1, memoranda prepared by the
law firm Milbank, Tweed, Hadley & McCloy LLP, which conducted an internal
investigation of ALC. See Bebo, Admin. Proc. Rulings Release No. 6731, 2020
SEC LEXIS 408 (ALJ Feb. 10, 2020). I also allowed the parties to seek
admission of handwritten attorney notes underlying the Milbank memoranda
and address the admissibility of Division exhibits that were excluded at the
prior hearing. See id. The Division responded that it did not object to admission
of the handwritten notes and no longer sought admission of the previously
excluded exhibits. Div. Post-arg. Br. at 4 (Feb. 13, 2020). Bebo provided the
notes, which I now ADMIT as Joint Supplemental Exhibit No. 2.
As agreed by the parties, this initial decision (1) is based on the existing
hearing record, except for Bebo’s Exhibit No. 2187 (expert report of David B.H.
Martin) and Sections VI.A, VI.B, and VII of Bebo’s Exhibit No. 2185 (expert
report of John Durso), which have been withdrawn; (2) makes all factual
findings and legal conclusions de novo, with no deference to or consideration of
any statements or determinations made by the first judge; (3) considers the
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parties’ arguments raised throughout the proceeding and all their briefs; and
(4) takes into account the parties’ other agreed terms. See Bebo, 2018 SEC
LEXIS 3561, at *2–8; Bebo, 2019 SEC LEXIS 1836, at *2–6. All arguments
inconsistent with this decision have been considered and rejected.
Preliminary Issues
Before my findings of fact and legal conclusions on the merits, I address
three preliminary issues: Bebo’s constitutional arguments, the weight that I
give to the Milbank memoranda, and Bebo’s credibility.
This proceeding does not violate the U.S. Constitution.
Bebo challenges the validity of this proceeding on constitutional grounds.
She argues that the statute authorizing the Commission to bring the
proceeding is unconstitutional on its face because it violates equal protection
and due process, that the Commission discriminated against her by bringing
this action as an administrative proceeding rather than in federal court, that
the administrative law judges were improperly appointed and are protected by
too many layers of tenure protection, and that the course of the proceeding
lacked due process. For the reasons discussed below, I find these constitutional
challenges to be without merit.
Constitutionality of Dodd-Frank Section 929P(a)
Section 929P(a)(2) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111-203, 124 Stat. 1376, 1863 (2010), gave the
Commission the authority to impose civil penalties in cease-and-desist
proceedings under the Exchange Act. Before the enactment of this section, the
Commission could impose civil penalties in administrative proceedings against
regulated individuals and entities. Since its enactment, remedies available to
the Commission in an administrative proceeding are generally coextensive
with remedies available in federal court. Bebo argues that this statute violates
the Constitution because it allows the Commission “unguided discretion” to
choose the forum for bringing an action against a respondent and thereby
choose whether a jury trial is available. Resp’t Post-hr’g Br. at 220 (Aug. 3,
2015). Bebo argues that this violates the rights of equal protection and due
process and that Section 929P(a) is unconstitutional on its face. Id. at 221.
The Commission lacks the power to invalidate an act of Congress as
unconstitutional. William J. Haberman, Exchange Act Release No. 40673,
1998 WL 786945, at *3 n.14 (Nov. 12, 1998), pet. denied, 205 F.3d 1345 (8th
Cir. 2000). Even so, I will analyze Bebo’s claim that this portion of Dodd-Frank
is unconstitutional for two reasons. First, Bebo was directed to first defend
herself in this proceeding and then raise her constitutional claims before a
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court of appeals, despite the Commission’s lack of authority to decide this issue.
See Bebo v. SEC, 799 F.3d 765, 773, 775 (7th Cir. 2015). Second, although the
Commission lacks jurisdiction to invalidate a statute, the public interest may
warrant a proceeding’s dismissal if enforcement against a particular
respondent would be unconstitutional. If Bebo is correct that Section 929P is
facially unconstitutional, it would necessarily be unconstitutional as applied to
her, and dismissal would be appropriate. See Wash. State Grange v. Wash.
State Republican Party, 552 U.S. 442, 449 (2008) (“[A] plaintiff can only
succeed in a facial challenge by ‘establish[ing] that no set of circumstances
exists under which the Act would be valid,’ i.e., that the law is unconstitutional
in all of its applications.” (quoting United States v. Salerno, 481 U.S. 739, 745
(1987))).
Equal Protection
Bebo argues that because Section 929P gives the Commission authority to
bring an enforcement action in an administrative proceedings or in federal
court, it divides respondents into two classes, treated unequally. But unlike in
the two cases that she cites, Baxstrom v. Herold, 383 U.S. 107 (1966), and
Humphrey v. Cady, 405 U.S. 504 (1972),1 Section 929P does not create any
objectively identifiable classes of people to be treated differently. See Engquist
v. Or. Dep’t of Agric. , 553 U.S. 591, 601 (2008) (“[T]he basic concern of the
Equal Protection Clause is with … legislation whose purpose or effect is to
create discrete and objectively identifiable classes.” (quoting San Antonio
Indep. Sch. Dist. v. Rodriguez, 411 U.S. 1, 60 (1973) (Stewart, J., concurring)
(first alteration in original))). Instead, it gives the Commission discretion over
the choice of forum. The Commission’s discretion is not limited to one
statutorily defined group, such as prisoners, while others are not subject to
that discretion. See Humphrey, 405 U.S. at 512; Baxstrom, 383 U.S. at 114–15.
Bebo separately challenges this discretion in an as-applied, class-of-one
challenge, which is addressed below. For her facial equal protection challenge,
Section 929P “neither burdens a fundamental right nor targets a suspect
class.” Romer v. Evans, 517 U.S. 620, 631 (1996). Because Bebo has not shown
that the statute even involves a legislative classification—let alone an
irrational one—her claim fails. Cf. Heller v. Doe, 509 U.S. 312, 319–20 (1993).

Baxstrom addressed a New York statute that determined availability of
jury review for civil commitment based on whether an individual is
incarcerated, 383 U.S. at 110, and Humphrey addressed a Wisconsin statute
that allowed non-jury process for civil commitment of some prisoners in
contrast to a general civil-commitment statute, 405 U.S. 511–12.
1

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Section 929P does not on its face treat any class of person differently from any
other.
Bebo’s argument that Section 929P “clearly discriminates against an
identifiable group—respondents who intend to exercise their constitutional
right to a jury trial in an SEC enforcement action”—is wrong. Resp’t Const.
MSD Reply Br. at 4–5 (Apr. 3, 2019). Even if this were an objectively
identifiable class, the statute does not prescribe different treatment for people
inside and outside of the group. Some people inside the group receive their
preferred outcome—a jury trial in federal court. There is no indication that the
statute was designed to discriminate against any class of respondents. Bebo’s
arguments about unfettered discretion and arbitrariness are not valid facial
attacks on the statute. Bebo has not established that Section 929P is
unconstitutional in every application. Wash. State Grange, 552 U.S. at 449.
Due Process
Bebo argues that Section 929P violates due process because it allows the
Commission to penalize a citizen for asserting the Seventh Amendment right
to a jury trial. Resp’t Const. MSD Br. at 17 (Mar. 1, 2019); Resp’t Post-hr’g Br.
at 224–27. But there is no evidence that the Commission has targeted her or
anyone else on this basis. The Supreme Court has confirmed the
constitutionality of nonjury administrative proceedings. The statute simply
allows the Commission to choose between two lawful forums.
The Seventh Amendment provides that “[i]n Suits at common law, … the
right of trial by jury shall be preserved.” U.S. Const. amend. VII. The right to
a jury trial extends to statutory causes of action, so long as the statute “creates
legal rights and remedies … enforceable in an action for damages in the
ordinary courts of law.” Curtis v. Loether, 415 U.S. 189, 193–94 (1974). But
there is a distinction for “cases in which the Government sues in its sovereign
capacity to enforce public rights.” Atlas Roofing Co. v. Occupational Safety &
Health Review Comm’n, 430 U.S. 442, 450 (1977). When enacting a statute
with a new public right, Congress has the authority to assign adjudication of
the public right to an administrative agency without the right to a jury trial.
Id. And Congress may do this “even if the Seventh Amendment would have
required a jury where the adjudication of those rights is assigned instead to a
federal court of law.” Id. at 455
Congress was thus permitted to assign the adjudication of public rights
under the Exchange Act to the Commission. The statutory causes of action in
this proceeding are exactly the type of public rights that the Court has
approved for nonjury adjudication because the “statutory cause of action
inheres in, or lies against, the Federal Government in its sovereign capacity.”

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Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 53 (1989); see Atlas Roofing, 430
U.S. at 461 (Seventh Amendment does not bar Congress from assigning
enforcement of workplace health and regulations to administrative tribunal).
Bebo argues that the statute violates due process because it gives the
Commission the ability to bring in action in an administrative forum or in
federal court. Bebo suggests that the Commission might bring an action in
federal court, wait to see if the defendant asserts the right to a jury, and then
dismiss that action and bring an administrative proceeding instead. Bebo
presents no evidence of this ever having occurred but argues that the fact it
could hypothetically occur is enough to invalidate the statute. Resp’t Const.
MSD Br. at 17.
United States v. Jackson, 390 U.S. 570 (1968), one of two decisions that
she claims support her, did not involve prosecutorial discretion to choose
between forums. Resp’t Const. MSD Br. at 14–15. In Jackson, the Supreme
Court invalidated part of a federal statute that exposed criminal defendants to
the death penalty if they asserted their jury trial right in certain cases but did
not provide for the possibility of capital punishment in the event of a guilty
plea or waiver of a jury trial. 390 U.S. at 570–71, 582–83. Nothing in DoddFrank suggests that the Commission’s choice of an administrative forum or the
range of sanctions available in this forum are causally connected to the
assertion of a constitutional right.
The second case on which she relies, Blackledge v. Perry, 417 U.S. 21
(1974), was not a facial challenge and did not strike down the “state statutory
regime” that authorized prosecutorial discretion. Resp’t Const. MSD Br. at 17.
The Court found unconstitutional the application of that discretion—bringing
a felony charge against the defendant after he exercised his right to appeal to
a jury on the original misdemeanor conviction. Perry, 417 U.S. at 28–29. Bebo
might have a claim, then, if the Commission carried out her hypothetical, but
it is not a valid facial attack on the Exchange Act.
Under Atlas Roofing and Granfinanciera, Congress could have assigned
adjudication of public rights under the Exchange Act solely to an
administrative forum. Congress instead chose to assign adjudication to the
Commission’s administrative process and the federal judiciary—and gave the
Commission the discretion to choose the forum. The Constitution permits this.
Equal Protection—Class of One
Bebo asserts that the Commission violated her constitutional right to
equal protection by bringing an administrative proceeding against her when it
brought actions against others in federal court. In general, equal protection
claimants must establish that they are a member of a protected class. But the
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Supreme Court has also recognized equal protection claims brought by a “class
of one.” A class-of-one claim arises when the claimant is treated differently
from similarly situated individuals without a rational basis for the difference.
Vill. of Willowbrook v. Olech, 528 U.S. 562, 564 (2000). Bebo asserts that the
Commission has arbitrarily treated her differently from similarly situated
litigants, and she has sought discovery to support this claim. See Resp’t Supp’l
Post-hr’g Br. at 43 (Sept. 30, 2019). But Bebo’s class-of-one argument fails
because the Commission’s discretionary choice to bring this action in an
administrative forum cannot be attacked in a class-of-one equal protection
claim.
The Supreme Court has explained that some categories of governmental
decision-making involve discretionary, individualized choices and are not
amenable to class-of-one discrimination claims. Engquist, 553 U.S. at 603. “In
such cases the rule that people should be ‘treated alike, under like
circumstances and conditions’ is not violated when one person is treated
differently from others, because treating like individuals differently is an
accepted consequence of the discretion granted.” Id. The Supreme Court
illustrated this point with a hypothetical of a traffic officer giving speeding
tickets. If the officer gives a speeding ticket to one speeder but not to some
other drivers going the same speed, the ticketed speeder has no cognizable
class-of-one claim—such a claim would be “incompatible with the discretion
inherent in the challenged action.” Id. at 604.
The Commission’s choice of forum is one of those discretionary actions that
cannot be challenged on a class-of-one basis. Federal courts have held that
“Engquist precludes [class-of-one] challenges to prosecutors’ decisions about
whom, how, and where to prosecute.” Charles L. Hill, Jr., Exchange Act
Release No. 79459, 2016 WL 7032731, at *2 & n.21 (Dec. 2, 2016) (citing United
States v. Green, 654 F.3d 637, 650 (6th Cir. 2011)); United States v. Moore, 543
F.3d 891, 901 (7th Cir. 2008)). The conclusion that class-of-one claims are
incompatible with discretionary decisions in prosecutorial enforcement of the
criminal laws applies with equal force to administrative enforcement of the
securities laws. See Del Marcelle v. Brown Cty. Corp., 680 F.3d 887, 905 (7th
Cir. 2012) (en banc) (Easterbrook, C.J., concurring) (“[T]here is no class-of-one
doctrine in federal administrative law, any more than in criminal law.”).
The Commission has repeatedly found that a class-of-one equal protection
challenge to proceeding in an administrative forum is not legally cognizable.
See Hill, 2016 WL 7032731, at *2 & n.21; see also Mohammed Riad, Exchange
Act Release No. 78049A, 2016 WL 3627183, at *50 (July 7, 2016), set aside on
other grounds, No. 16-1275 (D.C. Cir. Sept. 19, 2018); David F. Bandimere,
Exchange Act Release No. 76308, 2015 WL 6575665, at *17–19 (Oct. 29, 2015),
pet. granted on other grounds, 844 F.3d 1168 (10th Cir. 2016); Timbervest, LLC,
8

