STRONG SELL RECOMMENDATION - REXI
Part 1 - Conflict of Interest Transactions Resulting in Insiders Profiting at the Shareholders Expense.
This report focuses strictly on situations where we feel management of REXI has failed to represent REXI shareholders, by failing to act in the shareholders best interests, and, by failing to act as a fiduciary for the company. In this report we also provide details of management's activities which show a history of very questionable related party transactions.
In some cases we feel it appears management has acted in a way that could be considered a “theft of corporate opportunity”, such as the TRM Copy Centers Deal, by taking profitable business opportunities personally, or giving profitable business at a discount to closely related parties. In other instances, it appears as officers and managers of REXI may have used corporate funds as their own private lending institution to finance investment opportunities which benefit themselves.
There appears to be a very disturbing pattern of related party transactions and use of shareholders monies for personal use, as well as significant potential for misuse of shareholders monies with a lack of internal regulation. In the REXI real estate loan business, it appears the proverbial fox seems to be the property manager of the chicken coop.
BACKGROUND OF ENTITIES AND PERSONS INVOLVED
1. Relationship of REXI to RAIT. RAIT commenced operations on January 14, 1998. REXI sponsored RAIT by acquiring approximately 14% of RAIT's common shares at a cost of approximately $12.0 million. This transactions was a case of husband Edward Cohen - REXI CEO - funding Wife Betsy Cohen's company RAIT, where she is CEO.
2. REXI & RAIT Relationship with Brandywine Construction & Management Inc., (“BCMI”). REXI holds commercial mortgage loans of borrowers whose underlying properties are managed by BCMI. Edward Cohen (REXI CEO), is Chairman of the Board of Directors and a minority stockholder (approximately 8%) of BCMI. ****REXI has advanced funds to certain of these borrowers for improvements on their properties, which have been performed by BCMI.****
This related party, conflict of interest transaction of advancing funds to BCMI may have compromised REXI sharholders.
According to the April ‘98 REXI S-3, “The President of BCMI (or an entity affiliated with him) has also acted as the general partner or trustee of ten of the borrowers”. That sounds to me like REXI advanced funds directly to BCMI, another significant related party transaction where the shareholders may have been compromised, and Ed Cohen as a shareholder of BCMI may be profiting significantly. The S-3 continues; “An entity affiliated with the president of BCMI is the general partner of the sole limited partner of an eleventh borrower.”
RELATIONSHIP OF REXI & RAIT INSIDERS
Edward E.Cohen is the CEO of REXI. He is also Chairman of the Board of Directors of Brandywine Construction & Management Inc., and approximately a 8% stockholder, (“BCMI”), (BCMI - performs property management for REXI & RAIT, and through a company it owns has received very large loans from REXI), and Chairman of the Executive Committee of JeffBanks.
Betsy Cohen is CEO of RAIT, and also CEO of JeffBanks, a bank holding company, which also does a good deal of business with REXI. For her work at RAIT, Betsy Cohen is paid a whopping $250k a year, plus options for 225,000 shares, making her the highest paid exec at RAIT, even though according to RAIT's SEC filing;
“Mrs. Cohen currently has substantial business interests apart from the Company which the Company anticipates will require a material amount of her time.”
Apparently being a Cohen at RAIT has it's advantages, as the RAIT President - Jay Eisner - is paid $50k less per year than Betsy's cousin - Jay Cohen - a mere VP at RAIT.
Daniel G. Cohen, is the son of Betsy and Ed, an Executive VP and director of REXI, and the CEO of FMF, the residential mortgage loan origination subsidiary of the Company.
Jonathan Z. Cohen, is another son of Betsy and Ed, and the Secretary director of Resource Energy, Inc., a wholly-owned subsidiary of REXI, and is REXI's nominee to RAIT's Board of Trustees.
QUESTIONABLE TRANSACTIONS
1. Sale of Property to Resource Asset Investment Trust (“RAIT”).
After Ed Cohen seeded his Wife's run company - RAIT - with $12 million cash, and paid the start-up expenses using REXI's shareholder's money, (see 2 below), REXI sold RAIT a number of loans at admittedly less than appraised value. The REXI shareholders received no additional consideration for doing this. From this action, I can only conclude either all of the REXI properties are not worth the appraised value - in which case the rest of the REXI accounting falls apart, or REXI made a transaction with a related party where the REXI shareholders were compromised, if not both.
