A shareholder of Chattanooga-base CBL & Associates is suing the company in Federal Court, saying shareholders were kept in the dark about a damaging lawsuit that stood to cost the company up to $180 million.
Pierre Kemmer filed the 95-page complaint against CBL and CBL officers and directors Stephen D. Lebovitz, Charles B. Lebovitz, Farzana Khaleel, Don Sewell, Augustus N. Stephas, Gary L. Bryenton, A. Larry Chapman, Matthew S. Dominski, John D. Griffith, Richard J. Lieb, Gary J. Nay, and Kathleen M. Nelson.
The suit is "for breaches of their fiduciary duties as directors and/or officers of CBL, unjust enrichment, waste of corporate assets, and violation of Sections of the Securities Exchange Act.
It is "a shareholder derivative action that seeks to remedy wrongdoing committed by CBL’s directors and officers from at least July 29, 2014 through the present."
The lawsuit says, "Throughout much of the relevant period, the individual defendants failed to disclose just such a threat: the pendency of a massive class action lawsuit against CBL, which had the potential to incur hundreds of millions of dollars in liability.
"The defendants permitted the company to take advantage of small business customers who rented mall space owned by the company by (1) unlawfully overcharging these retail tenants for electricity costs; (2) misrepresenting that the electric bills they received were not marked up; (3) hiding the fraudulent scheme by invoking audit waivers included in company leases; and (4) reaping ill-begotten gains from such improper activity."
It notes that a lawsuit was filed in Florida by Wave Length Hair Salons and others against CBL over the issue of electric overcharges.
That suit claimed that CBL "engaged in a pattern of racketeering activity by surreptitiously overcharging its tenants through a criminal enterprise by as much as 100 percent for its own profit."
It claimed that for several years the company had overcharged them for electricity, despite a contractual agreement to provide electricity at cost, to keep the excess for profit."
The suit says the Florida case "involved a class size of 4,800 people and the potential for treble damages, which brought the risk to $180 million in liability without attorney’s fees."
It says CBL’s motion to dismiss the racketeering litigation was almost entirely denied on April 11, 2017, except for a count for breach of the implied covenant of fair dealing.
On September 20, 2017, Catlin Specialty Insurance Company, CBL’s insurance provider, won a declaratory judgment in Delaware state court ruling that Catlin had no obligation to cover the company in the event that CBL incurred liability in the Florida case.
The federal court partially granted the racketeering litigation plaintiff’s motion to certify the class under RICO and the Florida Deceptive and Unfair Trade Practices, and on January 23, 2019, the federal court denied the company’s motion for summary judgment, "greatly accelerating the litigation."
The new lawsuits says it was not until last March 1 that "CBL finally revealed the existence of the racketeering litigation to the public in its annual report for the fiscal year ended December 31, 2018. However, the 2018 10-K still omitted material facts about the litigation, divulging neither the degree of risk nor the amount-in-controversy (up to $180 million without attorney’s fees) to shareholders, in clear violation of SEC and GAAP regulations."
Following this partial disclosure, CBL stock dropped by $0.16 per share (eight percent) from the previous trading day, to close at $1.98 on March 1, 2019.
On March 15, 2019, following a settlement mediation, CBL settled the Florida case for $90 million, which included the full claim amount of $60 million plus costs and attorney’s fees.
The new suit says, "CBL’s total capitulation indicates that the company likely had little to no valid defenses to the plaintiffs’ claims."
However, it said a CBL filing with the SEC one week later on March 22, 2019 "again failed to disclose the amount-in-controversy in the dispute, or that the parties had reached a settlement."
It says following the disclosure, CBL’s price per share dropped $0.47 per share (about 25 percent) on a trading volume of 11.7 million shares, from a closing price of $1.91 on March 26, 2019 to close at $1.44 on March 27, 2019. CBL Series D preferred shares fell by $0.74 (seven percent), and CBL Series E preferred shares fell by $0.69 in two days.
The suit says, "The individual defendants breached their fiduciary duties by knowingly or recklessly causing the company to engage in the overcharge misconduct and causing the company to fail to maintain internal controls.
"Furthermore, during the relevant period, the individual defendants breached their fiduciary duties by causing the company to repurchase its own stock at prices that were artificially inflated due to the foregoing misrepresentations. Between October 1, 2016 and March 26, 2019, the company repurchased 123,252 shares of its own stock for $464,653. As the company’s stock was actually only worth $1.00 per share, the price at which it was trading on April 25, 2019, the company overpaid $341,401."