Advisers Act Release No. 4197, 2015 WL 5472520, at *28–30 (Sept. 17, 2015),
set aside on other grounds, No. 15-1416 (D.C. Cir. Nov. 19, 2018). These three
Commission decisions have been set aside as a result of Appointments Clause
challenges and the Supreme Court’s decision in Lucia and are therefore not
binding precedent. Nevertheless, the reasoning in these decisions remains
persuasive and sound. “[T]he Commission’s decision to bring charges in one
forum rather than another is an inherently discretionary one,” and for the
reasons set forth by the Supreme Court in Engquist and the Seventh Circuit
in Moore, a respondent cannot challenge that decision on a class-of-one basis.
Riad, 2016 WL 3627183, at *50.
Because Bebo cannot prevail on her equal protection class-of-one claim,
her request for discovery to support it was properly denied.
ALJ Appointment
Bebo argued in her post-hearing brief that Commission administrative
law judges are “inferior officers” whose appointment must conform to the
requirements of the Appointments Clause. Resp’t Post-hr’g Brief at 229. This
argument proved correct. In 2018, the Supreme Court held that Commission
administrative law judges were subject to the Appointments Clause. Lucia v.
SEC, 138 S. Ct. 2044, 2049 (2018). Because the judge who heard Lucia was not
appointed in a way that conformed to the requirements of the Constitution, the
Supreme Court ordered a new hearing before the Commission or a properly
appointed administrative law judge. Id. at 2055.
The Commission has implemented the remedy prescribed by the Supreme
Court in all cases, including this one, pending before it at the time of the
Court’s decision. The Commission cured the underlying Appointments Clause
deficiency by ratifying, as head of a department, the prior appointment of its
administrative law judges. Pending Admin. Proc., Exchange Act Release No.
32929, 2017 WL 5969234, at *1 (Nov. 30, 2017); Pending Admin. Proc.,
Exchange Act Release No. 83907, 2018 WL 4003609, at *1 (Aug. 22, 2018) (“In
an abundance of caution and for avoidance of doubt, we today reiterate our
approval of their appointments as our own under the Constitution.”).
Ratification by the proper authority cures a prior unauthorized action as long
as the party ratifying had the authority to do the act at the time the act was
done and also has the authority at the time of ratification. FEC v. NRA
Political Victory Fund, 513 U.S. 88, 98 (1994); see FEC v. Legi-Tech, Inc., 75
F.3d 704, 709 (D.C. Cir. 1996). That condition is satisfied here.
The Commission vacated the initial decision previously issued and
ordered that “respondents be provided with the opportunity for a new hearing
before an ALJ who did not previously participate in the matter.” Pending

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Admin. Proc., 2018 WL 4003609, at *1. Bebo was provided with that
opportunity.
Bebo argues, however, that the Supreme Court’s decision in Lucia
“rendered the OIP in this case legally invalid and statutorily defective.” Resp’t
Const. MSD Br. at 23. Bebo asserts that since the OIP ordered a hearing before
an administrative law judge and the Commission’s administrative law judges
were, at the time the OIP was issued, not properly appointed, “the OIP never
instituted valid proceedings and was itself a nullity.” Id. at 24. The only way
for the Commission to proceed against Bebo, she asserts, would be to issue a
new OIP, and because that proceeding would be barred by the statute
limitations, this case must be dismissed. Id. at 25.
That logic is flawed. The original OIP complied with the requirements of
the Exchange Act and the Commission’s Rules of Practice. See 15 U.S.C. § 78u3(b) (requiring the OIP for a cease-and-desist proceeding to set a hearing date
30 to 60 days after service); 17 C.F.R. § 201.200(b) (requiring the OIP to state
the nature of the hearing, legal authority and jurisdiction under which it is
held, a statement of the fact and law to be considered, and the nature of any
relief sought). The Commission had the authority to institute the proceeding
and order a hearing before an administrative law judge. 15 U.S.C. § 78v. An
OIP issued by the Commission does not depend on the valid appointment of an
administrative law judge, as the Commission could assign a proceeding to itself
at any time. Nothing in Lucia changed that.
Bebo argues that because none of the administrative law judges employed
by the Commission at the time the OIP was issued was validly appointed, the
OIP was defective. But the case law she cites is not on point. In Pereira v.
Sessions, 138 S. Ct. 2105, 2110 (2018), for example, the Court found invalid a
notice to appear at immigration removal proceedings that did not provide the
time and place for the hearing. The applicable statute required the notice to
contain the time and place. Id.; 8 U.S.C. § 1229(a)(1)(G)(i). The OIP in this
proceeding, by contrast, contained everything required by statute and the
Commission’s own rules. Bebo also points to cases holding that a defect in a
hearing officer’s appointment “was an irregularity which would invalidate a
resulting order.” United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 34,
38 (1952); see also Freytag v. Commissioner, 501 U.S. 868, 879 (1991); Papasan
v. Allain, 478 U.S. 265, 276 (1986). But here, as in Tucker Truck Lines, the
invalid appointment is not a defect that “deprives the Commission of power or
jurisdiction,” and the defect in appointment of the administrative law judge
did not cause the OIP to become a nullity. 501 U.S. at 38.

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ALJ Tenure Protection
Bebo challenges as unconstitutional the tenure protection afforded to
administrative law judges. The previous presiding administrative law judge
rejected this argument in an order denying Bebo’s motion for summary
disposition for constitutional violations. Bebo, Admin. Proc. Rulings Release
No. 6571, 2019 SEC LEXIS 1094, at *7–8 (ALJ May 10, 2019). Although the
Supreme Court has not expressly ruled on this issue, there is no basis to set
aside the prior ruling, as explained below. See Lucia, 138 S. Ct. at 2050 n.1
(declining the solicitor general’s invitation to address the removal issue).
Commission administrative law judges are afforded tenure protection. An
administrative law judge may be removed from office “only for good cause
established and determined by the Merit Systems Protection Board.” 5 U.S.C.
§ 7521. Bebo argues that this is a problem because members of the Merit
Systems Protection Board may themselves be removed “only for inefficiency,
neglect of duty, or malfeasance in office.” 5 U.S.C. § 1202(d). And the Supreme
Court has assumed—but not decided—that the Commissioners may only be
removed under the same standard. Free Enter. Fund v. PCAOB, 561 U.S. 477,
487 (2010).2 In Free Enterprise Fund, the Supreme Court invalidated the duallayer tenure protection given to members of the PCAOB in the Sarbanes-Oxley
Act. Id. at 492. According to Bebo, administrative law judges’ multiple layers
of tenure protection interfere with the President’s ability to oversee the
executive branch in the same way. Resp’t Const. MSD Br. at 20 (citing Free
Enter. Fund, 561 U.S. at 484).
The Commission has rejected the argument that administrative law
judges’ tenure protection offends the Constitution. E.g., optionsXpress, Inc.,
Securities Act Release No. 10125, 2016 WL 4413227 (Aug. 18, 2016). In
optionsXpress, the Commission identified three relevant reasons why the
current removal restrictions are permissible: (1) administrative law judges
perform adjudicative rather than core executive functions; (2) the Commission
has other means to exercise control over its administrative law judges; and (3)
the adjudicatory system set up by the Administrative Procedure Act, including
tenure protection for administrative law judges, has a long history. Id. at *51–
52.3
The Securities Exchange Act of 1934 predated the Supreme Court’s
decision Humphrey’s Executor v. United States, 295 U.S. 602 (1935), and the
statutory text contains no mention of tenure protection.
2

The Commission also noted that civil servants who are not officers may
have multiple layers of removal protection, 2016 WL 4413227, at *51, but the
3

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Adjudicative function
In Free Enterprise Fund, the Court noted that its holding that the
PCAOB’s tenure protection was unconstitutional did not address the tenure
protection afforded to administrative law judges. Free Enter. Fund, 561 U.S. at
507 n.10. The Court explained that, contrary to members of the PCAOB,
administrative law judges “perform adjudicative rather than enforcement or
policymaking functions.” Id. This difference in function is important because
the Court has approved limitations on presidential removal authority for
positions with purely adjudicatory functions. Wiener v. United States, 357 U.S.
349, 356 (1958); Free Enter. Fund v. PCAOB, 537 F.3d 667, 699 n.8 (D.C. Cir.
2008) (Kavanaugh, J., dissenting) (“ALJs perform only adjudicatory functions
that are subject to review by agency officials, … and that arguably would not
be considered ‘central to the functioning of the Executive Branch’ for purposes
of the Article II removal precedents.”); cf. Seila Law LLC v. CFPB, 140 S. Ct.
2183, 2200 (2020) (recognizing an exception allowing restrictions on removal
of “inferior officers with limited duties and no policymaking or administrative
authority”); Morrison v. Olson, 487 U.S. 654, 691 (1988) (finding restrictions
on removal permissible where the President’s need to control an official is not
“central to the functioning of the Executive Branch”). According to one legal
scholar, the “insulation of adjudicators from removal at will” is a “longstanding
and largely unquestioned understanding [that] has developed into a very
strong convention.” Naomi Rao, Removal: Necessary and Sufficient for
Presidential Control, 65 Ala. L. Rev. 1205, 1247–49 (2014) (“[T]here are some
good reasons for the conventional and established view that the President’s
control does not require at will removal for administrative law judges or other
officials who solely adjudicate within the executive branch.”).
Other means of control
The problem the Supreme Court saw in the structure of the PCAOB was
one of control. The Court found that the Commission, lacking the power to
remove PCAOB members, could not adequately control its functions. Free
Enter. Fund, 561 U.S. at 504. The PCAOB could “take significant enforcement
actions … largely independent of the Commission,” and the Commission lacked
the “effective power to start, stop, or alter” PCAOB investigations. Id. In stark
contrast, the Commission has all those powers over its administrative law
judges. It chooses what proceedings, if any, are to be presided over by an
administrative law judge. 17 C.F.R. § 201.110. It may direct that any matter
before an administrative law judge be submitted to it for review at any time.
Supreme Court’s holding that administrative law judges are officers eliminates
that argument.

12

Id. § 201.400(a). It may review any initial decision by an administrative law
judge, and this review is plenary both as to law and facts. Id. §§ 201.410–.411;
see 5 U.S.C. § 557(b) (“On appeal from or review of the initial decision, the
agency has all the powers which it would have in making the initial decision
except as it may limit ….). With these effective means of control, there is no
doubt that the final agency decision in an administrative proceeding is the
Commission’s. The public could readily determine “on whom the blame” for a
bad decision “ought really to fall.” Free Enter. Fund, 561 U.S. at 498 (quoting
The Federalist No. 70 (Alexander Hamilton) (Jacob Cooke ed. 1961)). This
control reduces the constitutional need for authority to remove judges at will.
Significant history
In Free Enterprise Fund, the Supreme Court highlighted the “highly
unusual” structure of the PCAOB. Free Enter. Fund, 561 U.S. at 505. It quoted
then-Judge Kavanaugh below observing that “the most telling indication of the
severe constitutional problem with the PCAOB is the lack of historical
precedent” for an independent agency “appointed by and removable only for
cause by another independent agency.” Id. at 505–06 (quoting Free Enter.
Fund, 537 F.3d at 699 (Kavanaugh, J., dissenting)); see Seila Law, 140 S. Ct.
at 2201. The system of administrative law judges, including their removal
protections, has a history that dates back to 1946. See Administrative
Procedure Act, Pub. L. 79-404, § 11, 60 Stat. 237, 244 (1946) (“Examiners shall
be removable by the agency in which they are employed only for good cause
established and determined by the Civil Service Commission … after
opportunity for hearing and upon the record thereof.”). The removal protection
was not ancillary to the APA, but a significant objective of Congress in creating
a fairer adjudicatory system.
***
Because administrative law judges are limited to an adjudicatory role and
have no executive or policymaking function, are subject to control through the
Commission’s plenary review of any matter at any time, and have a long
history of removal protections, the problems with multiple layers of tenure
protection identified by the Supreme Court in Free Enterprise Fund are not
present. The removal protections do not violate the Constitution.
Finally, even if the removal protections were unconstitutional, the remedy
would be severance of the removal protections, not dismissal. See, e.g., Free
Enter. Fund, 561 U.S. at 508–09. That remedy provides no help to Bebo. See
Collins v. Mnuchin, 938 F.3d 553, 592–95 (5th Cir. 2019) (en banc), cert.
granted, No. 19-563 (July 9, 2020). Invalidation of the actions of an
unconstitutional agency or officer are limited to those cases where actors “were

