The Real Deal New York

Empire State Building investor asks FBI to probe IPO filings

But legal sources downplay chance of serious investigation

September 12, 2013 04:24PM
By Adam Pincus

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Edelman-ESB-Malkin

From left: Richard Edelman, the Empire State Building and Anthony Malkin

The investors in the company that owns the Empire State Building have all voted to back a plan from Malkin Holdings to fold the landmarked tower into a real estate investment trust. But a handful of stakeholders have publicly chafed at the proposal.

San Diego resident Richard Edelman, whose grandparents invested $100,000 in the building in 1961, has been battling Malkin Holdings, led by CEO Anthony Malkin, for nearly two years.

In January, through letters and conference calls, Edelman leveled a barrage of allegations against the firm. The most explosive? That Malkin threatened shareholders in a letter filed with the U.S. Securities and Exchange Commission as the company was nailing down backers for the initial public offering of the $5 billion, 18-building REIT.

Now, as New York heavyweight investors such as Joseph Sitt and Rubin Schron have offered to buy the Empire State Building, Edelman has turned up the heat on Malkin with his complaints about the alleged threats. On Aug. 27, he met with the Federal Bureau of Investigation in San Diego, and this week he met with the New York Attorney General’s office to formally lodge his complaints, which he described as extortion, he told The Real Deal.

Edelman and others believe their stakes are worth more through a building sale than through the IPO as currently valued.

Several white collar lawyers, who were not involved with the case but briefly reviewed the allegations, said it was unlikely that a prosecutor would pick up the charges because Malkin’s so-called threat could be seen as Malkin simply advising investors about possible outcomes if the IPO does not go through.

Nevertheless, attorney Robert Heim, a former assistant regional director at the SEC, and partner at the law firm Meyers & Heim, said the claims underscored the fierce debate over the plan.

“The use of inflammatory language such as extortion shows the level of opposition and passion that some of the existing shareholders have, that are opposed to the IPO,” Heim said. He is not involved in the potential IPO.

Malkin, in its own letters to investors filed with the SEC, rebutted many of Edelman and others’ complaints, often calling such charges “lies,” though the firm did not specifically address this claim.

“[Edelman and his cousin Steven Edelman] have waged a more than yearlong campaign which uses social media, website, emails, mailings, and conference calls to spread these lies and deceptions amongst ESBA participants,” Malkin Holdings said in a January SEC filing, referring to the company that owns the Empire State Building. “Now that we have begun our solicitation, we are no longer constrained from commenting extensively on the lies and deceptions that they have spread to ESBA participants.”

Malkin declined to comment for this article.

Edelman, however, rejects Malkin’s criticisms, and is pressing ahead. His allegations, shared by two other shareholders interviewed by The Real Deal, hinge on a statement Malkin made in a Jan. 3 letter to investors, while the company was trying to obtain the final votes needed to win approval of the IPO.

If the IPO fails, the letter said, the result could be “immediate and sustained reductions or cessations … [of] overage rent,” which is a portion of the building’s profit used to pay investors based on their stake, similar to a dividend.

To understand the alleged threat, one needs to peek into the complex ownership structure of the building.

The Empire State Building Associates, which has more than 2,800 investors including Malkin family members and the Edelman family, owns the building. But another company, called Empire State Building Company, controls the management of the property through a sublease from ESBA, and is essentially a tenant to ESBA. Malkin is an investor in and supervises ESBC.

The ESBC manages the flow of money in the building, including paying a basic rent to its landlord, ESBA. Using that money, ESBA pays the mortgage interest on a loan taken out in 2002. That basic rent payment to ESBA rose in recent years, to cover the interest for a separate loan used for building upgrades.

At the end of each year, the ESBC pays ESBA investors a share in the profits, known interchangeably as “overage rent” or “additional rent.”

Edelman believes Malkin dangled the possibility of withholding payments to induce investors who had not yet approved the IPO to do so, under the threat that their income stream would be reduced.

According to Edelman, Malkin made a false statement in the Jan. 3 letter concerning the provenance of funds ESBC used to make the 2002 mortgage. The statement suggested “overage rent” was going to be used to pay the mortgage.

In that letter, Malkin explained that without the REIT IPO approval, operating cash flow might be diverted to pay for building improvements, instead of sent to investors.

But Edelman said that was incorrect, and that there was never a risk to mortgage payments.

This amounted to a threat to withhold the payouts to the investors, according to Edelman. In a May 13 quarterly filing with the SEC, Malkin effectively admitted that there was never any possibility of withholding such payments, Edelman claims.

And that letter came two days before Malkin reported that it had obtained 99.3 percent of the votes needed to win approval for the IPO.

A representative for the FBI declined to comment.

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