Lawsuit alleges IIP knew it was a Ponzi scheme, however stated nothing.
An investor group is suing Modern Industrial Properties (IIP) (NYSE: IIPR) for not doing correct due diligence in its Kings Backyard funding.
Investor Michael Mallozzi initially sued IIP in April 2022, when the Blue Orca Capital report got here out. He was then joined by traders Alejandro Handal and Stephen Forrester.
They’re claiming IIP mislead traders, was incompetent, and broke securities legal guidelines.
In December, IIP requested the courtroom to dismiss the case, however the newest temporary asks the courtroom to disclaim that request to dismiss as a result of IIP was conscious that Kings Backyard was a Ponzi scheme whereas telling traders every thing was OK.
Kings Backyard Deal
In April 2019, IIP entered right into a sale-leaseback transaction with California-based Kings Backyard, led by its CEO and Chairman Michael King. Between 2019-2021, IIPR bought six properties from Kings Backyard at costs far larger than Kings Backyard had paid for the properties.
In complete, IIP invested roughly $150 million into Kings Backyard hashish farms, which accounted for as much as 10% of IIP’s rental revenues. The corporate additionally spent cash to construct out the amenities for Kings Backyard.
Due Diligence?
On the coronary heart of the lawsuit, the traders declare that IIP didn’t do the due diligence that it claimed it had. Particularly, the case states {that a} easy background test would have uncovered that Swiss American Funding Company, one among Kings Backyard’s traders, filed a go well with alleging that Kings Backyard had not paid out promised quarterly dividends.
It additionally factors out “irregular” transactions involving tens of millions of {dollars} between Kings Backyard and its managing administrators, a number of related-party transactions between Kings Backyard and entities its managing members owned or managed, and that there was “self-dealing … and a scarcity of transparency round its monetary affairs.”
The courtroom temporary additionally said, “King had already been concerned with 32 lawsuits earlier than January 2019, already had felony expenses, and had already modified his identify. The knowledge from which IIPR finally concluded that Kings Backyard was a Ponzi scheme with organized crime ties was accessible in early 2019 with just some keystrokes.”
As a substitute, IIP continued to inform traders that Kings Backyard was in good condition – up till IIP sued it for lack of cost. At that time, the corporate stated it truly suspected Kings Backyard was not being trustworthy.
The traders argue that IIP can’t have it each methods, claiming in a single lawsuit that Kings Backyard lied to them, however in one other lawsuit stated that they had no concept Kings Backyard was mendacity.
Building Cash
The case makes use of IIP’s personal language saying that it sends its due diligence crew to test on building tasks and verifies invoices. However, the lawsuit claims, it wasn’t doing any of that.
“Two of these tasks, the San Bernardino and nineteenth Road properties, had allowances for as much as a complete of $76.4 million in ‘Draw Requests.’” the go well with stated. “On the finish of the Class Interval, IIPR said that it had paid $49 million {dollars} in Draw Requests to Kings Backyard for work that had by no means been carried out, as a consequence of solid Draw Requests and invoices.”
For instance, {an electrical} bill seemed to be cobbled along with mismatched fonts and textual content bins that had been added to an outdated bill. That doc was from an electrical firm beforehand owned by Kings Backyard’s vice chairman of operations.
Blue Orca
The lawsuit additionally brings up an April 2022 report by the activist short-seller Blue Orca that wrote about IIP’s publicity to Kings Backyard. The case says that as a substitute of addressing the problems raised by Orca, IIP stated that Orca didn’t perceive business actual property or the hashish business.
Within the firm’s Might 2022 earnings name, IIP continued to sing the praises of Kings Backyard, saying, “Michael King and his crew have probably the greatest reputations for product high quality and consistency and maybe the only largest hashish market on the earth.”
Just some weeks later although, the courtroom submitting claims that IIP realized the issues. In July 2022, it instructed traders that Kings Backyard had give up paying hire and in August filed a lawsuit in opposition to the corporate for fraud calling it a Ponzi scheme.
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