13

granted power inconsistent with their role in the constitutional program” or
“were not properly appointed” because in both cases the actors “were vested
with authority that was never properly theirs to exercise.” Id. at 593. By
contrast, where the problem is that a properly appointed officer is “too distant
from presidential oversight to satisfy the Constitution’s requirements,” the
“only judgment” Bebo is “entitled to is the one the Supreme Court has given in
similar removal-restriction cases,” which is severance of the offending removal
protections. Id. at 593, 595; see also Seila Law, 140 S. Ct. at 2210–11; cf. Barr
v. Am. Ass’n of Political Consultants, Inc., 140 S. Ct. 2335, 2356 (2020)
(Kavanaugh, J., plurality op.) (rejecting challenge to “the Court’s current
approach” to severability, which “is constitutional, stable, predictable, and
commonsensical”). Therefore, even if Bebo’s tenure protection argument were
correct, dismissal of the proceeding would not be the appropriate remedy.
Procedural Due Process
In Bebo’s post-hearing brief, she raised many objections to the process
afforded in the original hearing—both to the general structure and rules of the
Commission’s administrative proceedings and also to specific evidentiary
rulings. She also asserted that the Division’s conduct in preparing witnesses
for the hearing compromised “the fundamental fairness of the hearing.” Resp’t
Post-hr’g Br. at 245.
Due process is afforded in Commission administrative proceedings.
Bebo asserted that in this administrative proceeding she was given
inadequate time to prepare her defense; lacked sufficient access to evidence
and witnesses compared to a similar action in federal court; and, because the
Federal Rules of Evidence and Federal Rules of Civil Procedure did not apply,
unreliable evidence was admitted against her. Resp’t Posthr’g Br. at 238–41,
247–51.
The Supreme Court has held that the Due Process Clause requires “some
form of hearing … before an individual is finally deprived of a property
interest.” Matthews v. Eldrigde, 424 U.S. 319, 333 (1976). “The fundamental
requirement of due process is the opportunity to be heard ‘at a meaningful time
and in a meaningful manner.’” Id. (quoting Armstrong v. Manzo, 380 U.S. 545,
552 (1965)); see also Jonathan Feins, Exchange Act Release No. 41943, 1999
WL 770236, at *7 (Sept. 29, 1999) (“Administrative due process is satisfied
where the party against whom the proceeding is brought understands the
issues and is afforded a full opportunity to meet the charges during the course
of the proceeding.”).
The Commission’s Rules of Practice provide for a hearing that provides
the meaningful process required by the Constitution. “[C]ourts have
14

consistently held that agencies need not observe all the rules and formalities
applicable to courtroom proceedings.” McClelland v. Andrus, 606 F.2d 1278,
1285 (D.C. Cir. 1979). It is not a violation of due process that the rules permit
the admission of evidence that would be excluded under the Federal Rules of
Evidence. See EchoStar Comm’ns Corp. v. FCC, 292 F.3d 749, 753 (D.C. Cir.
2002) (explaining that administrative agencies may consider hearsay if it
appears reliable). Nor is it a violation that discovery is more limited than would
be the case under the Federal Rules of Civil Procedure. See NLRB v. Valley
Mold Co., 530 F.2d 693, 695 (6th Cir. 1976) (“It is well settled that parties to
judicial or quasi-judicial proceedings are not entitled to discovery as a matter
of constitutional right.”); see also Hill, 2016 WL 7032731, at *3 (“[T]he fact that
the Federal Rules of Civil Procedure and the Federal Rules of Evidence do not
apply in administrative proceedings is not a violation of due process.”); cf. Opp
Cotton Mills, Inc. v. Adm’r of Wage & Hour Div. of Dep’t of Labor, 312 U.S. 126,
155 (1941) (“[I]t has long been settled that the technical rules for the exclusion
of evidence applicable in jury trials do not apply to proceedings before federal
administrative agencies in the absence of a statutory requirement that such
rules are to be observed.”). The discovery permitted was not insignificant, and
the entire record was sufficiently substantial to provide for a meaningful and
vigorous defense of the allegations.
As for the time allowed for preparation of that defense, the hearing was
held over several weeks in April, May, and June 2015, four to six months after
the OIP was issued. Moreover, the issuance of the OIP was not the first
moment Bebo learned of the allegations against her. She was aware of the
Commission’s investigation from at least October 2013, when the Division first
took her investigative testimony. In June 2014, the Division informed her that
it was recommending an enforcement action against her, and she made her
first of three Wells submissions in August 2014. In any event, the
Commission’s remand order afforded Bebo the opportunity for a new hearing
and consequently more time to prepare a defense. The parties instead agreed
to proceed with the record created in the first hearing, with minor exceptions,
so Bebo cannot continue to claim that she was afforded insufficient time.
Regardless of the opportunity provided on remand, the time provided did not
violate due process.
Evidentiary rulings did not violate due process.
Bebo asserts that various evidentiary rulings made during the hearing
were unfair and prejudicial. These rulings include allowing the Division to
admit declarations as evidence, admitting unreliable evidence, partially
quashing a third-party subpoena sought by Bebo, prohibiting certain questions
on cross-examination of witnesses, and denying the opportunity to seek

15

discovery of possible spoliation of evidence by a third party. Resp’t Post-hr’g
Br. at 249–62.
The parties’ agreement for the conduct of the proceeding on remand
provided that, with several narrow exceptions, no new discovery would take
place. Bebo, 2018 SEC LEXIS 3561, at *2–8. This waived any objection to the
denial of discovery about spoliation. The parties agreed to preserve objections
to the admissibility of admitted evidence for review by the Commission but did
not contest the bulk of those decisions following remand. Id. at *8 (“As to
evidence that was previously admitted in the record, all admissibility
objections would be preserved for Commission review. However, all evidence
previously admitted would remain admitted for the purpose of [the presiding
judge’s] review and the parties would continue to be able to make arguments
about the weight or relevance of such evidence.”). Because I have not been
asked to review the admissibility of this evidence, it would be inappropriate to
find that the evidence’s admission was a violation of due process. In any event,
as the Commission may cure procedural and evidentiary errors upon de novo
review, Bebo’s disagreement with prior rulings is not a valid basis for
dismissal. See Ronald S. Bloomfield, Securities Act Release No. 9553, 2014 WL
768828, at *10 & n.54 (Feb. 27, 2014), pet. denied, 649 F. App’x 546 (9th Cir.
2016).
Bebo has not established misconduct by the Division.
Bebo argues that the Division improperly influenced witnesses during the
investigation by mentioning criminal referrals and the Fifth Amendment
privilege against self-incrimination. Resp’t Posthr’g Br. at 242–45. Bebo also
asserts that certain witness testimony reflects rehearsal and is unreliable. Id.
at 245–47. But Bebo points to no authority showing that the Division’s conduct
was improper, and there is no evidence that any witness was coerced to testify
falsely. As for witnesses, I independently reviewed the testimony and have
reached my own conclusions about reliability.
***
Bebo’s due process objections are without merit.
The Milbank memoranda and notes help corroborate some testimony
and resolve some inconsistencies.
The parties disagree about the weight and interpretation to be given to
Milbank attorneys’ interview memoranda for those witnesses who testified live
at the prior hearing, and, by logical extension, the notes underlying those
memoranda. See, e.g., Div. Supp’l Post-hr’g Br. at 22-24 (Sept. 27, 2019); Resp’t
Supp’l Post-hr’g Reply Br. at 25-30 (Nov. 4, 2019); see also Jt. Supp’l Exs. 1 &

16

2. The parties’ adopted stipulation is dispositive of the permitted use of the
Milbank interview memoranda, as the parties agreed that the relevant
memoranda “may be admitted into evidence and utilized by the parties for the
purposes of identifying impeachment or corroboration material and
supplemental briefing”; the parties also stipulated that no sponsoring witness
was needed, the memoranda were prepared by Milbank attorneys in the course
of an internal investigation, and they were not verbatim witness statements
unless explicitly indicated by quotation marks. Bebo, 2019 SEC LEXIS 1836,
at *3.
There is no dispute that the witness statements in the interview
memoranda and notes are hearsay. See Fed. R. Evid. 801(c); Hook v. Regents
of Univ. of Cal., 394 F. App’x 522, 530–31 (10th Cir. 2010).4 In Commission
administrative proceedings, the weight of hearsay evidence is evaluated based
on several non-exclusive factors, including
the motives or potential bias of the declarant; the
availability and credibility of the declarant; whether the
statements are contradicted or consistent with direct
testimony; the type of hearsay (e.g., sworn, written,
attributable to an identified person); the availability of
the missing witness and any attempts to compel witness
testimony; and whether or not the hearsay is corroborated
by other evidence in the record.
Amendments to the Commission’s Rules of Practice, 81 Fed. Reg. 50,212,
50,226–27 (July 29, 2016); see also Hoska v. U.S. Dep’t of the Army, 677 F.2d
131, 138–39 (D.C. Cir. 1982); Guy P. Riordan, Securities Act Release No. 9085,
2009 WL 4731397, at *14 (Dec. 11, 2009), pet. denied, 627 F.3d 1230 (D.C. Cir.
2010), abrogated on other grounds by Kokesh v. SEC, 137 S. Ct. 1635 (2017).
Although the Division argues that the memoranda are entitled to sparing
weight, see, e.g., Div. Supp’l Post-hr’g Br. at 22–23, I find that they are
Although the Federal Rules of Evidence do not govern admissibility in this
administrative proceeding, City of Anaheim, Exchange Act Release No. 42140,
1999 WL 1034489, at *2 (Nov. 16, 1999), those rules can provide helpful
guidance on issues not directly addressed by the Commission’s Rules of
Practice. Cf. Yanopoulos v. Dep’t of Navy, 796 F.2d 468, 471 (Fed. Cir. 1986)
(“Although the Federal Rules of Evidence do not apply to Board hearings, they
are a helpful guide to proper hearing practices.” (internal citation omitted));
Wheat, First Sec., Inc., Exchange Act Release No. 48378, 2003 WL 21990950,
at *12 n.55 (Aug. 20, 2003) (“Even if the Federal Rules of Evidence applied, the
law judge properly admitted the evidence as non-hearsay.”).
4

17

generally helpful for the parties’ agreed purposes. First, the interviews were
taken more than two-and-a-half years before the hearing, when memories were
presumably fresher. Second, the documents’ authors were Milbank attorneys,
who are ostensibly skilled in conducting and memorializing interviews in the
context of internal investigations. Here, I can do more than just presume
counsel’s skill. Having reviewed the various memoranda, I find them to be
creditably detailed accounts of information disclosed during the interviews.
Although Milbank was hired by ALC, there is no indication that they were
directed or encouraged to reach a particular result. Insofar as I cite statements
from the memoranda in this decision, those statements have been evaluated
against the hearing record for consistency and corroboration, considering
possible witness bias or motives.
Interestingly, while Bebo generally advocates reliance on the Milbank
memoranda, when it comes to her Milbank interviews, she asks that I reject
the Division’s use of the memo to impeach her, because it:
(i) was the first time Bebo was interviewed in-depth about
these issues, (ii) occurred over three years after she
contacted the Board and its members about employee
leasing, (iii) was conducted prior to Bebo having the
benefit of having her recollection refreshed with a
multitude of materials, (iv) was focused on events (e.g.,
the Ventas lease and employee leasing) that were
generally immaterial from her and ALC’s perspective and
thus unlikely to be at the forefront of her recollection, and
(v) focused on events and conversations that occurred in
an extremely condensed time period.
Resp’t Supp’l Post-hr’g Reply Br. at 35.
Yet, these objections pertain equally to every other individual interviewed
by Milbank. Cf. id. Even if this was Bebo’s first in-depth interview, there is no
indication that she was taken by surprise about the subject matter. In addition,
Bebo, among other witnesses, appeared with her own chosen counsel when
interviewed by Milbank. Although in no instance do I find that the Milbank
memoranda are, by themselves, dispositive, they still serve to corroborate
certain points made by witnesses, as well as to help resolve certain
inconsistencies. Although I do not rely on it in this decision, for the purpose of
establishing the record evidence, this reasoning also applies to Joint
Supplemental Exhibit No. 2, which contains the handwritten attorney notes
underlying the memoranda.

