As faithbridge and Lincoln Property Company go through their most recent financial collapse, a former top executive has filed a lawsuit claiming that the companies were defrauds in the form of over $20 billion in unrealized gains from their real estate ventures.
The suit filed in a New York federal court, filed Thursday by Richard A. Roesch and Peter F. Hirschfeld, is the latest to highlight a growing issue with the way companies are structured.
The companies’ assets were worth far more than their actual value when they were sold to investors in 2009, according to the suit.
The money was invested in “real estate investment trusts,” which are a type of deferred compensation plan that allow companies to receive payments based on the company’s performance rather than its assets.
The trusts, in turn, have a fiduciary duty to investors to protect the investments.
However, as of March 2016, about half of the companies that the suit says had at least $20.6 billion in assets were not required to register with the Securities and Exchange Commission as a deferred compensation investment, which is a form of deferred payment.
While the SEC requires a deferred payment to be registered, the agency’s rules are largely silent on whether deferred compensation can be taken out and returned.
And unlike many other securities, such as bonds, the deferred compensation rule is rarely enforced, leaving investors with little recourse in the event of a fraudulent purchase or sale.
The new lawsuit contends that Lincoln and faithbridge, along with the other four companies, were engaged in a pattern of fraudulent practices in the real estate industry.
Faithbridge had a massive, $1.5 billion in real estate investments with a valuation of over a trillion dollars, according the suit, which cites a 2008 internal memo from Lincoln that showed the company had more than $5 billion of real estate assets.
Lincoln had assets valued at $1,637.6 million, according a filing by the plaintiffs.
But when the Lincoln-based companies sold those assets, their real properties went into foreclosure.
The lawsuit argues that Lincoln’s $20,838,500 in unrealised gains in 2011 resulted from an ill-advised sale of Lincoln’s “unrealized gains” to a subsidiary, which the plaintiffs say did not disclose that it had lost the $1 billion in gains.
The lawsuit says the company should have reported its loss in its 2011 financial statements.
In an emailed statement, Lincoln said that it “does not provide specific guidance for any investment strategy.”
Faithbridge, meanwhile, said it had no idea how its $1 million unrealized gain would affect its 2012 financial statements, adding that it didn’t receive any information about its 2011 unrealized losses until it was notified by the SEC.
“The SEC’s guidance on investment strategy and reporting is clear and simple,” the company said in a statement.
“We do not and will not disclose any information regarding our investments in this matter.
Our guidance and practices are designed to ensure that investors receive fair, accurate, and timely disclosures and compensation, and that our investors are not defrauded or misled.”
Lincoln said it did not respond to multiple requests for comment.
In a statement, faithbridge said it “understands the significance of these issues and has cooperated with the SEC on its oversight.”
Faithbridges lawsuit comes as the SEC is considering requiring a hedge fund to disclose the real value of investments it holds in investments that were acquired before the funds’ funds were put on a regulated investment list.
The SEC announced last month that it will consider whether to issue a new rule that would require hedge funds to disclose their real assets.