2. Loan of monies to RAIT by REXI.
According to the RAIT SEC filing for RAIT's securities offering, (page 23), REXI advanced funds to RAIT:
“for legal, accounting and filing fees and expenses, salaries of the RAIT's executive officers, rent and other organizational expenses (which are estimated to be $526,900) and for the expenses incurred by REXI in sponsoring the Company, including an allocation of compensation of REXI employees (which are estimated to be $562,000). These advances are without interest and will be repaid from the proceeds of this Offering.”
The shareholders of REXI were - according to RAIT's own admission - not compensated for this activity, and therefore the REXI shareholders were compromised.. This looks like just one more example of flagrant misuse of shareholder's monies, in a conflict of interest situation, where it personally benefited Ed and Betsy Cohen as well as others in REXI and RAIT management, at the detriment of the shareholders.
3. TRM Copy Centers - Theft of Corporate Opportunity?
Using REXI monies, management of REXI did due diligence on an investment in TRM Copy Centers. After putting REXI money at risk, REXI decided the TRM deal did not make sense for REXI. Instead, on June 24, ‘98, REXI management including Ed Cohen and his son Daniel Cohen chose to take the deal themselves - personally, a fact they failed to disclose in the REXI 10Q ending June 30, ‘98. Here from the TRM 10 Q we see the transaction involved $20 million dollars:
“On June 24, 1998 (the "Closing Date"), TRM Copy Centers Corporation, an Oregon corporation ("the Company"), issued and sold to ReadyCash Investment Limited Partners, L.P. (the "Purchaser") 1,777,778 shares of a new series of Preferred Stock of the Company, designated the "Series A Preferred Stock", and warrants (the "Warrants") to purchase 500,000 shares of the Company's Common Stock at an exercise price of $15.00 a share, for an aggregate purchase price of $20,000,000 in cash (the "Transaction").”
“Daniel G. Cohen is the majority shareholder and an officer and director of the general partner of the Purchaser and Edward E. Cohen is the father of Daniel G. Cohen.”
“In connection with the Transaction, ... the Company's Board of Directors was increased to nine members, and Messrs. Daniel G. Cohen, Edward E. Cohen, Joseph G. Denton, Kent A. Godfrey, Joel R. Mesznick and Kenneth L. Tepper were elected to the Board. Pursuant to the terms of the Transaction...”
This transaction seems to be very representative of what management is doing with shareholder's money. The company did have money at risk in this transaction as REXI was doing DD. It would seem logical that had this deal been done ethically, someone should have decided up-front - hey this is a deal for the company, or this is a deal for us personally. That's not what happened. While insiders “apparently” reimbursed REXI for DD costs of this deal, the question remains as to whether this was “theft of a corporate opportunity” by REXI insiders.
In addition to the question of if this transaction falls into the “theft of a corporate opportunity” category, the question of where the $20 million used to fund this purchase came from? Considering the long list of related party transactions and apparent misuse of shareholders monies by REXI management, it would not be out of the question to consider if shareholders monies were used indirectly in this transaction - without benefit to the shareholders.
4. OSEB Loan of $65 Million To RAIT and BCMI.
From Note 5 of REXI's 10Q ending June 30:
“Also in the third quarter of fiscal 1998, the Company provided a first mortgage loan to OSEB Associates, L.P. ("OSEB") which is owned by RAIT (89%) (which acquired its interest in July 1998) and Brandywine Construction & Management, Inc. (11%) , a property manager affiliated with the Company. The loan, funded by the Company in June 1998 at a cost of $58.5 million, bears interest at 10% per year on a stated principal amount of $65.0 million. The Company also received a fee of $840,000(paid in August 1998) from OSEB in connection with these transactions.”
You will recall REXI CEO Ed Cohen is a “Chairman of the Board of Directors of Brandywine Construction & Management Inc.,”, and also approximately an 8% stockholder. You will also recall RAIT's CEO is wife to REXI CEO.