18

Bebo’s testimony often lacked credibility.
The Division disputes Bebo’s credibility, and it is best to address the issue
as a preliminary matter. The Division claims that “Bebo was impeached
approximately 35 times over the course of the hearing.” Div. Post-hr’g Br. at
45 (Aug. 3, 2015) (citing transcript passages where claimed impeachment
occurred). In addition to the instances of impeachment, the Division notes that
while on the witness stand, Bebo repeatedly evaded questions by providing
non-responsive information, and failed to “provide concise answers to simple
questions.” Div. Post-hr’g Br. at 45 n.20. The Division also claims that Bebo’s
account to Milbank, as detailed in Milbank’s interview memo, contained
thirteen statements that were inconsistent with her hearing testimony. See
Div. Supp’l Post-hr’g Br. at 24–26 (citations omitted). As detailed below in my
factual findings, Bebo’s testimony was often contradicted by the recollections
of other witnesses and her own prior testimony. When Bebo lacked credibility
on relevant issues, I indicate the evidence supporting my credibility
determinations.
I do disagree with the Division on one point. The Division argues that
“Bebo’s best friend, Bucholtz, testified that she knew Bebo to ‘twist the truth’
and had ‘lied to get what she wanted.’” Div. Post-hr’g Br. at 45 (citing Tr. 3016–
17). This testimony, however, relates mainly to an instance of dishonesty that
is unconnected to the Division’s allegations. This one instance does not mean
that Bebo was lying under oath at the hearing to “get what she wanted.”
Findings of Fact
I base the following factual findings on the entire record per the parties’
agreement regarding alternative procedures, see Pending Admin. Proc., 2018
WL 4003609, at *1; on their stipulations, see 17 C.F.R. § 201.324; and on facts
officially noticed from filings in the Commission’s EDGAR database and
publicly available court filings, see id. § 201.323; Global Network Commc’ns
Inc. v. City of N.Y., 458 F.3d 150, 157 (2d Cir. 2006) (public court filings);
Helpeo, Inc., Exchange Act Release No. 82551, 2018 WL 487320, at *4 n.37
(Jan. 19, 2018) (EDGAR filings). I apply preponderance of the evidence as the
standard of proof. See Rita J. McConville, Exchange Act Release No. 51950,
2005 WL 1560276, at *14 (June 30, 2005), pet. denied, 465 F.3d 780 (7th Cir.
2006).
Relevant parties and witnesses
ALC and its CEO Bebo and CFO Buono
Assisted Living Concepts, Inc., was a publicly traded company that
operated assisted living facilities. Ex. 2 at 6. It began trading on the New York
19

Stock Exchange under the ticker name ALC in 2006. Id. It ceased trading in
2013 when TPG Capital, L.P., took it private. See ALC, Current Report (Form
8-K) (July 16, 2013).
During the pertinent period, Laurie Bebo was ALC’s CEO and president,
as well as a member of its board of directors. Tr. 1764, 1767. She worked as a
senior executive at ALC’s predecessor company and served as ALC’s CEO until
her termination in May 2012. Tr. 1764–65. John Buono was ALC’s chief
financial officer (CFO) and treasurer from approximately 2007 until 2013,
when ALC was taken private. Tr. 2311.
ALC-Related Witnesses
David Hennigar was ALC’s chairman of the board, and through his family
members’ ownership of a holding company, he held beneficial control of a
majority of ALC’s voting shares. Tr. 547–48, 3821–23; see, e.g., Ex. 2073 at 14–
16 (original document pagination). Alan Bell, Derek Buntain, and Charles
Roadman II were members of ALC’s board and its audit committee from 2006
until it went private. Tr. 546, 1353, 2559–60. Melvin Rhinelander was vice
chairman of ALC’s board and the former CEO of ALC’s previous parent
company. Tr. 2796–97.
Eric Fonstad was ALC’s general counsel and secretary from 2006 until
late 2010. Tr. 1296. Mary Zak-Kowalczyck was ALC’s senior corporate counsel
from 2006 until 2013. Tr. 4331. Sitalakshmi Natarajan worked as a payroll
specialist and then payroll manager at ALC (and its successor) from 2011 until
the hearing. Tr. 468–69. Robin Herbner was ALC’s field accounting manager
from 2006 until 2009. Tr. 510–11. Sean Schelfout was a treasury manager at
ALC for about four years starting in 2007. Tr. 965–66. Daniel Grochowski
served as director of tax and then director of treasury for ALC between 2006
and 2014. Tr. 1083–84. Anthony Ferreri was ALC’s assistant controller
between 2005 and 2014. Tr. 1221–22. Jared Houck worked at ALC from 2007
until 2014 with increasing responsibilities in the company’s operations. Tr.
1463–65. Kathy Bucholtz held various positions within ALC and its
predecessor from 1997 until 2013, finally serving as vice president of sales and
marketing. Tr. 2934–35. David Hokeness was ALC’s director of internal audits
from 2006 to 2013. Tr. 3036. Joy Zaffke was Bebo’s executive assistant from
2006 until 2012, and Gale Bebo is Bebo’s mother and was an occasional standin receptionist at ALC. Tr. 3208, 3241–43. John Lucey was ALC’s director of
financial reporting during the relevant time period. Tr. 3678. Jason Dengel
worked at ALC as an accounts receivable specialist between 2011 and 2013.
Tr. 3908.

20

Bruce Davidson was a corporate law partner at Quarles & Brady, who
worked with ALC on corporate and securities matters. Tr. 2289–90. Melissa
Koeppel and Jeffery Robinson were audit partners at Grant Thornton, ALC’s
external auditor; Koeppel led the audits between 2006 and 2010 and Robinson
led them starting in 2011. Tr. 3307, 3382.5 James Trouba was the concurring
reviewer on the audits from 2010 until 2013. Tr. 3565–66.
Ventas and Related Witnesses
Ventas, Inc., is a real estate investment trust with a “portfolio of seniors
housing and healthcare-related properties.” Ventas, Annual Report at 1 (Form
10-K) (Feb. 29, 2008); see Tr. 159. Eight of its numerous facilities were operated
by BBLRG, LLC (CaraVita), pursuant to a lease in Alabama, Florida, Georgia,
and South Carolina. Tr. 165; Ex. 1.
Timothy Doman was Ventas’s senior vice president and chief portfolio
officer of asset management, and worked there from 2002 through the hearing
date. Tr. 159–60. Joseph Solari was Ventas’s managing director of acquisitions
from 2007 to 2009. Tr. 399–400. Joy Butora was an asset manager at Ventas.
Tr. 891–92.
ALC enters the Ventas lease and discloses it on Form 8-K.
In 2007, Bebo took part in negotiating an agreement between ALC and
Ventas under which ALC would lease eight CaraVita facilities from Ventas
and acquire their operations. Tr. 167–69, 1777; Ex. 1. ALC operated 8,535
assisted living units as of December 31, 2007, and the Ventas facilities added
541 residential units to ALC’s operations. See ALC, Annual Report at 3, 23
(Form 10-K) (Mar. 12, 2008). ALC’s operation of the Ventas facilities was
governed by a lease that subjected ALC to extensive, mandatory covenants.
See Ex. 142 §§ 7.2.1, 8.1–.2.
The lease included “financial covenants” specifying occupancy and
“coverage ratio” requirements. See id. § 8.2.5. The lease defined “coverage
ratio” as each facility’s cash flow for an applicable period (generally, resident
rental income) divided by ALC’s rent payments to Ventas for that facility. Id.
at B-5. For example, if occupant rental income was equal to ALC’s rent
Although it does not inform my decision in this case, I note that Koeppel
and Robinson were barred from practicing before the Commission as
accountants, and Grant Thornton was sanctioned, in part because of their
actions related to ALC’s audits. See Melissa K. Koeppel, CPA, Exchange Act
Release No. 76537, 2015 WL 7755467 (Dec. 2, 2015); Grant Thornton, LLP,
Exchange Act Release No. 76536, 2015 WL 7755463 (Dec. 2, 2015).
5

21

payments, the “coverage ratio” would be 1.0, which can also be described as a
ratio of 1:1. As another example, if occupant rental income was only half of
ALC’s rent payments, the “coverage ratio” would be 0.5, or a ratio of 1:2.
Specifically, the lease required that ALC satisfy: (1) 65% quarterly
occupancy at each individual Ventas facility; (2) 75% trailing twelve-month
(TTM) occupancy at each individual facility; (3) 82% TTM occupancy for the
eight facility portfolio; (4) a 0.8 TTM coverage ratio for each facility; and (5) a
1.0 TTM coverage ratio for the entire portfolio. Id. § 8.2.5. Although occupancy
was not a defined term in the lease, Ventas deemed it important that facility
operators calculate occupancy consistently over time in their reports. Tr. 323–
24, 332–33. ALC calculated occupancy based on the number of occupied units,
which was determined using a system called TIPS. Tr. 512, 516, 2795. TIPS
tracked paying residents and counted a unit as occupied if a lease agreement
or payment rendered a resident financially responsible for it. Tr. 512–13,
3028–29. ALC used TIPS to generate each facility’s financial statements and
occupancy data, and the data in TIPS was verified through periodic field
audits. Tr. 512, 516, 519. For each facility, the number of occupied units was
divided by the total number of units, yielding that facility’s occupancy
percentage. Tr. 516, 519. This was ALC’s standard occupancy calculation
method, and it never included employees who stayed at non-Ventas properties
in those properties’ occupancy calculations. Tr. 830, 3010, 4545–46.
The lease required ALC to demonstrate its compliance with the financial
covenants within 45 days of the end of each quarter by providing Ventas with
schedules documenting compliance with the financial covenants, and financial
statements for each facility and the portfolio, prepared in accordance with
generally accepted accounting principles (GAAP). Ex. 142 §§ 25.3, 25.4. Ventas
required GAAP-compliant financial statements so it could rely on the
information prepared by ALC. Tr. 896; Ex. 142 §§ 25.1–.4. The lease also
required that an ALC executive certify the completeness and accuracy of the
information by signing an officer’s certificate and providing it to Ventas with
each quarterly production. Ex. 142 § 25.4 and at Ex. D; Tr. 2323–24; Exs. 32–
45.
In addition to the detailed reports following the close of each quarter, the
lease also required ALC to promptly notify Ventas of any covenant’s breach.
Ex. 142 § 8.2.3(a).
If ALC failed to meet any of the numerous requirements imposed by the
lease, including the above-listed financial covenants, Ventas was entitled to:
(1) terminate the entire lease; (2) evict ALC from all eight facilities; and (3)
require ALC to pay damages equal to the net present value of the unpaid rent

22

for the remaining term of the lease (through March 2015) for the entire
portfolio. See id. §§ 17.1–.4.
In addition, section 33 of the lease provided that “[a]ll notices, demands,
requests, consents, approvals and other communications … shall be in writing
and delivered” to Ventas’s “Lease Administration” and its “General Counsel,”
unless Ventas designated another official. Id. § 33 (emphasis added). Although
Ventas’s CEO encouraged Bebo to consider Solari a Ventas point of contact
during a conversation that did not involve discussion of covenants, Tr. 1859,
there is no indication that he was ever designated in lieu of Ventas’s lease
administration and general counsel for lease communications contemplated by
section 33. Solari’s own actions and testimony validate this, as he took no
action involving an email following a January 2009 meeting that will be
discussed below and instead turned it over to Doman and William Johnson,
Ventas’s asset manager. Tr. 427–28; see Ex. 184 at 1; Ex. 1343 at 1. Even if
Solari were the designee, that arrangement would have ended upon Solari’s
termination from Ventas later in 2009. See Ex. 1116. Given section 33, Bebo
knew that notices or requests were required to have been in writing to specific
Ventas officials, and that various actions would have only become effective
upon written disclosure to Ventas, and, in some cases, when approved in
writing by Ventas. See Tr. 1781–82.
Bebo knew Ventas had been unwilling to give up these covenants and
other key provisions in the lease negotiations, and that Ventas had
communicated that ALC could either “take it or leave it.” Tr. 552, 1299, 1777;
Ex. 1572. Before ALC decided to enter the lease, Buono warned Bebo that he
was concerned about the covenants. Tr. 2313–14. In an email, he wrote that it
had been difficult working with Ventas and Solari and he expected any
potential relationship would be adversarial. Ex. 140. At that time, ALC did not
try to negotiate more favorable financial covenants or consequences of
noncompliance. Tr. 2317–20.
Bebo was a forceful proponent of the Ventas lease, and presented it to
ALC’s board for acceptance Tr. 548, 1354, 1778, 2803, 2936–37, 3885–86.
Despite Bebo’s zeal, Fonstad and board members Bell and Buntain advocated
against the lease because it contained provisions, including the financial
covenants, that were unfavorable to ALC. Tr. 550–52, 1298–1300, 1355–57,
1779–80, 2320, 2804, 3900–01. In response, Bebo assured the board that ALC
would meet the covenants. Tr. 551, 1781, 2640–41, 2804–05. Based on Bebo’s
assurances, the board—except for Bell and Buntain, who abstained—voted to
enter into the lease. Tr. 552–53, 1356–57, 2805. After reviewing the lease in
its entirety, Bebo signed the lease on behalf of ALC. Ex. 142; Tr. 168–69, 1781–
82.

