Biggest nontraded REIT being dogged by its own shareholders

Investors' complaints to SEC allege false valuations and excess fees

Mar 13, 2013 @ 4:01 pm

By Bruce Kelly

nontraded REIT, inland american, SEC, investigation
+ Zoom

The largest nontraded real estate investment trust, the $10.8 billion Inland American Real Estate Trust Inc., said Wednesday that some investors are alleging the REIT's management failed in its fiduciary responsibility, resulting in false valuations and excess fees being paid to the REIT's business manager.

In its annual report, the REIT stated that two separate groups of shareholders are piggybacking on a Securities and Exchange Commission investigation. Last year, the REIT said the SEC had launched a fact-finding investigation to determine whether there had been violations regarding the REIT's management fees, transactions with affiliates and distributions to investors.

The groups have asked the REIT's board to conduct investigations regarding their concerns.

Specifically, the first group of shareholders alleges that Inland American's management “falsely reported the value of our common stock until 2010, caused us to purchase shares of our common stock from stockholders in excess of their value, and disguised returns of capital paid to stockholders as REIT income, resulting in the payment of fees to the business manager to which it was not entitled.”

The investors looking to investigate the REIT represent a small number of shareholders, an Inland spokeswoman wrote in an e-mail.

“After our filing announcing the SEC investigation, we received two demand letters from a total of four investors out of 187,000 stockholders,” wrote Nicole Spreck. “In both demands, the board of directors has been asked to perform an investigation into issues similar to what Inland American disclosed the SEC is investigating.”

Ms. Spreck added: “The Inland American board has formed a special litigation committee to investigate the demands of these four stockholders and management is fully cooperating with this special committee.”

Inland American is one of several large nontraded REITs that were sold to investors during the real estate bubble at $10 per share but have suffered dramatic drops in valuations since then. At the end of last year, the REIT said its estimated per share value was $6.93 per share, down from $7.22 per share at the end of 2011.

The allegations of false valuations and jacking up fees are at the heart of a litany of complaints dogging the $10 billion-per-year nontraded REIT industry, one attorney said.

“We are aware of those allegations surrounding Inland and other REITs the past few years,” said Steven Caruso, a partner at Maddox Hargett & Caruso PC. “It's been the crux of most investor complaints — that valuations are not accurate and the misrepresentation of the liquidity of the shares they purchased.”

Mr. Caruso said his firm is handling about a dozen investor complaints regarding Inland American, with most of the investors being retirees. “That compounds the problems,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The client of the future

Your clients of tomorrow want you to stay ahead of the curve with technology. Some of the industry’s top young advisers and thought leaders explain what they think tomorrow’s clients will need.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print