In addition to the glaring concerns this enormous loan - from insiders to insiders - raises, monies from the April 29, $120 million REXI stock offering must have been used in this transaction. It is rather disturbing to note that the prospectus for REXI's $120 million stock offering does not disclose intentions or details of such a personal loan in the “Use of Proceed” section. Again, the question is raised - have shareholders been compromised by this loan, and by the lack of disclosure of this large loan in the REXI securities registration?
Indeed, normal logic would conclude there could be no good reason for the insiders to do so many of these transactions personally, off balance sheet, unless they were able to benefit in some way - personally.
It would seem a well run company could find enough business to conduct in which a good portion of business did not involve related party and insider conflict of interest transactions. That does not seem to be the case with REXI.
5. Off Balance Sheet Purchase of Loan From REXI By REXI Insiders.
According to page 10 of the 10Q filed Aug. 14, REXI insiders took the following loan off balance sheet from REXI as described here:
“One loan, in which a senior lien interest was sold at a gain of $4.9 million, was acquired pursuant to an order (the "Order") of the United States Bankruptcy Court for the District of Columbia that was in effect at the time the Company acquired the loan. Pursuant to the Order, the Company had the right to cause title to the property underlying the loan to be transferred on or before June 30, 1998. To maintain control of the property (which the Company deemed necessary to protect its investment), the Company exercised its right and caused title to the property to be transferred to a limited partnership in which a subsidiary of the Company is the general partner (with a 1% interest) and the Chairman, President and Vice-Chairman of the Company are limited partners (with a 95% interest; the remaining 5% is held by an unrelated party). These officers have agreed that any economic benefit resulting from resale of this interest will be paid to the Company.”
Once again one must ask the question - why are these insiders doing so many transactions personally - unless they benefit some way personally? In this case, taking the loan off balance sheet will provide the insiders a tax benefit by allowing them to take the tax deduction of depreciation from the loan personally. Also, it could have the effect of increasing REXI EPS by keeping depreciation off the balance sheet.
RED FLAGS - ADDITIONAL RELATED PARTY TRANSACTIONS (as reported in the REXI S-3)
Relationships with Certain Borrowers.
“The Company has from time to time purchased loans in which affiliates of the Company are affiliates of the borrowers, as discussed in the following paragraphs...”
“In August 1997, the Company, through a subsidiary, acquired a loan (loan 35) with a face amount of $2.3 million from Jefferson Bank at a cost of $1.6 million. The loan is secured by a property owned by a partnership in which Mr. Schaeffer, the Company's executive vice president and a director, is the general partner and Edward E. Cohen, together with his spouse, are limited partners. The Company leases its headquarters space at such property. The lease provides for rents of $65,000 per year through May 2000. Ledgewood Law Firm, P.C., a law firm which provides legal services to the Company, and BCMI are also tenants at such property.”
“In June 1997, the Company acquired a loan (loan 29) with a face amount of $7.0 million from a partnership in which Mr. Schaeffer and Edward E. Cohen, together with his wife, are limited partners. Mr. Schaeffer was previously the general partner of such partnership. The Company acquired such loan at a cost of $3.0 million.”
“In December 1994,
*****the Company acquired a loan (loan 13) with a face amount of $3.0 million from California Federal Bank, FSB at a cost of $1.7 million. The loan is secured by a property owned by a borrower whose general partner is the President of BCMI. Edward E. Cohen, together with his wife, is a limited partner in such partnership.****
The borrower refinanced the Company's loan in September 1995, applying $2.0 million of the proceeds to the repayment of the Company's loan. As a result, the Company obtained a gain on its investment of $303,000, while maintaining a continuing interest in the loan of approximately $1.0 million.”
In August 1994, the Company acquired from third parties a loan (loan 8),in the original principal amount of $ 3.4 million (and with a then-outstanding balance of $4.4 million), for an investment of $1.6 million.
****The borrower is a limited partnership of which Mr. Lubin, a director of the Company, is currently the general partner. Mr. Lubin assumed such position after the Company's acquisition of the loan. Previously, the general partner had been the President of BCMI.****
The borrower subsequently refinanced the loan with another third party and repaid the Company $934,000, leaving the Company with a net investment of $419,000. This loan was sold to RAIT in January 1998.