23

In Commission filings, Ventas had touted the financial covenants in its
leases as protection against nonpayment of rent. See, e.g., Ex. 2069 at 5; Tr.
309; see also Ventas, Annual Report at 46, 74–75 (Form 10-K) (Feb. 29, 2008)
(Ventas evaluates “collectibility” of “amounts receivable from third parties”
based on “compliance with the financial covenants set forth in the … lease
agreement, … the financial stability of the applicable … tenant and any
guarantor and … the payment history of the borrower or tenant”). Bebo was
aware of this because of her experience in the industry and periodic review of
Ventas’s SEC filings. Tr. 4047–51.
There is also evidence, however, that the consequences for breaching the
covenants would be limited. Doman testified that it was Ventas’s practice to
monitor operators more closely if they breached occupancy covenants, rather
than seeking more drastic remedies. Tr. 265–67, 281–82, 379–80. Rhinelander
stated that he never had any concern about the financial covenants, because if
“you blow through” one, it was “no big deal.” Jt. Supp’l Ex. 1 at 108.
Rhinelander stated that he would not have expected Ventas to try to accelerate
rent or expel ALC for a covenant default because Ventas would not want to
have to find a new tenant; it instead would want to keep a lessee that was
paying rent. Id. At most, he believed that ALC would have to pay “a few
dollars” when renegotiating lease terms and business would continue as usual.
Id. Other witnesses testified that financial covenant violations under leases or
loans usually get resolved with minimal adverse consequences to the tenant or
debtor. Tr. 2298–99 (Davidson’s testimony that notices of default were treated
on a case-by-case basis), 3568 (Trouba’s testimony about practices at audit
clients when covenants violated), 3634–36 (David Smith’s expert testimony
that in financial covenant breaches, “lenders rarely pursue a remedy as harsh
as an acceleration”), 3660–63 (Smith’s testimony indicating “substantial
evidence that in the wake of financial covenant violations, lenders do not
pursue remedies like acceleration, forcing into bankruptcy, foreclosing”); Ex.
2185 at 10–11 (expert report of John Durso, stating that the conditions of the
2008 to 2012 economic crisis affected senior-care facilities industrywide and
“demanded flexibility” between landlords and tenants of the facilities).
There is no indication on this record that Ventas ever sued a tenant for a
financial covenant violation or that anyone at ALC, despite concerns, believed
that Ventas would necessarily seek rent acceleration in response to a financial
covenant violation. Moreover, in August 2011, ALC stated in public
correspondence to the Division of Corporation Finance “that in the unlikely
event of a breach, the consequences would be less severe than those disclosed.”
Ex. 295 at 122837; see ALC, Correspondence (Aug. 4, 2011). Thus, although the
explicit terms of the lease contemplated rent acceleration or other adverse
consequences, the evidence shows that by no later than August 2011 it was

24

more likely than not that the marketplace would have known that the adverse
consequences referenced in the lease were unlikely.
On January 7, 2008, ALC filed a Form 8-K announcing its entry into the
lease with Ventas, which it termed a material definitive agreement. Ex. 1. The
Form 8-K, which attached the lease as an exhibit, specifically disclosed the
financial covenants and the consequences if ALC failed to comply. Ex. 1 at 2
(of 135 PDF pages). It also attached a press release stating that the residences
“are currently 92% occupied with all private pay residents and are expected to
generate post acquisition annual revenue … of $18.0 million.” Id. at 133. The
lease remained important to ALC’s bottom line throughout 2008; ALC
disclosed in its annual report that its occupancy would have declined if not for
the Ventas properties. ALC, Annual Report at 22–24, 57 (Form 10-K) (Mar. 6,
2009).
Through year-end 2011, ALC’s public filings disclosed the amount of
unpaid rent ALC could have to pay Ventas if it failed the covenants—
approximately $16 million to $26 million. See Ex. 2 at 30; Ex. 3 at 38; Ex. 4 at
42; Ex. 5 at 45; Ex. 6 at 34; Ex. 7 at 36; Ex. 8 at 38; Ex. 9 at 45; Ex. 10 at 32;
Ex. 11 at 36; Ex. 12 at 37; Ex. 13 at 43. Additionally, ALC recorded an
“operating lease intangible asset” on its financial statements, which
represented the present value of the future income streams associated with the
Ventas facilities. At year-end 2009, ALC valued that intangible asset at $11.57
million. Ex. 5 at F-15.
Bebo knew that Ventas viewed occupancy and coverage ratios as indicia
of whether ALC could make its rent payments. Tr. 178, 401, 908–09; Ex. 190
at 3; Ex. 198. Ventas also knew that in the future it would need to find a new
tenant to operate the facilities, and future tenants would pay higher rents for
facilities with better occupancies and cash flows. Tr. 175–76, 381–82, 961–62.
For these reasons, Ventas reviewed and scrutinized the covenant calculations
and financial information provided quarterly by ALC. Tr. 191–97, 404–05,
894–95, 897–98; Exs. 46–60, 147. Ventas also communicated to ALC that it
wanted to preserve the value of its properties while ALC ran them. Tr. 2326–
27; Ex. 198. In addition to scrutinizing the covenant calculations, Ventas held
quarterly conference calls or meetings with Bebo and Buono and periodically
visited the facilities to monitor performance. During these discussions, Ventas
staff asked detailed questions about the financial performance of its facilities.
Tr. 197–208, 899–908, 910–32, 2295–97; Exs. 144, 147, 207, 208, 215, 217, 240,
241, 279, 300, 301.

25

Bebo knew ALC would likely default on the financial covenants.
Occupancy declined quickly after ALC began operating the Ventas
facilities in 2008. Tr. 750, 2327–28, 3958. Due to that year’s great recession,
occupancy rates at assisted living facilities declined nationwide, and did not
stabilize until late 2012. Ex. 2185 at 10 & Ex. A; see Tr. 3185–86. Bebo, Buono,
and members of ALC’s accounting department regularly reviewed and
monitored occupancy and coverage ratios at the Ventas facilities to prepare the
required quarterly documentation. Tr. 838, 1839, 2321, 2327–28; Ex. 150. As a
result, Bebo knew occupancy was trending downward throughout 2008 and,
for the purpose of the covenants’ trailing twelve-month calculations, that ALC
“could be running into problems with the covenant calculations” and was losing
its best chances to post impressive financial results. Tr. 1849, 1859–60, 3958–
59; Ex. 160; Ex. 3252 at 3.
By August 2008, Bebo and Buono began discussing whether ALC should
purchase the Ventas facilities to avoid the ramifications of missing the
covenants. Tr. 1840–41; Ex. 3015.
ALC’s board required Bebo and Buono to regularly report on ALC’s
compliance with the covenants. Tr. 557, 576–78, 1357, 1785–86, 2321–22,
2807–08; Ex. 98 at 5; Ex. 150. In addition to the initial concerns raised by Bell
and Buntain, Bebo understood that ALC’s board and chairman Hennigar
considered it important to know whether ALC was complying with the
financial covenants. Tr. 1785–86, 1834. At each board meeting following ALC’s
entry into the Ventas lease through February 2012, Bebo and Buono reported
and presented PowerPoint slides showing that ALC was in compliance with
the covenants. Tr. 554–55, 1357, 1837, 2322, 2641–42, 2808.
At the August 2008 board meeting, the directors questioned Bebo and
Buono about the Ventas facilities’ declining occupancy and the implications of
breaching the covenants. Ex. 150. In response, Bebo approved a memo
distributed to the board before its November 2008 meeting, advising that:
“breach of any of the occupancy or financial coverage covenants would entitle
Ventas to terminate the Lease … and require payment of the present value of
unpaid future rental amounts.” Id. at 1; Tr. 2811–12. That memo observed that
“[t]he immediate concern revolves around occupancy. We have deployed a team
of sales persons to the Southeast region who are immediately focused on
improving census at Greenwood Gardens and Peachtree Estates.” Ex. 150 at
4; see also Ex. 567 (listing “SE Task Force Responsibilities”). At the November
2008 meeting, to address the board’s concerns about declining occupancy, Bebo
told the board she would attempt to improve occupancy by sending a
“taskforce” of ALC employees to the Ventas facilities to improve sales and
operations. Tr. 559–60, 2328–30, 2812–13, 2939, 3070–74, 4725–26; Ex. 97 at

26

4; Ex. 150 at 4; Ex. 567. Bebo did not tell the board she would include the
taskforce members in the covenant calculations. Tr. 560, 2645, 2813. The task
force resulted in a small number of ALC employees, for a limited period,
traveling to and rotating their stays at Ventas facilities to boost occupancy by
improving facilities’ performance. See Jt. Supp’l Ex. 1 at 45.
After the November 2008 board meeting, Bell asked Buono to attempt to
negotiate with Ventas for relief from the financial covenants. Tr. 2330, 3045;
see Ex. 156. Buono investigated the accounting implications of obtaining “a
modification or waiver” of the covenants in exchange for ALC accelerating its
lease payments to Ventas. Tr. 2330–31; Ex. 152. Buono expected Bebo to make
a covenant relief proposal at a meeting Bebo requested in late November 2008
with Ventas’s CEO, Debra Cafaro. Tr. 1850, 2331–33. On November 18, Buono
emailed Bebo his recommendation to seek a suspension of the covenants, and
Bebo planned to discuss this proposal at their meeting with Cafaro. Tr. 1851–
53, 1855–56; Ex. 156. However, when they met with Cafaro, Bebo dodged any
discussion of the covenants, and afterwards Buono expressed his
disappointment. Tr. 410–13, 1856, 1858–59, 2333–34. ALC did not discuss
covenant relief with Ventas in 2008. Tr. 412–13, 1859.
By the December 16, 2008, board meeting, Bebo and Buono believed that
ALC would eventually default on the covenants. Tr. 2334–35. Herbner, ALC’s
field accounting manager who prepared occupancy projections in advance of
the meeting, also believed ALC would violate the covenants unless occupancy
markedly improved. Tr. 754. At the meeting, Bebo told the board that ALC
would meet the covenants as of the end of the year. Tr. 560–61, 753–54, 1861–
62, 2335–36; Ex. 98 at 5. On December 19, 2008, Buono emailed Bebo and again
recommended ALC attempt to negotiate covenant relief with Ventas and
consider buying some Ventas properties as a negotiating strategy. Tr. 2336–
37; Ex. 164. On December 30, 2008, Buono learned that another assisted living
company that leased facilities from Ventas would be purchasing those
properties from Ventas for a very high price. Tr. 2337–39. Buono alerted Bebo
that he believed the reason the company was paying such a high price was
because it ran into “covenant issues” with Ventas. Tr. 1864, 2337–39; Exs. 165,
166.
Bebo begins considering a scheme to include ALC employees and
other nonresidents in covenant calculations.
In January 2009, Bebo began mulling the idea of including ALC employees
in the covenant calculations because of the intensifying challenge of satisfying
them with actual residents. Tr. 1865–66, 1900–01, 2339, 3046–47. The genesis
of Bebo’s idea was her discovery that at least one CaraVita employee had
previously signed a lease and was living at one of the Ventas facilities.

27

Tr. 1882–83, 3993–94. Bebo did not know whether CaraVita had ever included
an employee who was leasing a unit in a facility in the covenant calculations,
and never bothered to find out, although she believed one was included.
Tr. 1885–87, 3994; see Jt. Supp’l Ex. 1 at 16. But there is no other evidence
that ALC’s predecessor ever counted one of its employees who leased a room
toward the covenant calculations. Buono similarly learned, in early 2009, that
CaraVita had a few employees staying in units at its properties. Jt. Supp’l Ex.
1 at 17, 58.
In addition to the handful of employees in the taskforce, ALC required
certain employees who traveled to its properties, including the Ventas
facilities, to spend the night there rather than at a hotel. Tr. 1551, 1874–77,
1878–79, 2966–67. These included regional management staff, financial
management staff, and marketing, information technology, and finance
personnel. Tr. 1306, 1551.
At that time, Fonstad was aware of an effort by ALC to send personnel to
the Ventas properties to “improve operations … in addition to the usual
practice of sending people to … visit the properties.” Tr. 1305–06. Fonstad
recalled that information technology and financial personnel were among those
who traveled to improve operations. Tr. 1306. He testified that the number was
as many as 12 to 15 before decreasing. Tr. 1306. Fonstad understood the
program’s focus to be standardizing operations and giving home office
personnel field experience. Tr. 1307.
At some point, Fonstad learned of “a discussion where the idea was
brought up that … if employees stayed at the [Ventas] facilities, they should
be able to be included in the covenant calculations.” Tr. 1307. Fonstad believed
Bebo’s proposal was restricted to the limited number of ALC employees who
actually stayed at the Ventas facilities. Tr. 1305–09, 1314, 1316–17.
ALC general counsel advises Bebo about her idea of including
employees in the covenant calculations.
Bebo sought Fonstad’s advice on whether the lease permitted ALC to rent
rooms to employees and include such employees in the covenant calculations.
Tr. 1307–08, 1888–90, 2339–40, 3994–95. Fonstad testified that while
discussing Bebo’s proposal, he learned Bebo would have a call with Ventas and
discuss including employees in the covenant calculations. Tr. 1309–10.
Because Fonstad had concerns that the lease did not permit this, he drafted a
memorandum in a January 19, 2009, email with his legal advice and sent it to
Bebo. Tr. 1310; Ex. 1152.
Fonstad’s memorandum is framed as an inquiry about the provisions of
the lease that could impact ALC’s ability to rent rooms to employees and
28

relatives. It points out that the lease limits the uses of the Ventas facilities,
but that Ventas may agree to employee renting after discussion and written
agreement. Ex. 1152 at 1. Fonstad’s email then discussed particular lease
provisions in varying degree of detail. Id.
Fonstad noted that the lease’s section 7 required ALC to use the Ventas
facilities only for their “Primary Intended Use” and to “operate each Facility in
a manner consistent with its current operation as a quality health care
facility.” Ex. 1152 at 1; see also Ex. 142 § 7.2.1. The memorandum explained
that because the primary use of most locations was assisted living care and
only one facility was designated for independent living, renting rooms for
lodging could be inconsistent with the facilities’ intended uses; nevertheless,
Ventas might agree that limited rentals to employees would be consistent with
designated operations. Ex. 1152 at 1; Tr. 1314, 1319–20; see Ex. 142 at
Schedule 1.3, B-14 (defining the primary intended uses of the facilities).
Fonstad used the term “limited” to describe “rental to employees” for two
reasons: (1) he understood Bebo proposed “a limited number of employees” and
(2) he anticipated that Ventas would not agree to “an unlimited number of
people” and instead “would want to have some limit on it.” Tr. 1314. Fonstad
believed that Ventas would want to limit the number of ALC employees housed
at the facilities because the lease protected the Ventas facilities’ primary
intended uses and Ventas would be concerned if they were used significantly
for other purposes. Tr. 1314. When he drafted the memorandum, Fonstad did
not understand that, at any one time, ALC would propose to include 75 to 100
employees in its covenant calculations. Tr. 1317.
Fonstad also discussed the lease’s prohibition on ALC entering into
transactions with affiliates unless in the ordinary course of business, with
terms disclosed to Ventas in advance, and “on terms no less favorable than
would be obtained in a comparable arms-length transaction” with someone
unrelated to ALC. Ex. 1152 at 1; Ex. 142 § 8.1.3. According to Fonstad, the
lease’s broad definition of an “affiliate” would include ALC’s employees, agents,
and anyone with a so-called “reason to go” to a facility on behalf of ALC.
Ex. 1152 at 1; Ex. 142 at B-2. Fonstad strove to convey to Bebo that
transactions with affiliates required advance disclosure to Ventas. Tr. 1313.
Fonstad speculated that “Ventas may not object to renting units to employees
and relatives of ALC employees, especially if rents are the same as we charge
nonaffiliated persons.” Ex. 1152 at 1.6

