Washington, D.C., March 18, 2008 – LAWFUEL – The Securities and Exchange Commission today filed settled securities fraud charges against W.P. Carey & Co., a manager of real estate investment trusts (REITs), and two of W.P. Carey’s senior executives for paying undisclosed compensation to a brokerage firm that sold the REITs to investors. W.P. Carey did not disclose the payments to the broker-dealer, as it was required to do in the REITs’ offering documents, and misrepresented the payments in the REITs’ periodic filings.
REITs are entities that invest in different kinds of real estate or real estate related assets such as office buildings, retail stores, and hotels. The SEC complaint names as defendants W.P. Carey & Co.; John J. Park, formerly the chief financial officer of W.P. Carey, until yesterday a managing director of strategic planning at W.P. Carey and currently an employee in charge of strategic planning; Claude Fernandez, formerly the chief accounting officer and currently a managing director of W.P. Carey; and Carey Financial, LLC, a broker-dealer subsidiary of W.P. Carey.
To settle the SEC’s charges, W.P. Carey agreed to pay approximately $30 million – approximately $20 million in disgorgement and interest and $10 million in penalties. Park’s settlement includes a five-year bar from serving as an officer or director of a public company, and a $240,000 penalty. Fernandez’s settlement includes a two-year suspension from appearing before the Commission as an accountant and a $75,000 penalty.
“This case makes clear that the SEC will not tolerate undisclosed payments like those at issue here,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “What a brokerage firm is being compensated for in selling a particular investment is critical information to investors because it goes to the heart of the broker’s investment recommendation.”
Mark K. Schonfeld, Director of the SEC’s New York Regional Office, said, “This case is about making sure investors receive accurate and complete information on which to base their investment decisions. The defendants not only failed to disclose the payment of additional compensation to the brokerage firm selling W.P. Carey’s REITs, but also went to great lengths to conceal the additional payments.”
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, makes several allegations.
Undisclosed Broker-Dealer Compensation: Between 2000 and 2003, W.P. Carey paid nearly $10 million in undisclosed compensation to a broker-dealer that sold shares of W.P. Carey’s REITs to the public. The arrangement benefited not only the broker-dealer, but also W.P. Carey, because the broker-dealer’s sales of the REIT shares increased the management and other fees that W.P. Carey received. Although W.P. Carey received the benefits of this arrangement, W.P. Carey paid the broker-dealer by using nearly $10 million in cash assets of the affiliated REITs.
W.P. Carey did not disclose the payments to investors. W.P. Carey, through Park and Fernandez, also requested sham invoices from the broker-dealer as a means to conceal the payments and circumvent applicable regulatory limitations on compensation to broker-dealers. By circumventing this limitation, W.P. Carey indirectly collected an excess of $6.4 million in fees and reimbursements from the REITs above what was legally permissible.
Undisclosed Payment for Proxy Solicitation Services: In 2002, W.P. Carey proposed to merge two of its affiliated REITs, subject to approval by shareholders of the REITs. W.P. Carey caused the two REITs to pay $100,000 to a broker-dealer, which had sold the REITs’ shares to investors, to solicit shareholder votes in favor of the merger. In the registration statement and proxy materials for the merger, W.P. Carey failed to disclose the $100,000 payment that Park authorized to the broker-dealer for proxy solicitation services.
Unregistered Offering: In 2002 and 2003, W.P. Carey and Carey Financial offered and sold more than $235 million of one of the affiliated REIT’s shares without a registration statement being in effect, in violation of the registration provisions of the federal securities laws.
Other Disclosure Failures: W.P. Carey also failed to comply with other disclosure requirements. In filings with the Commission, W.P. Carey failed to disclose the bankruptcy of a company at which a W.P. Carey senior executive was previously the CFO. In addition, prior to 2004, the majority of executive officers and directors of the affiliated REITs failed to file forms required under Section 16(a) of the Securities Exchange Act of 1934, and the REITs’ annual proxy statements and reports falsely stated there were no Section 16(a) delinquent filings.
The defendants agreed to settle the Commission’s charges without admitting or denying the allegations of the complaint. In addition to the financial penalties, W.P. Carey agreed to a permanent injunction from violating the antifraud, reporting, proxy, books and records, and registration provisions of the federal securities laws. The disgorgement and prejudgment interest will be distributed to the affected REITs. Carey Financial agreed to a permanent injunction from violating the registration provisions of the federal securities laws.
Park additionally agreed to a permanent injunction from violating, or aiding and abetting violations of, the antifraud, reporting, proxy, and books and records provisions of the federal securities laws, and Fernandez agreed to a permanent injunction from violating, or aiding and abetting violations of, the antifraud, reporting, and books and records provisions of the federal securities laws.
All of the settlements are subject to court approval. The Commission’s investigation is continuing.