It says, "The need to undertake internal investigations, the losses from the waste of corporate assets, and losses due to the unjust enrichment of Individual defendants who were improperly over-compensated by the company and who benefited from the wrongdoing alleged herein, the company will have to expend many millions of dollars. The company has been substantially damaged as a result of the Individual defendants’ knowing or highly reckless breaches of fiduciary duty and other misconduct.
The suit says Stephen D. Lebovitz has served as the company’s CEO since January 1, 2010 and as a company director since November 1993. He served as the president of the company for a portion of the relevant period, from February 1999 to June 2018. He also serves as a member of the Executive Committee. According to the 2019 Proxy Statement, as of March 15, 2019 Stephen Lebovitz beneficially owned 832,154 shares (1.01 percent) of the company’s stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, Stephen Lebovitz beneficially owned over $1.5 million worth of CBL stock. For the fiscal year ended December 31, 2018, Stephen Lebovitz received $3,472,388 in compensation from the company. This included a base salary of $707,000 and stock awards worth $1,471,139.
Charles Lebovitz is the company’s chairman of the board and has been a company director since 1993. He previously served as CBL’s president from November 1993 until 1999, and as its CEO from November 1993 until 2010. He also serves as chair of the Executive Committee. According to the 2019 Proxy Statement, as of March 15, 2019 Charles Lebovitz beneficially owned 19,112,878 shares (10.4 percent) of the company’s stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, Charles Lebovitz beneficially owned approximately $34.6 million worth of CBL stock. For the fiscal year ended December 31, 2018, Charles Lebovitz received $2,540,247 in compensation from the company. This included a base salary of $681,750 and stock awards worth $1,044,001.
Farzana Khaleel has been the company’s executive vice president, chief financial officer, and treasurer since September 10, 2012. According to the 2019 Proxy Statement, as of March 15, 2019 she beneficially owned 318,371 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, she beneficially owned over $576,000 worth of CBL stock. For the fiscal year ended December 31, 2018, she received $1,283,157 in compensation from the company. This included a base salary of $534,279 and stock awards worth $417,600.
Don Sewell has served as the company’s senior vice president – Management since February 2018. Previously, he served as the company’s vice president – Mall Management from February 2000 through February 2018, and he served in various other property management positions with the company from 1973 through 2000.
Augustus N. Stephas served as the company’s executive vice president and COO from 2010 until he resigned on December 31, 2018. Previously, he served as COO – senior vice president of the company from February 2007 through January 2010, and as senior vice president – Accounting and Controller from January 1997 through February 2007. According to the 2019 Proxy Statement, as of March 15, 2019, he beneficially owned 208,354 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, he beneficially owned approximately $377,120 worth of CBL stock.
Gary L. Bryenton served as a company director from 2001 until his retirement on December 31, 2018. He was a member of the Audit Committee during the relevant period. For the fiscal year ended December 31, 2018, he received $180,000 in compensation from the company. This included a base salary of $80,000 and stock awards worth $100,000.
A. Larry Chapman has been a company director since August 16, 2013. He also serves as the chair of the Audit Committee and as a member of the Compensation Committee. According to the 2019 Proxy Statement, as of March 15, 2019, he beneficially owned 84,397 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, he beneficially owned approximately $153,000 worth of CBL stock. For the fiscal year ended December 31, 2018, he received $180,000 in compensation from the company. This included cash compensation of $80,000 and stock awards worth $100,000.
Matthew S. Dominski has been a company director since February 2, 2005. He is also the Lead Independent Director, serving as the chair of the Compensation Committee and as a member of the Audit Committee. According to the 2019 Proxy Statement, as of March 15, 2019, he beneficially owned 93,276 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, he beneficially owned approximately $169,000 worth of CBL stock. For the fiscal year ended December 31, 2018, he received $205,000 in compensation from the company. This included cash compensation of $105,000 and stock awards worth $100,000.
John D. Griffith has been a company director since January 7, 2015. He also serves as a member of the Compensation and Nominating/Corporate Governance Committees. According to the 2019 Proxy Statement, as of March 15, 2019, he beneficially owned 83,382 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, he beneficially owned approximately $151,000 worth of CBL stock. For the fiscal year ended December 31, 2018, he received $170,000 in compensation from the company. This included cash compensation of $70,000 and stock awards worth $100,000
Richard J. Lieb has been a company director since February 10, 2016. He also serves as a member of the Audit and Nominating/Corporate Governance Committees. According to the 2019 Proxy Statement, as of March 15, 2019 Defendant Lieb beneficially owned 72,509 shares of Company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, he beneficially owned over $131,000 worth of CBL stock. For the fiscal year ended December 31, 2018, he received $175,000 in compensation from the company. This included cash compensation of $75,000 and stock awards worth $100,000.