It is worth noting, however, that the lease language requiring terms “no
less favorable” is not necessarily limited to rent. Ex. 142 § 8.1.3. Tenants were
also required to have approved residency agreements covering the terms of the
6

29

Next, Fonstad wrote that “Section 24.1 of the lease prohibits subleasing
all or any part of any Leased Property.” Ex. 1152 at 1; see Ex. 142 §§ 24.1, .2.
As a result, renting rooms to employees without an approved residency
agreement would have arguably been a sublease prohibited by sections 24.1
and 24.2.
Fonstad also alerted Bebo to the fact that the lease “may only be modified
by a writing signed by both” Ventas and ALC. Ex. 142 § 42.6 (emphasis added);
Ex. 1152 at 1.
Fonstad concluded his email by informing Bebo she should send Ventas a
letter confirming an understanding that her program was acceptable to Ventas
after getting verbal agreement. Ex. 1152 at 1; see Tr. 1315. Although Fonstad
did not reference the lease’s covenant sections in the body of his email, that is
unsurprising, given that the lease provisions he did discuss were preconditions
to Ventas agreeing to count ALC employees or others for purposes of the
occupancy covenants. Fonstad did, however, include language about the
occupancy covenants in the draft template he attached to his email, which was
essentially a draft letter that ALC could finalize and send to Ventas in the
event Ventas agreed to ALC’s proposal. Ex. 1152 at 2. Fonstad’s template
stated in part:
This letter confirms the understanding we reached about
the interpretation of certain terms of the [lease] …
[ALC] proposes to rent a limited number of units to
employees of [ALC] for the purpose of facilitating their
ability to assist in operating the [Ventas facilities]. … It
is not expected that the number of units rented to ALC
employees would exceed ___ at any one time. Rents paid
would be the same as charged to unrelated parties.
In addition, from time to time, relatives of ALC employees
may become residents of one or more of the Facilities. The
rentals would be on terms no less favorable than would be
obtained in comparable arms-length transactions with
unrelated parties.

tenancy, including the payment of a security deposit. Id. § 8.1.11(f), B-2. If ALC
was to rent to employees, it would have needed the same agreements with
them to ensure that they were being treated no differently than unaffiliated
third parties.

30

The units would only be considered occupied for purposes
of the minimum average occupancy covenants[—but not
the coverage-ratio covenants—] for the days that rent is
actually paid.
Ex. 1152 at 2 (blank space in original).
Fonstad’s draft letter referenced a “limited number” of rented rooms for
the same reasons he described previously: he “thought that Ventas would
require that there be a limit, and also that was what [he] understood was the
proposal that ALC was going to make.” Tr. 1316–17.
Similarly, when he drafted the template, Fonstad did not know ALC would
propose to include employees in the covenant calculations outside of the time
periods they spent at Ventas facilities. Tr. 1317. Fonstad understood that ALC
employees could not be included in covenant calculations if they did not
actually stay at the Ventas facilities; his understanding was that Bebo’s
proposal hinged on including employees “in the calculation if they stayed at
the facility.” Tr. 1308. Bebo did not ask Fonstad if the lease permitted including
employees in the calculations when they did not visit the Ventas facilities
during the reporting period, so Fonstad did not tell her whether it was legally
permissible. Tr. 1308–09. Fonstad testified that Bebo never discussed with him
the idea of including the same employees at multiple facilities or employees
who had a reason to go to the Ventas facilities—but did not actually go—in the
covenant calculations. Tr. 1308–09, 1509.
Fonstad referred to relatives in the template because the discussion he
had with Bebo included the possibility of her mother staying at a facility and
Bebo’s belief that she should be included in the calculations if that occurred.
Tr. 1318. Other than Bebo’s mother, Fonstad does not recall Bebo mentioning
any other ALC relatives she “proposed to be included in the covenant
calculations.” Tr. 1318.
Fonstad testified that he referenced the occupancy covenants because “it
was important that it clearly state that the … proposal was that these
individuals … would be included in the covenants, and that was the important
element.” Tr. 1319. Bebo testified that Fonstad advised her that Ventas needed
to agree so that ALC could include employees in the covenant calculations. Tr.
1895.
Fonstad’s template then asked Ventas to agree and confirm that ALC’s
proposal was allowable under the lease, specifically referencing sections 7.2.1
and 8.1.3. Ex. 1152 at 2. Fonstad, who believed the lease required a signature
to document Ventas’s acceptance, concluded his draft letter with a blank

31

signature block for Ventas to sign if it accepted the proposal. Tr. 1319–20;
Ex. 1152 at 2.
Bebo and Buono speak to Solari by phone on January 20, 2009.
On January 20, 2009, the day after Fonstad’s email, Bebo and Buono
participated in a telephone call with Solari. Tr. 413–14, 2342–43. Before the
call, Buono emailed Bebo to warn her that ALC was either in violation of the
covenants at some of its facilities for the fourth quarter of 2008, or in danger
of missing their occupancy targets for the first quarter of 2009. Tr. 1899–1900;
Ex. 174 at 1–2. There is no evidence that Bebo or Buono gave Solari any
advance notice of the issues they planned to discuss at the meeting.
Solari and Buono testified consistently about the call. Solari said the two
topics discussed were: (1) subleasing units at one of the Ventas facilities to a
hospice provider; and (2) whether ALC corporate employees traveling to the
facilities could overnight there instead of at hotels. Tr. 414. Buono agreed,
recalling discussion of the potential hospice sublease and a proposal to have
ALC employees stay at the Ventas facilities. Tr. 2344. Neither recalled any
discussion of the occupancy or coverage ratio covenants. Tr. 416, 2344.7 Solari
was emphatic that he would have remembered a request to include ALC
employees in the covenant calculations because it is “outlandish” and would
“circumvent the integrity of the financial covenants.” Tr. 417, 422–23. Solari
further testified that he would have never agreed to the proposal, as he lacked
the authority to do so without the approval of his boss or maybe Ventas’s CEO,
and in fact, that he did not agree to any of Bebo’s proposals over the phone.
Tr. 409–10, 415–18. Buono confirmed that Solari did not agree to anything
during the call, and that Solari asked for proposals to be made in writing.
Tr. 2344–45.
Bebo’s version of the call differed in significant respects from Solari’s and
Buono’s. According to Bebo, Solari agreed that ALC, at Bebo’s discretion, could
include an unlimited number of employees and others who had a “reason to go”
to the facilities in the covenant calculations, even if: (1) those employees did
not actually stay at the facilities; (2) ALC did not disclose to Ventas the number
of employees included in the calculations; and (3) ALC, instead of the
employees, “paid” rent for the units. Tr. 1904, 1907–09, 1912–13.

In his interview during the Milbank investigation, Buono was less sure
about what Bebo had told Solari on the call, and suggested that long-term
leases to ALC employees were discussed. Jt. Supp’l Ex. 1 at 64. Still, he did not
recall Bebo telling Solari that employee leases would be used to meet
occupancy covenants. Id.
7

32

However, Bebo concedes she spent more time discussing the hospice
sublease proposal on the call than the issue of employees leasing rooms.
Tr. 1914. She also concedes she never told Solari that: (1) ALC would fail
covenants without including employees; (2) no cash would change hands for
the employee-leased rooms; (3) ALC would treat a room as occupied for an
entire month even if the employee stayed there for only one night or never
stayed there at all; (4) most of the rooms ALC would include in the calculations
would never be occupied; (5) Bebo’s friends and former ALC employees would
be included in the calculations; and (6) the same employee could be included at
multiple facilities during the same time period. Tr. 1903, 1920–23, 4007–08.
I do not credit Bebo’s version of what Solari agreed to during the call for
several reasons. For one, as discussed below, none of it was reflected in the
email she later prepared that summarized the call. If Bebo had really obtained
a sweeping agreement from Solari allowing anyone who had a reason to go to
the facilities to be included in the covenants, surely she would have
memorialized it. Yet, despite Bebo’s claims to the contrary, Tr. 4010–11; Resp’t
Supp’l Post-hr’g Reply Br. at 27, there is no evidence she took contemporaneous
notes of the call with Solari that support her account. Bebo did not mention the
existence of any such material to the Milbank investigators, and they
determined that no documents were lost or erased. See Jt. Supp’l Ex. 1 at 20–
21; Tr. 627–28; Ex. 558 at 1. Even if Bebo took notes that were later lost, it is
hard to fathom why she did not use them to at least ensure that the email sent
to Solari two weeks later reflected her understanding of what he actually
agreed to on the call. See Tr. 4011 (Bebo claimed that she last saw the notes in
April 2012). Relatedly, if Solari had indeed agreed to major concessions during
the call, it seems peculiar that Bebo and Buono would have waited an entire
week just to begin drafting a follow-up message to Solari.
Second, according to Buono, Solari usually negotiated “with the premise
that [Ventas] will not ‘give away’ anything.” Ex. 140 at 1. Giving up so much
on the call would have been out of character for him. Solari credibly testified
that he lacked the authority to agree to covenant changes anyway. Tr. 416.
Third, it appears she told the Milbank investigators a different story: that
the call was only about whether ALC could rent units to its employees, and not
about including employees in the covenant calculations. Jt. Supp’l Ex. 1 at 20–
21. Although Bebo told the investigators that Solari said he did not care how
many employees rented units, agreeing to allow unlimited employee rentals on
an arms-length basis is very different than agreeing to allow ALC to include
employees in covenant calculations. Id. at 21.
Finally, the other two participants did not recall the call in the way Bebo
did, and she fails in her attempt to undermine their testimony. To begin with,

33

Bebo’s assertion that Buono’s testimony corroborates her account is
unpersuasive. See Resp’t Supp’l Post-hr’g Br. at 9–10. Contrary to her claim
that Buono testified that Solari “expressed no concern” about ALC paying for
employee apartments, Buono actually testified that “Solari never said
anything one way or the other” because “it wasn’t part of the discussion.” Id.
at 9; Tr. 4657–58. At best, Buono’s testimony demonstrates the absence of any
agreement by Solari. That Buono himself understood that ALC intended to pay
for the employee apartments is beside the point. See Tr. 4657, 4659. Similarly,
Buono simply testified that in 2009, he thought Ventas was aware that ALC
was “going to put employees … into the properties” and that “a reasonable
person would only think we’d do that in order to meet covenants”; he never
testified that Solari or Ventas had agreed to anything. Tr. 2489–90; cf. Resp’t
Supp’l Post-hr’g Br. at 9. Further, although it may be true that by including
employee rooms in the covenant calculations from 2009 to 2012, Buono “acted
consistent with the belief that there was an agreement with Ventas,” see Resp’t
Supp’l Post-hr’g Br. at 10, that does not mean he actually believed one existed;
he may have acted as he did for any number of reasons, including out of fear
that he would be fired if he did not follow Bebo’s directions. See Tr. 2348.
Bebo has not made a compelling showing that Buono testified falsely about
the call with Solari because the Division made him aware of evidence that Bebo
“blamed things on” him; Buono could not recall what those “things” were at the
hearing, which suggests they lacked significance. See id.; Tr. 2434–35, 2490–
91. In any event, even if Buono’s testimony were influenced by his settlement
with the Commission or by matters the Division told him—although there is
no evidence that the Division acted inappropriately—there are plenty of other
reasons to be skeptical of Bebo’s account of the call with Solari.
Similarly, Bebo lacks support for her skepticism of Solari’s account. Bebo
argues that the Milbank memorandum demonstrates that Solari agreed to
employees renting rooms, see Resp’t Supp’l Post-hr’g. Br. at 18; Ex. 1879 at 4;
Tr. 3480, but the Milbank investigators did not speak to Solari, and instead
noted only that a lawyer for Ventas said that Solari could not deny Bebo’s
account of the call. Ex. 1879 at 4; Tr. 3480. It is likely that Solari could not
deny Bebo’s account because at the time of the investigation, he could not recall
the telephone conversation having taken place. See Tr. 451–52. The call took
place over three years before the Milbank investigation—by which time Solari
had long ceased to be employed by Ventas—and there is no indication that
Solari took notes of the call. See Tr. 3480. Unlike at the hearing, there is also
no indication that during the Milbank investigation, Solari was provided with
the follow-up email Bebo sent him, which may well have reminded him about
the call. See Ex. 1879 at 4. However, by the hearing, with his recollection
refreshed, Solari testified about the call as described above. See Ex. 175;

