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Resource Capital (RSO) Securities Fraud Class Action Lawsuit

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Resource Capital shareholder accuses company of stock fraud

Resource Capital is a real estate finance company that focuses primarily on commercial real estate and commercial real estate–related assets.

The class action alleges that, since March 2, 2015, Resource Capital and certain of its executive officers and directors have misrepresented the risk involved in its commercial loan portfolio.

On August 4, 2015, Resource Capital put out a press release announcing its financial results for the quarter that had ended on June 30, 2015. It showed a net loss of $31 million for that quarter.

Resource Capital’s common stock plunged from $3.48 to $3.05, a single-day loss of more than 12%. The announcement thus wiped out approximately $54.6 million of Resource Capital’s market capitalization.

According to Resource Capital’s August 7, 2015 10-Q filing with the SEC, in 2007 it made a “mezzanine” loan, a high-risk (subordinated) type of loan, for approximately $41 million. The loan was originally secured by thirteen hotel properties. The company’s August 4 press release said that “[t]he last three luxury brand hotel properties securing the loan are located in or near San Juan, Puerto Rico”.

Puerto Rico’s economy has been mired in a recession since around 2006. In 2014, Standard and Poor’s decided to downgrade Puerto Rico’s debt securities to junk status. In fact, the August 4 press release spoke about the loan in connection with Puerto Rico’s economy, noting that “recent economic and credit disruptions in Puerto Rico resulted in events that caused [Resource Capital] to determine that the loan should be fully reserved.” This means that the company believed there was a chance that the loan could be in trouble in the future and that it had therefore set aside increased reserves to cover the potential loss.

What investors are part of this class action? The class period is currently defined as all persons who purchased Resource Capital’s common stock between March 2, 2015 and august 4, 2015, inclusive (the “Class Period”).  Resource Capital common stock trades on the NYSE under the symbol “RSO”.

Procedural Status.  The lawsuit was filed on September 9, 2015 and is captioned Levin v. Resource Capital Corp. et al. It was filed in the New York Southern District Court. Its civil docket number is 1:15cv07081.  The lead plaintiff deadline is November 9, 2015.      

The lawsuit alleges several things:

  • That Resource Capital did not previously disclose to its shareholders its exposure to the Puerto Rican economy.
  • That with this particular loan, made in 2007, Resource Capital did not follow its own procedures for assessing loan risks on an ongoing basis and maintaining sufficient reserves, as set forth in its March 2, 2015 10-K filed with the SEC.
  • That the stock price was inflated because of the lack of information.
  • That the loss Resource Capital announced on August 4 was primarily due to the need to put aside these reserves.
  • That the abrupt decline in the price of Resource Capital’s shares at that time was due to the revelation of the loss.

 

Current Case Status: 

This case is in the notice period. When a shareholder brings suit under certain federal securities laws, it must generally give notice of the suit via a press release. This notice starts a 60-day period during which any other shareholder can investigate the claims and choose to bring suit as well. At the end of the 60-day period, the court appoints a shareholder or a group of shareholders to be the plaintiffs for the suit. We will review the docket again in June and update this page as warranted.  

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