Risk Management

Uneasy REITers

W.P. Carey and its former CFO and former chief accounting officer settle SEC fraud charges over undisclosed compensation to a broker.
Stephen TaubMarch 18, 2008

The Securities and Exchange Commission settled securities fraud charges against real estate investment trust management company W.P. Carey & Co. and two of Carey’s finance executives after alleging that they paid undisclosed compensation to a brokerage firm that sold the REITs to investors.

The regulator said that W.P. Carey, did not disclose the payments to the broker-dealer, as required in the REITs’ offering documents, and misrepresented the payments in the REITs’ periodic filings.

Carey and the two individuals charged — John J. Park, the company’s former CFO and until Monday a managing director of strategic planning, and currently an employee in charge of strategic planning; and former chief accounting officer Claude Fernandez, currently a managing director — consented to the charges without admitting to or denying the allegations.

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Under the settlement, W.P. Carey agreed to pay about $30 million — $20 million in disgorgement and interest, and about $10 million in penalties. Park agreed to a five-year bar from serving as an officer or director of a public company, and a $240,000 penalty. Fernandez agreed to a two-year suspension from appearing before the Commission as an accountant and a $75,000 penalty.

Also named in the complaint was Carey Financial LLC, a broker-dealer subsidiary of W.P. Carey.

The SEC’s complaint alleges that between 2000 and 2003, W.P. Carey paid nearly $10 million in undisclosed compensation to a broker-dealer that sold shares of its 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 shares increased the management and other fees that W.P. Carey received, the SEC stated.

Although W.P. Carey received the benefits of this arrangement, the SEC charged, the company paid the broker-dealer by using nearly $10 million in cash of the affiliated REITs. The commission also noted that W.P. Carey did not disclose the payments to investors.

In addition, 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, according to the complaint. 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, it added.

The SEC, which also alleged other disclosure failures by W.P. Carey, said that in the registration statement and proxy materials for the merger of two of its affiliated REITs, the company specifically failed to disclose a $100,000 payment that Park authorized to the broker-dealer for proxy solicitation services.

The SEC also charged W.P. Carey and Carey Financial with selling more than $235 million of one of the affiliated REIT’s shares without a registration statement.