34

Tr. 413–14, 450–51. Although Bebo contends that Solari’s “recollection of the
call is inadmissible and should be given no weight” because of his “failed
memory,” Resp’t Post-hr’g Br. at 82, memory almost always fades over time,
and Solari was ultimately able to remember some basic details of the call after
being refreshed. Contrary to Bebo’s suggestion, there is no evidence that the
Division wrote Solari’s testimony for him. See Resp’t Post-hr’g Br. at 82. I find
his recollection credible because it corresponds in substance with the email
Bebo sent him two weeks after the call and with ALC’s practice of lodging select
traveling employees at facilities in lieu of hotels.
Bebo contends that Fonstad also participated in the call with Solari, but I
find it more likely than not that he did not participate. Tr. 1504–05 (Fonstad
did not recall being on the call with Solari); Jt. Supp’l Ex. 1 at 81 (According to
the Milbank investigation, Fonstad only “later heard that a conversation
between Bebo and Buono and Ventas had gone well”). However, Fonstad may
have been in the room while the call took place. Tr. 2781–82 (Buono
acknowledged that he previously testified that Fonstad was in the room during
the call); Ex. 2122 at 2 (notes memorializing Buono’s proffer where he stated
that Fonstad was in the room); Tr. 3217–18 (Zaffke, Bebo’s executive assistant,
testified that Fonstad was in Bebo’s office during the call). Still, because
Fonstad’s general practice was to take notes of meetings he participated in, the
lack of notes strongly suggests that even if he was present, he did not
participate. Tr. 1304.
Whether Fonstad was involved in the call or not, Bebo did not rely on his
advice when ultimately including employees and others in the covenant
calculations as discussed below. Fonstad testified that he never gave Bebo
additional legal advice about using employees for covenant compliance beyond
what was in his original memorandum. Tr. 1508. No other memo from Fonstad
exists, and his general practice as ALC’s general counsel was to put legal
advice to management in a written memo. Tr. 1304. At the hearing, Fonstad
testified that “no one told” him “that ALC had started using employees to meet
the Ventas lease covenants” and that he had not approved of the practice.
Tr. 1507–08; see also Jt. Supp’l Ex. 1 at 81 (also unaware of the inclusion of
“phantom” employees who never stayed at the properties). Although Fonstad
understood that ALC and Ventas shared “a good working relationship” and
that “Ventas was not holding ALC to the letter of the lease with respect to
reporting requirements,” Fonstad had told Bebo and Buono that “it was
important to get Ventas’s consent in writing” before “including employee leases
in the covenant calculations.” Jt. Supp’l Ex. 1 at 81; Tr. 633–34 (Fonstad
advised Bebo that ALC should not enter into the “employee arrangement”
unless there was a “written confirmation agreement” with Ventas); Ex. 558 at
4. Buono recalled that Fonstad’s advice made him believe that ALC’s rental of

35

rooms to employees or individuals for use in covenant calculations was
“kosher,” Tr. 4651–53, but the other evidence suggests that Fonstad probably
only meant it was “kosher” if ALC management followed his advice and
obtained Ventas’s written consent. See Jt. Supp’l Ex. 1 at 81. Even according
to Bebo’s account of the call—which I discount—she only had an oral
agreement with Solari.
Bebo follows up by email with Solari.
A week later, on January 27, 2009, Buono prepared an initial draft of an
email to Solari to follow up on the call. Tr. 2467–70, 2756–58; Exs. 179, 1320A.
Buono recalls that Fonstad was present when he drafted the email, but there
is no testimony or documentary evidence about Fonstad’s role in composing the
draft. Tr. 2354, 2468. Significantly, Buono did not copy Fonstad when he
emailed Bebo his draft. See Ex. 1320 (cover email). The draft email does not
mention the Ventas lease covenants and does not seek to memorialize any
agreement made by Solari during the call; rather, it merely confirms a
notification that ALC will be renting “rooms to employees and/or family
members … in the ordinary course of business and on terms no less favorable
than would be obtained in a comparable arms-length transaction with an
unrelated third party.” Ex. 1320A. At the hearing, Buono explained that he
assumed Solari would “reasonably think” that ALC wanted to include the
employees it rented to in the covenant calculations and that the proposal
“makes no sense” otherwise. Tr. 2758. However, Buono admitted that there
was never any direct indication from Solari confirming that Ventas understood
it in the same way. Tr. 2489–90, 2496.
Further, Buono’s assumption that “there would be no other reason to put
[ALC employees] in the [Ventas] houses other than to put them in the
calculations” was not entirely reasonable. Tr. 2487. As noted, ALC generally
required certain lower-level employees who traveled to its properties (Ventasowned or not) to spend the night there in lieu of staying at a hotel, presumably
because ALC achieved cost or productivity benefits by doing so. Tr. 1551, 1874–
79. Indeed, the context of the call with Solari and the request for legal advice
from Fonstad in part concerned whether ALC could temporarily house
employees in the facilities where they were working. Tr. 1550–51. Thus, there
may very well have been reasons unrelated to the occupancy covenants to
house ALC employees at the facilities.
Bebo collaborated with her friend and ALC’s vice president of sales and
marketing, Bucholtz, to edit Buono’s draft summarizing the call, and she sent
it to Solari on February 4, 2009. Tr. 1931–35, 2934, 2949–50, 2987–92; Exs.
184, 1320, 1320A, 1343. She copied Buono on the email, but not Fonstad,
further suggesting that Fonstad did not participate in the call. See Ex. 1343 at

36

2. The email is similar to Buono’s draft and is overwhelmingly devoted to
seeking advanced written approval of exceptions to specific lease provisions
implicated by a hospice sublease at the Peachtree facility. See Ex. 1343 at 2. It
devotes only a single paragraph (about one-tenth of the email) to ALC renting
rooms to its employees:
In addition to the potential hospice lease, we are also
confirming our notification of our rental of rooms to
employees. We confirm that all rentals related to
employees are in the ordinary course of business and on
terms no less favorable than would be obtained in a
comparable arms-length transaction with an unrelated
third party.
Ex. 1343 at 2.
Like Buono’s draft, the email purports to “confirm[]” ALC’s “notification”
about employee rentals, but makes no reference to any agreement by Solari,
further suggesting that Solari did not agree to anything on the call. Id. There
is no mention of rentals to any nonemployees, such as family members, friends,
or other persons with a “reason to go.” See Tr. 1904. In fact, the only difference
between Buono’s draft of this portion of the message and the final version is
that Bebo took out the language about potential rentals to “family members”
in addition to “employees.” Compare Ex. 1320A, with Ex. 1343 at 2. Because
the email speaks of the proposed rental terms as comparable to “arms-length
transaction[s],” there is no indication, for example, that ALC intended to rent
rooms for employees who would not pay for them. Ex. 1343 at 2. Unlike the
discussion of the hospice sublease, there is also no discussion of other lease
requirements such as primary intended use, subleasing, or anything that
would be relevant to the ways ALC actually ended up conducting the employee
rentals. More important, there is no discussion of the financial covenants.
Finally, unlike the hospice proposal, Bebo’s email does not ask for Ventas to
take any action or follow up on the notice of ALC’s planned rentals to
employees. See id. (Bebo concludes her email by asking Solari to “call at [his]
earliest convenience to address any questions … related to this potential
hospice relationship”).
Solari responded to Bebo the same day and copied Buono and Johnson,
advising that “Bill Johnson will be following up with you and/or John with any
questions or requests for further information regarding this matter.” Id. at 1.
As Buono reasonably testified, Solari’s response does not indicate that Ventas
agreed to include ALC employees in covenant calculations. See Tr. 2346. At
most, one can infer from Solari’s response that “Ventas would consider the
employee leasing arrangement.” Jt. Supp’l Ex. 1 at 59. Similarly, when

37

Johnson wrote to Bebo and Buono on February 13 (copying other Ventas
employees) asking to schedule a call about the hospice opportunity ALC
wanted to pursue, there is no indication that Ventas approved of Bebo’s
notification about employee rentals, and there is no proof that Ventas knew
about or agreed to ALC including employees in the covenant calculations. Ex.
1343 at 1. I do not credit Bebo’s testimony that Ventas’s silence confirmed its
agreement that ALC could include in the calculations (both occupancy and
coverage ratio) an unlimited number of employees who did not actually stay at
the facilities, as long as those employees had a “reason to go.” Tr. 1938, 1942.
Other evidence from February 2009 does not indicate that ALC had an
agreement with Ventas about including employees and others in the covenant
calculations. On February 8, 2009, Hokeness, ALC’s director of internal audit,
drafted a memorandum intended for Bebo, Buono, Fonstad, and ALC’s audit
files. Ex. 1129 at 1; Tr. 3036. It is unclear whether the memo was ever finalized
and circulated. See Tr. 3052–53, 3122–23 (Hokeness did not recall circulating
the memo); but see Tr. 4046–47 (Bebo recalled receiving the memo in hard
copy). In the memo, Hokeness discussed “alternative strategies to improve
occupancy” and meet the lease covenants that management looked at,
including “sub-leases to hospice companies … and using the available units to
house certain ALC employees on site specifically to assist the local team.”
Ex. 1129 at 1–2. Hokeness explained that although the “lease arrangements
with Ventas do not provide for employees to be considered as residents[,] [i]t is
my understanding that Ventas is aware of and had approved our treatment of
employees as residents as it pertains to the fourth quarter covenant
calculations.” Id. at 2. Yet all Hokeness’ memo proves is that someone, such as
Bebo or Buono, told him that Ventas had approved of counting employees for
covenant compliance. It does not show that an agreement between Ventas and
ALC actually existed.
Similarly, Buono’s comments at a February 13, 2009, ALC disclosure
committee meeting, where he told the committee that “Ventas lease covenants
continue to be monitored and correspondence between ALC and Ventas has
occurred whereby the covenant calculations have been clarified as to census,”
Ex. 124 at 3, do not indicate any agreement with Ventas about counting
employees in the covenant calculations. First of all, it is not completely clear
what Buono meant at the committee meeting. Even if he was talking about an
agreement with Ventas to include employees in covenant calculations, Buono
testified at the hearing that he may have been referring to the subtext he had
read into Bebo’s conversation with Solari, namely, “that Ventas would realize
[employees] could be put in the covenant calculations.” Tr. 2496 (emphasis
added). There is no indication, however, that there was any written agreement
with Ventas to that effect.

38

Bebo orders ALC staff to include nonresidents in the covenant
calculations but to not disclose that fact to Ventas.
Each quarter, pursuant to the lease, ALC sent Ventas a package of
materials documenting its compliance with the covenants. Tr. 749; Exs. 32–45.
Following the January 20, 2009, call with Solari, when ALC was working on
its calculations for the fourth quarter of 2008, Bebo directed Buono to include
ALC employees and their attendant revenue in those covenant calculations,
even though Ventas had not agreed to their inclusion and ALC’s board had not
approved the practice. Tr. 754, 1974–77, 2347–48, 2351; see Ex. 32. They
discussed that the practice “had to be something real” and that ALC could only
include “employees that were staying at the properties.” Tr. 2348. Bebo
directed Buono not to inform Ventas of the practice or to provide Ventas with
calculations that revealed the inclusion of employees and associated revenue.
Tr. 2348–49, 4669–70. Buono followed Bebo’s directives because he felt he
would be terminated if he disobeyed. Tr. 2348.
Robin Herbner was responsible for preparing the covenant calculations
and the quarterly materials that ALC sent to Ventas. Tr. 511, 519, 749–50. For
the fourth quarter of 2008, Bebo and Herbner understood ALC would include
only employees who actually stayed overnight at the Ventas facilities. Tr. 756–
57, 1989. To perform the calculations, after the quarter had ended, Herbner
gathered information from Bebo showing which employees had stayed at the
Ventas facilities, and for what days. Tr. 756–57, 798–802; see also Tr. 2944–
46, 2993. Herbner performed her calculations on an Excel spreadsheet that she
referred to as the occupancy reconciliation tab. Tr. 791–93; see, e.g., Ex. 17.
Herbner calculated the revenue associated with the employees and
reported the information to assistant controller Ferreri, who posted journal
entries to record the revenue on ALC’s general ledger. Tr. 757–58, 803–04,
807–08, 1221–22. Bebo determined the daily rate used for calculating revenue
associated with the added employees. Tr. 806, 824. After Ferreri posted the
journal entries, Herbner included the revenue associated with the employees
in the financial materials sent to Ventas. Tr. 808–09.
Bebo gave Herbner a directive like the one she gave Buono: ALC’s
documentation to Ventas need not disclose ALC’s use of employees in the
covenant calculations. Tr. 2088–89. Accordingly, Bebo understood Ventas
could not figure out that ALC included its employees in the covenant
calculations from the quarterly information. Tr. 2087–88.
Ferreri, for his part, supervised the posting of journal entries to ALC’s
general ledger, including the ones that resulted from the occupancy
reconciliation process. Tr. 1223–25. But the journal entries that resulted from

