Investor suit alleges Arbor hid “toxic” portfolio, financials “cannot be trusted”

Arbor Realty Trust, already entangled in a federal investigation of alleged fraud in its books, now faces an investor lawsuit claiming the multifamily lender concealed a “toxic” portfolio to juice its stock price. 

Investor Lois Martin filed the lawsuit Thursday seeking class-action status. If approved, the suit could garner thousands of plaintiffs, according to the complaint.

The lawsuit cites a March 2023 report by short-seller Ningi Research, which alleged Arbor hid the “toxic” mobile home portfolio through a web of holding companies, some of them fake, for over a decade.

The scheme, Martin alleges, amounts to securities fraud. 

A spokesperson for Arbor said in a statement that the “claims are without merit and we look forward to prevailing early in the litigation process.”

“Arbor does not own, nor has it ever owned, any interest in a mobile home portfolio,” the spokesperson said.

Short-sellers such as Ningi stand to profit if a company’s stock price slips. In the two days after Ningi released its report, Arbor’s shares fell by 11 percent, according to the lawsuit.

Arbor released a day-of response to the Ningi report, dismissing the claims as false and inflammatory. The REIT argued the report was a play by Ningi to profit from its short position.

The investor who sued, citing the report, goes on to claim that Arbor failed to disclose the performance of the mobile home portfolio to “avoid insolvency,” about $600 million in Arbor’s escrows “evaporated overnight” and its financial statements “cannot be trusted.” 

The report adds that the lender’s repo lines — a vital artery to lending— are “drying up” and $2.5 billion in credit lines could be subject to margin calls.

The Arbor spokesperson denied the allegation, saying “there is no validity to the claim that Arbor’s repo lines are in jeopardy.” 

If those allegations are true, they could be disastrous for Arbor’s performance. Repo lines allow lenders to borrow money from a bank to make loans to its clients — in Arbor’s case commercial real estate borrowers, many of them buying multifamily. 

Those loans collateralize the repo lines, and banks can decide that the value of the assets that back the loans has dipped, meaning the loan value has fallen, too.

Banks could then make a margin call, forcing Arbor, in this case, to put up the money to cover the repo lines. The question would then become: Does Arbor have the cash on hand to meet the call?

The suit also cites a December report by short-seller Viceroy alleging Arbor’s entire loan book is distressed. 

Though short-seller reports should be reviewed with skepticism and investor suits are commonplace when share prices fall, the investigation of Arbor opened by the Department of Justice and the Federal Bureau of Investigation in New York signals pressure is mounting for the multifamily lender. 

Arbor reported $1 billion in multifamily delinquencies in a second-quarter earnings report Friday, a sign the firm is struggling to handle the volume of troubled loans on its balance sheets.   

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