RELATIONSHIPS WITH CERTAIN LIEN HOLDERS
The Company has sold two senior lien interests and one junior lien interest in its commercial loans to entities in which officers of the Company have minority interests as discussed in the following paragraphs.
“In December 1997, the Company purchased from third parties, for an aggregate of $1.52 million, two loans (loan 43) in the aggregate original principal amount of $2.0 million and with an aggregate outstanding balance at the time of purchase of $1.96 million. The loans are secured by an apartment building.
****The Company sold to a limited partnership in which Edward E. Cohen and Scott F. Schaeffer beneficially own a 17.8% interest a senior lien interest in one of the loans for $1.0 million,****
reducing the Company's net investment to $518,000 and leaving the Company with a retained interest in outstanding loan receivables of $1.0 million (at a book value of $803,000).”
“From November 1996 to June 1997 the Company acquired from third parties loans (loan 26) relating to one property in the aggregate original principal amount of $5.8 million (and with aggregate outstanding balances at the respective times of purchase of $7.6 million) for an investment of $2.5 million. The Company sold a senior lien interest in the loan for $2.2 million reducing the Company's net investment to $235,000 and leaving the Company with a retained interest in outstanding loan receivables of $5.9 million (at a book value of $2.3 million).
****The purchaser was a limited partnership in which Edward E. Cohen and Scott F. Schaeffer beneficially own an 18.3% limited partnership interest.”****
“In June 1996, for an investment of $2.4 million the Company acquired from third parties a loan (loan 22), in the original principal amount of $3.3 million (and with a then-outstanding balance of $3.3 million).
****The Company sold a junior lien interest in the loan for $875,000, leaving the Company with a net investment of $1.5 million, to a limited partnership in which Messrs. Edward E.Cohen and Scott F. Schaeffer beneficially own a 21.3% limited partnership interest.”****
Relationship with Jefferson Bank.
The Company maintains normal banking and borrowing relationships with Jefferson Bank, a subsidiary of JeffBanks, Inc. See also "Business -- Recent Developments -- Commercial Mortgage Loan Credit Facility." The Company anticipates that it may effect other borrowings in the future from Jefferson Bank. The Company, through FMF, subcontracts any residential mortgage loan servicing duties to Jefferson Bank. See "Business --Real Estate Finance -- Residential Mortgage Loans." Edward E. Cohen and his spouse are officers and directors of JeffBanks, Inc. (and his spouse is Chairman and Chief Executive Officer of Jefferson Bank and JeffBanks, Inc.),and are principal stockholders thereof. Daniel G. Cohen is a director of Jefferson Bank. Jefferson Bank is also a tenant at two properties which secure loans held by the Company and, at one of such properties, subleases space to RAIT.
CONCLUSION
The volume and regularity of property being transferred to and from insiders, or entities involved with insiders is deeply disturbing. Indeed, each new SEC filing made by the company seems to discloses a slew of new, disturbing transactions taken off balance sheet by REXI insiders. We believe this is a good reason to avoid ownership of this company at all costs. Management of REXI seems to have performed a long list of transactions that could and most certainly has benefited them or their close affiliates significantly, at the shareholder's expense.
Part two of this report discusses the accounting methods used by REXI which we believe has allowed them to improperly, and significantly over state income by using non GAAP compliant, non-standard accounting, contrary to the report from their Auditor Grant Thornton. We believe the company will be forced to restate their earnings, significantly reducing income.
Pluvia Securities Research is a securities research boutique specializing in corporate valuations, equity research and investigation of fraudulent stock promotions. This report should not be construed as an offer to sell or solicitation of an offer to buy any securities. Opinions expressed are subject to change without notice. This report has been prepared from original sources and data which we believe to be reliable but accuracy is not guaranteed. Certain matters described in this report are forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. This research report was prepared by Pluvia Securities Research whose stockholders, officers and employees may from time to time acquire, hold or sell a position in the securities mentioned herein. Mr. Pluvia and affiliates of Pluvia Securities Research currently hold positions consistent with the above rating.
e-mail Pluvia2@aol.com
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