(Reuters) - WeWork is facing scrutiny from the U.S. Securities and Exchange Commission over whether it violated financial rules in the run-up to its abandoned initial public offering, Bloomberg reported on Friday, citing two people with knowledge of the matter.
The SEC's inquiry is preliminary and may not lead to any allegations of wrongdoing, Bloomberg reported, adding that it could not determine whether specific WeWork business decisions or transactions prompted the review.
WeWork shelved its IPO in September after investors grew wary of its mounting losses, a business model with high leasing liabilities and corporate governance that forced former chief executive and co-founder Adam Neumann to resign.
Neumann and other WeWork officials are also being sued by minority shareholders who accuse the company's board of directors of breaching its fiduciary duties.
Masayoshi Son, chairman of SoftBank Group which took control of WeWork last month, is also one of the defendants in the case.
The SEC's enforcement division is reviewing WeWork's business and its disclosures to investors after media reports showed conflicts of interest and the company's fundraising, according to the report.
WeWork has retained top Wall Street lawyer Andrew Ceresney, who previously headed the SEC enforcement unit, Bloomberg reported.
WeWork and the SEC declined to comment.
The SEC took issue with WeWork's use of non-regular financial reporting rules, including a profitability measure it dubbed "contribution margin," the Wall Street Journal reported on Sunday. The SEC told WeWork the term could be misleading.
WeWork should have clearly indicated its losses would continue to mount in the near term in its IPO filing, analysts have said. WeWork also failed to provide a cash flow statement that would show it would run out of money if it did not receive anticipated financing from the shelved IPO.
Neumann has been accused of self-dealing, or acting in his own interests instead of the company's. Neumann earned $5.9 million for selling the rights for the name We Company, WeWork's parent, which he returned in September after a public outcry.
Material information also was omitted in the IPO filing, including that Neumann had been on the board's compensation committee when he was CEO, the Journal reported in October.
The We Company on Wednesday said net losses in the third quarter more than doubled to $1.25 billion.
(Reporting by Uday Sampath in Bengaluru, additional reporting by Herbert Lash in New York; Editing by Marguerita Choy and Maju Samuel)