SEC drops investigation of Inland American but giant REIT raises new questions over fees

The giant nontraded real estate investment trust, with $7.5 billion in total assets at the end of 2014, received a clean bill of health but joined a lawsuit against former business partners

Mar 31, 2015 @ 11:57 am

By Bruce Kelly

It's been a good news, weird news kind of week for Inland American Real Estate Trust Inc. and its shareholders.

The giant nontraded real estate investment trust, with $7.5 billion in total assets at the end of 2014, last Wednesday said it had received a clean bill of health from the Securities and Exchange Commission.

In May 2012, Inland American, which is one of several REITs under the Inland brand, said it was under investigation by the SEC for potential violations of federal securities laws regarding its fees and administration.

SEC staff last week told the REIT that it had concluded its formal investigation of matters related to Inland American and did not recommend an enforcement action against the company, according to a regulatory filing.

Then, by the end of the week, events for Inland American took a legal twist perhaps worthy of Franz Kafka novella. According to the company's annual report released Friday, Inland American has joined a lawsuit against its former business management firm and property management firm, from which it separated last year, over the payment of fees. Those two businesses, the business management firm and property management firm, are controlled by The Inland Group Inc., the REIT's former sponsor.

Executives with Inland American and The Inland Group Inc. publicly stress that the two are independent companies despite sharing a common brand name. However, there has been clear overlap on the boards of the two companies; Robert Parks, one of the founders of the Inland Group, was chairman of the board of Inland American and a director until the end of last year.

Making Inland American's legal issues even more unusual, the current chief executive of the REIT, Thomas McGuinness, was the president of the property manager, Inland American Holdco Management, from 2005 to 2011. After he left , he became the president of the business manager Inland American Business Manager & Advisor Inc. in 2012 and was there until last March, when the REIT terminated its agreements with both those businesses but hired many of their employees.

Inland American spokesman Dan Lombardo said the company does not comment on legal matters.

“It is our policy not to comment on continuing litigation," said Inland Group spokeswoman Nicole Spreck in an email. "It should be noted that the SEC has terminated its investigation of Inland American without recommendation of any enforcement action after receipt and review" of an internal report by a special litigation committee, she added.

LAWSUITS FILED

After the SEC announced its investigation in 2012, Inland American shareholders filed three derivative lawsuits, requesting the company launch an internal investigation. Inland American's independent board of directors then created a special investigation committee. That committee filed its report of findings to the board in December, according to annual report.

In a clear positive for Inland American, the special investigation committee “concluded that there is no evidence to support the allegations of wrongdoing” in the derivative lawsuits.

But the special investigation committee did find something else.

“In the course of its investigation, the special litigation committee uncovered facts indicating that certain then-related parties breached their fiduciary duties to the company by failing to disclose to the independent directors certain facts and circumstances associated with the payment of fees to our former business manager and property managers,” according to the annual report. The annual report, however, mentions no specific allegations of misconduct stemming from the failures to disclose the facts and circumstances around those fees or gives a timeline as to when the alleged misconduct occurred.

In January, the REIT's board authorized the company to file a motion to join, as lead plaintiff, an ongoing derivative lawsuit in Cook County, Ill., Trumbo v. The Inland Group Inc., according the annual report.

That legal action will “pursue claims against our former business manager, property manager and Inland American Holdco Management for breach of fiduciary duties in connection with the failure to disclose facts and circumstances associated with the payment of fees to related parties,” according to the annual report.

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