Arbor Realty Trust Faces More Investor ‘Fraud’ Suits

Amid a federal probe into its lending practices, Arbor Realty Trust now faces two more suits by investors alleging the REIT engaged in fraud by overstating its net income and abandoning its underwriting standards.

The complaints, filed on Feb. 26 and March 17, make three cases total against the prolific lender to struggling multifamily syndicators; a proposed class action was filed in July.

Arbor’s Chief Financial Officer Paul Elenio called the latest claims “baseless” in a statement, adding that they “regurgitate misleading short seller reports that have proved to be meritless.”

“Our audited financial statements continue to demonstrate the accuracy of our financial reporting and our compliance with proper risk management,” Elenio added.

A spokesperson for the firm said the suits include vague allegations and amount to copycat filings of the proposed class action, which the representative also called baseless.

The suits do highlight short seller reports by Viceroy Research, which has published over two dozen dives into Arbor in a year and change. As a short seller, Viceroy benefits if Arbor’s stock price falls.

The release at the heart of the complaints is one from May 2024 entitled “Fraud.” It alleges Arbor failed to recognize losses by selling foreclosed assets to an off-balance sheet entity run by a former Arbor executive.

The Arbor spokesperson called the claims demonstrably false and said all of the company’s transactions are properly accounted for and disclosed.

Foreclosures have been a growing issue for the lender since the Sun Belt multifamily boom it helped finance went bust and sponsors have struggled to pay the short-term, floating-rate debt it specializes in.

In the fourth quarter, it reported twice as many assets taken back as REO or lender-owned than in the year prior. Its earnings, which were reported on Feb. 21, came in 33 percent below the year-ago period, which drove shares down nearly 14 percent; the firm said it would cut its dividend.

Both shareholder suits hit court records after Arbor’s fourth-quarter earnings.

After Viceroy’s May report, the Department of Justice and the Federal Bureau of Investigation in New York launched a probe into the lender’s practices and disclosures, Bloomberg reported.

The firm told Bloomberg that it routinely cooperates with regulatory inquiries and is very confident it conducts itself properly. Then it went mum, declining to answer questions about the investigation during earnings calls.

During February’s call, it did disclose that it had been “affected by elevated legal and consulting fees as a direct result of short seller resorts,” which it expected to “continue for the foreseeable future.” An analyst asked if the fees were related to the investigations; CEO Ivan Kaufman again declined to comment on the probe, then mentioned the expense of audits and compliance.

The recent investor suits also allege issues with the company’s internal controls — processes in place to ensure the accuracy, reliability and transparency of financial reporting.

Elenio, in his statement, said, the firm’s financials show the soundness of its internal controls.

In mid-March, Arbor secured a $1.1 billion repurchase or repo line from JPMorgan to pay off its collateralized loan obligation bondholders. The short-term, floating-rate loans in those CLOs are at the root of Arbor’s distressed debt.

Elenio highlighted the recent closing with “one of the world’s top financial institutions” as an event that “continues to validate the value of our loan book.”