According to Los Angeles County court records, online real estate investing platform Rich Uncles is being sued by a former employee, claiming retaliation for blowing the whistle on the company's actions that were in violation of securities regulations, resulting in a substantial fine in 2019.
The company manages two real estate investment trusts (REITs) it has funded via online capital raising from individual investors, with one recently announcing it would be liquidated and the other starting to recover from a painful second quarter.
Whistleblower pushing back against attempt to force arbitration, accusing executives of plagiarism, lying to investors
The plaintiff, who has remained anonymous, has accused Rich Uncles executives, specifically CEO Aaron Halfacre, of a number of potentially illegal acts, including plagiarizing investment materials and lying to investors about a delay in offering new shares for sale in an email communication in 2019.
The suit also alleges that Rich Uncles, along with JAMS, the private company Rich Uncles uses for arbitration, has attempted to to force the plaintiff to use private arbitration, despite what the plaintiff claims is federal law that voids arbitration agreements for whistleblowers.
SEC violations addressed, but coronavirus pandemic upended BRIX REIT, impacted NNN REIT
Rich Uncles changed its structure to get back in compliance with securities regulations dealing with how it could market and raise money. But when the coronavirus pandemic hit the U.S. hard in March, its BRIX REIT, which was concentrated in university student apartments and also owned a property leased to now-bankrupt Gold's Gym, was faced with potential insolvency.
Recently, the worst-case scenario was realized when the REIT's board recommended liquidation of the REIT, a plan 77% of shareholders voted in favor of implementing. As a result, the company will spend the next year selling "substantially all" its assets to repay its liabilities. The remaining proceeds -- if any -- will be distributed to shareholders, likely returning pennies for every dollar invested in the REIT.
NNN REIT, the company's sole remaining investment vehicle, is in better shape, having survived the worst of the coronavirus pandemic's shutdowns that impacted almost all of its tenants in the second quarter. The REIT worked with a third-party real estate expert to revalue its assets and announced in late May that it was reducing the net asset value of NNN REIT to $7 per share, down 30% from the $10 per share initial price, as well as slashing its dividend payment due to the number of tenants unable to make rent payments.
Since then, business has stabilized significantly and the company has reached agreements to sell off three of its commercial properties to raise capital, pay off debt, and repurchase shares from investors. More importantly, rent collections have recovered and management is in "active dialogue" with several tenants to renew leases.
Business is getting better, but lawsuit overhang indicates some risk remains
While BRIX REIT investors are faced with what will almost certainly be a minimal recovery of their investment once creditors and other liabilities are repaid, NNN REIT seems to have come through the worst of the coronavirus pandemic.
Yet the ongoing litigation shouldn't be dismissed out of hand. Whether it proceeds to a trial or the parties reach a settlement remains to be seen, but the whistleblower is alleging behaviors that should give investors pause. Crowdfunded REITs require investors to trust management teams explicitly. You're giving them your money and letting them make all the decisions on the properties being acquired and the companies being hired to do the work as well as to negotiate all the components of every deal.
If management was indeed lying to investors, as alleged by the whistleblower, their credibility to act in investors' best interests would be significantly undermined.