Gary J. Nay served as a company director from 2011 until his retirement on December 31, 2018. For the fiscal year ended December 31, 2018, he received $170,000 in compensation from the company. This included cash compensation of $70,000 and stock awards worth $100,000.
Kathleen M. Nelson has been a company director since May 5, 2009. She also serves as the chair of the Nominating/Corporate Governance Committee and as a member of the Executive Committee. According to the 2019 Proxy Statement, as of March 15, 2019, she beneficially owned 90,931 shares of company stock. Given that the price per share of the company’s common stock at the close of trading on March 15, 2019 was $1.81, she beneficially owned over $164,500 worth of CBL stock. For the fiscal year ended December 31, 2018, she received $175,000 in compensation from the company. This included a cash compensation of $75,000 and stock awards worth $100,000.
The lawsuit charges that during 2005, "the individual defendants laid the groundwork for the overcharge misconduct, a fraudulent strategy that involved overcharging the company’s retail tenants for electricity, and concealing such overcharges from the tenants and the public. This scheme was first proposed at a CBL leadership conference held in 2005. At the conference, the head of Valquest Systems, Inc., a consulting firm specializing in utilities allocation, presented a PowerPoint to certain members of the company’s management, including defendants Sewell and Stephas. The PowerPoint presentation laid out how the company could reap greater profits from its retail tenants by charging the tenants higher rates for each kilowatt hour of electricity, and for more kilowatt hours of electricity than the tenants actually used.
"Subsequently, the company and Valquest agreed to implement the scheme Valquest had devised, and to jointly track the amount of overcharge, so as to ensure that the overcharge would not increase to levels that would raise suspicion. Specifically, the company imposed a system of overbilling by directing and requiring its management to use lease agreements containing clauses that stated that tenants would be charged the same amount that the malls were charged by local utility providers. However, in spite of these contractual representations, the company would inflate tenants’ electric bills, sometimes by over 100 percent of the tenants’ actual utility usage. These unlawful electricity overcharges were then deliberately concealed by an audit waiver provision also included in the company’s leases.
"Each month, Valquest provided income allocation summaries tracking the amounts that company tenants had been overcharged to Sewell. Sewell and other members of CBL management participated in this correspondence. When tenants raised issues with the amounts they had been charged, Valquest would provide those tenants with misleading energy surveys intended to corroborate the inflated charges that the company billed.
"One of the retail tenants impacted by the overcharge misconduct during this period was Wave Lengths Hair Salon of Florida, Inc. In June 2006, Wave Lengths entered into a 10-year lease for space at Gulf Coast Town Cente, a mall in Fort Myers, Florida owned by a subsidiary of CBL. After experiencing abnormally high electricity charges at GCTC, Wave Lengths raised concerns to the company about its energy costs. In response, as was done with other tenants who complained about overcharges, the company paid Valquest to provide Wave Lengths with an energy survey that falsely inflated Wave Lengths’ energy costs, so as to conceal the overcharges.
"During early 2016, GCTC came under new management unaffiliated with the Company. GCTC’s new operator conducted an evaluation of electricity usage throughout GCTC, and determined that the company had been significantly overcharging the mall’s tenants for their electricity. Subsequently, GCTC’s operator reduced Wave Lengths’ electricity charges from an average of $600 per month to approximately $269 per month, thereby indicating that the company had been overcharging Wave Lengths by nearly 123 percent. Ultimately, through the overcharge misconduct, the company overcharged its retail tenants for over 190 million kilowatts of unused electricity, and raked in tens of millions of dollars as a result.
"Between January 2011 and April 2019 alone, the company made roughly $60 million in fraudulent profits obtained through the scheme."
The plaintiff said he is seeking damages and to require CBL to "take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect CBL and its shareholders from a repeat of the damaging events described herein, including, but not limited to, putting forward for shareholder vote the following resolutions for amendments to the company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies:
1. a proposal to strengthen the board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the board;
2. a provision to permit the shareholders of CBL to nominate at least five candidates for election to the board; and
3. a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations. (e) Awarding CBL restitution from Individual defendants, and each of them; (f) Awarding Plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees, costs, and expenses; and (g) Granting such other and further relief as the court may deem just and proper."
The suit was brought by attorneys Wade Cowan of Nashville and Phillip Kim of New York City.