39

occupancy reconciliation were not like normal journal entries. Prepared and
posted after the end of the month, these entries recorded revenue on the
accounts of the eight Ventas facilities, and recorded a corresponding amount
of “negative revenue” in a corporate-level revenue account known as the 997
account. Tr. 1225, 1227–28, 1236; Exs. 378–425, 427–450 (journal entries
showing supposed nonresident revenue and offsetting negative revenue in the
997 account). The two transactions offset, so there was no impact on ALC’s
consolidated financial statements. Tr. 1230–31, 1240–41, 1244–45. Bebo
understood this process. See Tr. 2031, 2061–62, 2065–66, 2067–68, 2771–72,
4129–30, 4133–34, 4137–38, 4585–87. As a result, the nonresident occupants
and additional revenue that ALC reported to Ventas were not reported in
ALC’s periodic reports, which Bebo also understood. Tr. 2074–75, 2771–72.
When Ferreri was assigned to post the employee revenue journal entries,
he became anxious because of the unusual nature of the transactions, which
Ferreri considered “definitely not consistent with GAAP.” Tr. 1227–28, 1243–
44. In his decades-long career, Ferreri had never seen an arrangement that
involved offsetting positive and negative revenue, as opposed to the typical
situation involving revenue and an offsetting expense. Tr. 1220–22, 1228,
1253–54, 1261. Also, ALC accountants were otherwise not involved in posting
revenue-related journal entries, which occurred automatically at the point a
resident purchased a good or service. Tr. 1228–30. Ferreri’s concerns
intensified when he eventually learned the journal entries related to the
covenants in the Ventas lease. Tr. 1254. Because of his discomfort with the
process, Ferreri requested either Buono or Bebo sign off on the nonresident
revenue journal entries. Tr. 1246–47. Before then, Ferreri never requested
that a CEO or CFO approve a journal entry, and neither Bebo nor Buono had
signed any other journal entries. Tr. 1246–48. Over the next three years, Bebo
would ultimately sign many journal entries reflecting nonresident revenue and
offsetting negative revenue in the 997 account. Tr. 2055–56, 2059–62, 2068–
69; see, e.g., Ex. 427 at 1 (of 5 PDF pages); Ex. 433 at 4 (of 8 PDF pages); Ex. 447
at 177174; Ex. 449 at 1 (of 5 PDF pages).
ALC considers purchase of New Mexico properties from Ventas in
exchange for covenant relief.
On February 17, 2009, Bebo and Buono discussed a new proposal with
Solari for ALC to purchase two Ventas properties in New Mexico in exchange
for Ventas waiving the occupancy and coverage ratio covenants. Tr. 429–31,
1951–52; Ex. 188 at 2 (of 3 PDF pages). Solari told them “that eliminating the
covenants entirely was not likely to occur, irrespective of their offer for [the
New Mexico properties],” but encouraged them to submit a proposal. Ex. 188
at 2 (of 3 PDF pages).

40

On February 19, Bebo emailed Solari an offer to purchase the two
properties in exchange for revising the lease so that the facility coverage ratio
would be temporarily waived and the portfolio-wide coverage ratio covenant
would be reduced. Ex. 190 at 2–3 (of 3 PDF pages). She reassured Solari that
ALC had “tried to address your concerns that the properties be managed to
adequately support lease payments.” Id. at 3.
On February 21, Buono drafted a proposal for the board’s consideration
that largely mirrored the terms proposed in Bebo’s February 19 email.
Tr. 1950–51; Ex. 193 at 2–3 (of 3 PDF pages). Based on conversations with
Solari, Buono mistakenly believed that ALC had reached a deal with Ventas.
Tr. 2360–61; see Ex. 192.
On February 23, ALC’s board met. Ex. 100. The minutes reflect that Bebo
reported that ALC was in compliance with the Ventas covenants and that ALC
may seek covenant relief from Ventas in connection with the purchase of two
New Mexico properties. Tr. 562–63, 1980–81, 2815–16; Ex. 100 at 2–3. Bebo
acknowledges that she did not disclose that the reason ALC was able to meet
the covenants was because it was already including employees. Tr. 1974.
Despite the lack of corroboration in the board minutes or other evidence,
Bebo testified that the board approved the practice of including in the covenant
calculations rooms ALC rented for “people with a reason to go.” Tr. 1970–71;
see generally Exs. 99–100. Five directors—Bell, Buntain, Hennigar,
Rhinelander, and Roadman—testified that no one discussed including ALC
employees in the covenant calculations at the February 23 meeting, and that
the board did not approve the practice. Tr. 563–64, 566–67, 1363, 2646–48,
2816, 2824; Ex. 492A at 55–56. Fonstad, who took the minutes, similarly
testified that the inclusion of employees in the covenant calculations was never
discussed. Tr. 1521–24. Buono also testified the board did not approve the
inclusion of employees in the covenant calculations at that meeting. Tr. 2761.8

Buono testified that on February 23, 2009, before the board meeting,
Rhinelander said that ALC “would do the employee leasing program.” Tr.
2395–96; see also Jt. Supp’l Ex. 1 at 62 (according to Milbank, Buono recalled
in early 2009 “participating in a meeting with Rhinelander and Bebo in Bebo’s
office” where “Rhinelander said that ‘we’ll just add employees now’”). Bebo also
testified at one point that she apprised Rhinelander of her plan in the presence
of Herbner. Ex. 496 at 128–29. However, neither Rhinelander nor Herbner
could recall the conversations described by Buono and Bebo. Tr. 841–42, 2822–
24. Rhinelander instead recalled a reference to ALC including employees in the
Ventas covenant calculations in the fall of 2011, but did not understand what
8

41

On February 25, Ventas countered with an offer that ALC purchase the
two New Mexico properties plus another poorly performing property in
exchange for temporarily waiving facility coverage ratios without reducing the
portfolio-wide coverage ratio or waiving occupancy covenants. Tr. 224–26, 435–
36; Ex. 194; Ex. 196 at 81834–35. During a call later that day between Bebo,
Buono, Fonstad, and Ventas representatives, Ventas executive Doman told
ALC that Ventas “take[s] covenant violations very seriously.” Tr. 1514–16;
Ex. 197 at 1 (of 3 PDF pages).
ALC viewed the counter-proposal as unacceptable, so it never obtained
even the temporary covenant relief offered by Ventas. Tr. 436–38, 2360–61;
Ex. 198. ALC’s effort to obtain covenant relief reinforces the notion that Bebo’s
recollection of her January 20 discussion with Solari is inaccurate. After Solari
was dismissed in April 2009 as part of a reduction in force, Bebo admits that
she never spoke with anyone else at Ventas about the use of nonresidents in
the covenant calculations. Tr. 399–400, 460–61, 4074.
Under Bebo’s direction, ALC begins to include individuals who did not
stay at the Ventas properties and who were not ALC employees in the
covenant calculations.
After the New Mexico negotiations fell through, the occupancy
reconciliation scheme continued and was expanded to compensate for declining
occupancy at the Ventas facilities. See Ex. 377 at 24–25 (ALC included over
100 nonresidents by the end of 2009). Without including nonresidents, ALC
would have repeatedly failed to satisfy the occupancy and coverage covenants
for the facilities. Id. at 24–27. The process that Bebo oversaw to make up for
these shortfalls, however, was no longer limited to actual ALC employees who
actually stayed at Ventas properties. See generally Ex. 552A (summary exhibit
showing nonresidents who should not have been included in the covenant
calculations).
As she did for the fourth quarter of 2008, Herbner performed the covenant
calculations after the first two quarters of 2009 and provided the resulting
the reference meant until March 2012. Tr. 2816–18. If Rhinelander did approve
of employees leasing rooms, it logically would have been to house task force
employees in available rooms to improve facility performance. See Tr. 2759–
61. Even if Rhinelander said what Bebo claims he did, it does not reflect
knowledge of Bebo’s scheme to satisfy the covenant requirements. Bebo admits
that in February 2009, before the board meeting, she had not yet determined
to include large numbers of employees and others in the covenant calculations.
Tr. 1989–90.

42

revenue amounts to Ferreri for ALC’s books. Tr. 811, 815–16, 824–25, 827–28.
Unlike the fourth quarter of 2008, however, Herbner determined the number
of employees by calculating the shortfall in occupied units and revenue needed
to meet the occupancy and coverage ratio covenants. Tr. 816–17. Bebo
understood this process. Tr. 1996–99, 2354–55. She even would sometimes
direct ALC accounting staff to get the coverage ratio above certain levels.
Tr. 2374–75; Ex. 304 (“[Bebo] told us we need to get it over the .80X.”).
Once Herbner had calculated the number of nonresidents that needed to
be included, Bebo provided Herbner with the names of nonresidents for her
occupancy reconciliation spreadsheet. Tr. 816–17, 2350–53; see also Tr. 1994,
1999–2000, 4076–77 (Bebo conceding she typically provided the names).
However, Bebo no longer provided documentation showing the days, if any,
that employees or other nonresidents actually stayed at the Ventas facilities.
Tr. 816–17. Instead, Bebo directed that each nonresident be considered an
occupant for at least a month, and normally the entire quarter. Tr. 989–90,
2352. Thus, Bebo knew that ALC included nonresidents who did not visit or
stay at Ventas facilities. Tr. 1989–90, 2249–64.
The names that Bebo selected for inclusion in the covenant calculations
included:
(1) Bebo’s parents, both under her mother’s maiden name,
Paremsky, instead of their surname “Bebo.” Tr. 2007–08;
Ex. 167 at 12 (of 34 PDF pages).
(2) Bebo’s husband, Nick Welter, and his friend, Kevin
Schweer, who were never ALC employees, as occupants of
multiple facilities at the same time. Tr. 2006–07, 2010–
12; Ex. 167 at 11–14 (of 34 PDF pages).
(3) Bebo’s friend and ALC executive, Bucholtz, who Bebo
listed as an occupant of up to four facilities at once.
Tr. 2014; Ex. 167 at 11–13 (of 34 PDF pages).
(4) Bucholtz’s parents, brother, sister-in-law, and sevenyear old nephew. Tr. 2046–50; Ex. 237 at 5, 7 (of 45 PDF
pages).
(5) Houck, an ALC executive and friend of Bebo’s who
never stayed at the Ventas facilities. Tr. 1465, 1468–71;
Ex. 21A, “2009 Q4 OU Recon” tab; Ex. 22A, “2009 Q4 OU
Recon” tab. Bebo reviewed Houck’s expense reports
showing that he stayed at hotels and not the facilities, yet

43

simultaneously listed Houck as an occupant of five
facilities at once. Tr. 1470–71, 1500.
(6) At least ten other ALC employees who did not stay at
and, in many cases, even visit the Ventas facilities. See
Exs. 451–454, 462, 466, 468, 470–471, 473.
(7) Tim Cromer, who was never an ALC employee.
Tr. 2053–55; Ex. 256 at 6–7 (of 51 PDF pages). Cromer
was the husband of another ALC employee who herself
was separately listed as an occupant of multiple facilities.
Tr. 2054–55; Ex. 256 at 7–8 (of 51 PDF pages).
(8) Former ALC employees, future hires who had not yet
started working for ALC, and full-time employees of the
Ventas facilities, who lived nearby and had no reason to
have rooms leased for them. See generally Ex. 552A.
Herbner became uncomfortable with this new process when Bebo directed
her to include Bebo’s parents (using Bebo’s mother’s maiden name) and
Schweer. Tr. 817–18, 852–53. It caused Herbner “great concern” because she
believed that Ventas would not have agreed and it was unclear whether they
actually stayed at the Ventas facilities. Tr. 818–19, 843.
Herbner was also concerned that ALC included the same employees at
multiple properties during the same time period, as this conflicted with her
preexisting understanding that Ventas had agreed employees could be
included only if they stayed at the facilities. Tr. 819–20. She was never asked,
by Bebo or others, to verify that the nonresidents included in the calculations
were appropriately listed or had actually stayed at the facilities. Tr. 820–21,
828–29.
Herbner’s concerns were heightened when Bebo continued to have her
conceal the occupancy reconciliation from Ventas. On July 28, 2009, a Ventas
employee emailed Herbner seeking an explanation for the “significant
increases in occupancy” at five of the Ventas facilities, which had resulted from
occupancy reconciliation. Ex. 211 at 1 (of 2 PDF pages). When Herbner asked
Bebo for assistance in answering the questions, Bebo admitted that she
dictated reasons to give Ventas for the occupancy increases—none of which
involved the true reason for the increases, the inclusion of employees. Tr. 833–
40, 2090–92; see Ex. 212.
Buono echoed Herbner’s concerns to Bebo each quarter as the number of
nonresidents used to satisfy the covenants increased. He repeatedly warned

44

Bebo that “this has to be real” and “I could go to jail if this is wrong, and I don’t
look good in stripes.” Tr. 2365.
In addition, Bebo herself concealed the occupancy reconciliation scheme
from Ventas. When she participated in quarterly meetings with Ventas, Bebo
gave various reasons for the changes in occupancy and coverage ratios, but
never disclosed the real reaso

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A5fd8e7bf4d936281. Public record. Not legal advice.