A Texas investor recently filed a potential class action lawsuit against Behringer Harvard REIT I (“Behringer Harvard”), which is one of the largest Real Estate Investment Trusts in the United States and currently has more than $4.0 Billion in assets.
According to the lawsuit filed in federal court in the Northern District of Texas, Behringer Harvard concealed the actual performance of the REIT by providing inaccurate share valuations while at the same time paying dividends to investors with their own money, rather than profits from the performance of the REIT’s assets. According to the lawsuit, not only was Behringer Harvard’s performance “abysmal,” but Behringer Harvard’s management added to the REIT’s performance problems by collecting more than $180 Million in fees that were “not negotiated at arm’s length.” Behringer Harvard’s Chief Operating Officer, Jason Mattox, says the REIT denies the allegations and fully intends to defend the claims vigorously in court.
Lawsuits, including class actions, against the largest REITs in the United States are uncommon. For example, many investors have chosen not to sue the REITs directly for their performance issues because until shares are liquidated, the extent of the investors damages are arguably unknown. Furthermore, lawsuits against REITs directly could often prove unsuccessful because most REITs continue to pay dividends to their investors despite declines in the per share value of the REITs. As such, the REITs are typically performing as advertised in their private placement memorandums, prospectus and other offering documents.
Unlike claims against the REITs, claims against the broker / dealers and financial advisors that recommended investing in REITs are common place today. Depending on what happens with the Behringer Harvard lawsuit, FINRA arbitration claims against broker / dealers and financial advisors who recommended investments in Behringer Harvard may increase. For example, if the Behringer Harvard case proceeds to discovery, information could be obtained by plaintiffs’ counsel that arguably served as a red flag about the ability for Behringer Harvard to perform as advertised. Furthermore, plaintiffs’ counsel will likely seek a list of all clients of Behringer Harvard as part of the class action lawsuit and a list of financial advisors and broker / dealers who were authorized to recommend investments in Behringer Harvard to their clients, providing FINRA claimants’ lawyers with a list of potential respondents for arbitration claims.
Essentially, if the Behringer Harvard class action lawsuit is not immediately dismissed, it will likely be the start to a flux of FINRA arbitrations against the broker / dealers and financial advisors who recommended Behringer Harvard investments to their clients, similar to the flux of FINRA arbitrations involving Provident Royalties and Medical Capital in and around 2008. If the Behringer Harvard class action lawsuit is dismissed, it may cause investors to pursue other avenues of recovery such as their financial advisors and broker / dealer firms.
As a result, broker / dealers and financial advisors who recommended Behringer Harvard to their clients should start reviewing their files and preparing for possibility of having to defend themselves in FINRA arbitrations commenced by their clients claiming damages as a result of their investment decisions.
Contact Foley & Mansfield’s Securities Regulation and Litigation team for more information on this topic.