Malkins cheated Empire State investors out of $500M: suit

TRD New York /
Jan.January 06, 2014 09:34 PM

Shareholders in the Empire State Building have filed yet another lawsuit against the fledgling Empire State Realty Trust, alleging that the Malkin family and executives of the real estate investment trust had their self-interest paramount when opting to take the tower public, resulting in a $500 million loss for shareholders.

The Malkins could have seriously entertained proposals from third-party bidders including Rubin Schron and Thor Equities’ Joseph Sitt, the highest of which would offer $500 million more than shareholders received in the REIT, according to the suit, filed January 6 in New York State Supreme Court. But by refusing to consider the offers, they ended up “wantonly breaching” their responsibilities to shareholders, the suit alleges.

The suit names, among others, Anthony and Peter Malkin and Empire State Realty Trust general counsel Thomas Keltner, and accuses them of “egregious self-dealing and blatant breaches of the fiduciary duties” owed to shareholders in the tower. The plaintiffs, Hope Ratner and Mary Jane Fales, are shareholders in Empire State Building Associates — the entity that was formerly owned by more than 2,800 individual investors including the Malkin family.

The plaintiffs’ attorney Stephen Meister said that the Malkins stood to gain about $720 million by incorporating the building into the REIT, rather than selling it to a third-party bidder.

Meister singled out Sitt’s $1.4 billion bid for the fee interest in the tower as being worth $500 million more to investors than the amount they received as part of the REIT.

Empire State Building Associates engaged financial advisory firm Lazard Freres & Co. to help them determine whether the building should be sold to a private investor or consolidated into the REIT. But the suit alleges that instead of making Lazard’s analysis available to the building’s shareholders, the Malkins kept it concealed from them, claiming that the report was confidential.

The building and about 18 others eventually transferred over to the nascent ESRT Trust for $1.89 billion — a far cry from the $2 billion-plus offers that Sitt and Schron had offered for the tower alone, as The Real Deal reported.

Meister added that a separate lawsuit filed on Christmas Eve by ESRT shareholders was “cut of the same cloth,” and that he expected the lawsuit filed by his clients to be “consolidated with the other suit.”

A spokesperson for ESRT said that the lawsuit’s claims were “wholly without merit,” and that they would be dealt with in court.

ESRT’s stock was at $15 per share at press time, after opening at $13 in October. Jason Meister, son to Stephen and an Avison Young investment sales broker who represented both Sitt and Schron in their unsuccessful bids, declined to comment on the lawsuit. He has previously said that the REIT’s initial public offering was a debacle comparable to the rollout of Obamacare.

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