How do you value shares of an investment over time if the shares are not traded on an open market? The complaint for this class action alleges that units of Apple REIT Nine, Inc. (A-9) were overvalued, and that when investors chose to receive dividends in the form of more units rather than cash, they were shortchanged.
A REIT is a real estate investment trust. It holds a portfolio of commercial real estate investments such as apartment complexes, healthcare facilities, hotels, fiber cable or cell tower infrastructure, office buildings, timberland, and so on. Investors buy shares or units of the REIT.
During one period, A-9 offered its investors the option of receiving their dividends in the form of additional units of the REIT instead of in cash. This is called a dividend reinvestment plan, or DRIP.
A-9 was to value the units at “fair market value,” defined as the value at the last sale of units by A-9, unless A-9’s board decided to reevaluate and adjust the worth of the units.
During the class period, investors in A-9 accepted roughly 1.1 million units of A-9 in place of about $11 million in cash dividends. The complaint claims that A-9 valued the shares at $10.25 during the whole class period, “even though there was objective evidence that the $10.25 conversion price grossly overvalued the A-9 units.” In other words, those who chose the DRIP option “did not receive enough A-9 shares in the DRIPs to be equal to the dollar value of the cash dividend…”
Since the shares of A-9 were never registered for trading on any exchange, there was no public market for its units that could set the price. The DRIP plan allowed A-9 to conserve cash, the complaint says, “when other Apple REITs were forced to borrow cash from A-9 in unreported related party transactions that [were] not properly recorded…” The complaint says that this led to an inflated value for A-9.
The complaint quotes a Securities and Exchange Commission (SEC) Administrative Proceeding on Apple REIT Eight, Inc. and others as saying that “A-9’s reported financial statements … violated [various sections] of the Exchange Act of various rules thereunder by failing to properly report over $1 million of compensation to A-9 officers thereby overstating income and a transfer of $20 million from A-9 to A-8 thereby overstating A-9’s book value.”
The complaint claims breach of contract and breach of the implied covenant of good faith and fair dealing,
The class for this action is all persons and entities who chose to participate in the A-9 DRIP between April 8, 2013 through the end of the DRIP and who received A-9 common stock valued at $10.25 per share in place of cash dividends.