DALLAS (CN) - One of Behringer Harvard's real estate investment trusts operates like a Ponzi scheme, while its directors drain millions from it in fees, an investor claims in a federal class action.
Named plaintiff Lillian Hohenstein sued the Addison, Texas-based real estate investment firm, its Behringer Harvard REIT I Inc. and several company directors. She claims that since she invested in the REIT, its value has plummeted.
"On December 28, 2011, defendants filed Form 8-K with the SEC estimating the per share value of the company's common stock to be $4.64 per shares, a 53.6 percent decline for those shareholders that purchased BH REIT stock at $10.00 per share," the complaint states.
"It is doubtful that BH REIT stock is even worth the $4.64 claimed by the defendants, as the company's shares have traded in the secondary market for as little as $2.40 per share."
Hohenstein claims that two of the REIT's properties were foreclosed on this year and that the company has indicated in its most recent SEC filings that more foreclosures are coming.
Hohenstein claims it operates as a Ponzi scheme because it pays distributions with offering proceeds, not operating cash flow.
"This flies in the face of BH REIT's stated investment objective of preserving its shareholders capital contributions," the complaint states. "What's worse is that although BH REIT is illiquid, defendants have made it even harder for the company's shareholders to exit their investment by misrepresenting its true value and amending the company's charter to make it more difficult for third parties making a tender offer for BH REIT shares."
Hohenstein claims the defendants urged shareholders in September 2011 and again in February this year to reject a tender offer for their shares by CMG Legal Income Fund, and that the defendants misrepresented the value of the REIT.
"Defendants have done so because tendering jeopardizes their control over BH REIT," the complaint states. "If defendants lose control over BH REIT then they will no longer be able to continue to prosper from related party transactions they have forced BH REIT to undertake. Also, they will not be able to drain the millions of dollars in asset and property management fees from BH REIT that they charge every year despite its negative operational performance."
Behringer Harvard announced 2 weeks ago that the REIT had become self-managed.
"The REIT owns 53 properties in 19 states and the District of Columbia, as of June 30, 2012," the company stated on its website. "The REIT's portfolio of more than 20 million square feet includes concentrations in the major markets of Chicago, Houston and Philadelphia."
Behringer Harvard's companies manage more than $6 billion and have invested more than $11 billion in assets, according to its website.
Hohenstein seeks class damages for securities fraud, fiduciary duty, unjust enrichment and negligence. She is represented by Joe Kendall of Dallas.