U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20501 / March 18, 2008
SEC v. W.P. Carey & Co. LLC et al., 08 Civ. 2846 (JSR) (S.D.N.Y.)
SEC Charges W.P. Carey and Two Senior Executives in Fraudulent Payment Scheme
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.
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. W.P. Carey agreed to be permanently enjoined from violating the antifraud, reporting, proxy, books and records, and registration provisions of the federal securities laws — namely, Sections 5 and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b), 13(a), 13(b)(2)(A), and 14(a) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9. W.P. Carey also agreed to pay a $10 million civil penalty and to pay $19,978,612.37 in disgorgement and prejudgment interest. The entire disgorgement and prejudgment interest will be distributed to the affected REITs. Carey Financial agreed to be permanently enjoined from violating Section 5(a) of the Securities Act.
Park agreed to be permanently enjoined from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 14a-9, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Rules 12b-20, 13a-1, and 13a-13. Park also agreed to consent to a bar from acting as an officer or director of any public company for two years, and to pay a civil penalty of $240,000. Fernandez agreed to be permanently enjoined from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(b)(5) of the Exchange Act, and Exchange Act Rule 13b2-1, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Fernandez also agreed to pay a civil penalty of $75,000. Fernandez has also consented to the issuance of an SEC Order based on the entry of the injunctions that will suspend him from appearing or practicing before the SEC as an accountant for two years.
All of the settlements are subject to court approval. The Commission's investigation is continuing.