Investor Sues CBL Alleging That It Did Not Properly Alert Stockholders About Costly Lawsuit

Thursday, May 23, 2019

An investor in Chattanooga-based CBL & Associates has filed a class action lawsuit, alleging that the firm did not properly notify stockholders of a costly lawsuit.

The suit was filed in Chattanooga Federal Court by Laurence Paskowitz.

It is also brought against CBL’s founder and Board Chairman Charles B. Lebovitz, Chief Executive Officer Stephen D. Lebovitz, Chief Financial Officer Farzana Khaleel, and Audit Committee Chairman A. Larry Chapman.

The suit says CBL’s 173.5 million common shares trade on the New York Stock Exchange, as do the shares of its two series of Preferred Stock, Series D and Series E.

It says, "Because it is a REIT, CBL must pay out 90% of its earnings as dividend distributions per the requirements of the Internal Revenue Service. This leaves CBL with relatively little in cash on its balance sheet at the end of each quarter. As of December 31, 2018, CBL’s balance sheet showed $25.1 million in cash.

"The company is subject to the federal securities laws and is obligated to follow generally accepted accounting principles as promulged by the Financial Standards Accounting Board. Thus, both the federal securities laws and GAAP require a public company to report threats to its business which could a result in a material change in the Company’s cash position in its quarterly and annual SEC filings.

"The material threats that must be fully disclosed include large lawsuits against the company. If such a lawsuit is filed, the company’s litigation must be discussed under a section entitled “Legal Proceedings” which must disclose: (a) the existence of the lawsuit; (b) the nature of the claims; (c) the potential materiality of a loss; and (d) the size of the claim, if such can be estimated. In addition, the financial statement must reflect a “reserve” against the contingency that the Company could pay out a substantial settlement or verdict, again to the extent an estimate can be made. Without such disclosures, investors were unable to assess the risks that CBL faced during the Class Period, and, as a result, its stock price was fraudulently inflated during the Class Period."

The suit says in 2016, a class action suit "that could result in tens of millions or even hundreds of millions of dollars in liability" was filed in Florida Federal Court. 

According to the complaint, "In the Overbill Litigation, the plaintiff alleged on behalf of a class of CBL retail tenants that CBL entered into leases providing that CBL would charge its tenants for electricity at cost, but rather engaged in theft by marking up the electricity bills by large amounts, and pocketing the difference. The plaintiff asserted numerous causes of action, including RICO claims, which were upheld in April 2017 against a motion to dismiss. The plaintiff’s class claims, if trebled, amounted to $180 million, not counting attorneys’ fees. Although CBL defended the Overbill Ligation for years, it turned out to have no true defense—it had been caught with its hands in the cookie jar."

It says earlier this year, CBL was forced to settle all claims by paying the Class 100 percent of damages ($60 million) and paying an additional $28 million to cover its adversary’s attorneys’ fees. No insurance covered these sums, as CBL’s insurer had disclaimed coverage, it was stated.

The suit states, "Because allegations of theft would have been viewed very unfavorably by both investors and potential mall tenants, Defendants herein embarked on a fraudulent scheme whereby they issued SEC reports that (until the tail end of the Class Period) simply pretended that CBL faced no material litigation at all. Indeed, Defendants made no mention of the Overbill Litigation at all. Thus, investors had no idea that there was a litigation."

The suit asks unspecified damages.

It was filed by attorneys Paul Kent Bramlett of Nashville as well as attorneys from New York City.  

 


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