The Chairman and CEO of Hovnanian Enterprises (HOV), a U.S. homebuilder, has paid millions of dollars to a relative that advises a state regulatory board currently taking legal action against Hovnanian. In its Q1 2021 10-Q, Hovnanian disclosed the related party transaction totaled $100,000 in the quarter, double the total from the same period in the prior year:

“During the three months ended January 31, 2021 and 2020, an engineering firm owned by Tavit Najarian, a relative of Ara K. Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, provided services to the Company totaling $0.1 million and $0.2 million, respectively.”

In an analysis of Hovnanian’s last thirteen 10-Ks, we calculate Hovnanian has paid Tavit Najarian’s engineering firm at least $14.8 million since 2008. In the three years prior to 2008, Hovnanian paid an unnamed engineering firm another $14.5 million. If it’s the same firm associated with Najarian, Hovnanian has paid a relative of the CEO $29.3 million since 2005.

Hovnanian has a long history of related party transactions, including tens of millions of dollars paid to relatives in land deals. However, the multimillion dollar deals with Najarian are of particular interest to investors as Najarian also advises a regulatory body taking legal action against Hovnanian.

In the latest 10-Q, Hovnanian makes clear that neither the company nor its CEO have a financial interest in Najarian’s engineering firm. However, Hovnanian does have an interest in a recent legal matter over which Najarian may influence.

The latest quarterly report revealed Hovnanian is being sued by the New Jersey Department of Environmental Protection (NJDEP) for its alleged involvement in contaminating groundwater in connection with a condominium development project:

“The complaint asserts claims under the New Jersey Spill Act and other state law claims and alleges that the NJDEP and the Spill Fund have incurred over $5.3 million since 2009 to investigate vapor intrusion at the development and to install vapor mitigation systems.”

Najarian— the relative paid millions— is a member of NJDEP’s Science and Advisory Board (SAB), which advises NJDEP’s commissioner. Najarian was appointed in 2012, meaning he is required to file a conflict of interest disclosure form prior to each appointment term. Under New Jersey’s Open Records Act, The Winkler Group has requested Najarian’s disclosure form to see if Hovnanian is listed. We’ll update subscribers when we receive new information.

Separately, NJDEP SAB members are required to recuse themselves from deliberations in the event of a conflict of interest. In New Jersey, a conflict of interest is defined as:

“For purposes of the above restriction, "conflict of interest" means any financial or other interest which conflicts with the service of the individual because it 1) could significantly impair the individual's objectivity or 2) could create an unfair competitive advantage for any person or organization. "Recusal" means the process by which a person is disqualified, or disqualifies himself or herself from a matter because of a conflict of interest.”

When DuDil contacted Najarian to learn whether he had listed Hovnanian as a potential conflict of interest on his NJDEP SAB disclosure form and whether he will recuse himself from any potential deliberations related to the Hovnanian suit, Najarian told us this:

“I am unaware of any lawsuit against Hovnanian Enterprises related to any groundwater contamination. Hence, I did not include it as a potential conflict. Needless to say, should that issue come in front of SAB, I will definitely recuse myself from any deliberation.”

- Tavit Najarian, Najarian Associates, March 8, 2021

Regarding the $5.3 million NJDEP spent on contamination mitigation, Hovnanian says it, “intends to defend these claims vigorously.” The $5.3 million in mitigation costs are approximately 10% of Hovnanian’s 2020 net income.

Investors interested in the suit’s outcome and Hovnanian’s future relationship with Najarian might track the size of any future payments Hovnanian makes to Najarian— relative to past payments— especially if Hovnanian loses the suit after Najarian recuses himself.