SEC Initiates Investigation Into Silver Star REIT Amid Leadership Turmoil, Failed Deal
Following leadership changes, media sparring and a $50M lawsuit, the Securities and Exchange Commission launched a formal investigation into Silver Star Properties REIT, according to a public filing.
Silver Star filed an 8-K with the SEC on Monday acknowledging that an investigation had been launched, though it had not yet received the subject subpoena. The nature of the investigation is unclear, according to The Real Deal, which first reported the news.
“The Company is unable to predict, what action, if any, might be taken in the future by the SEC or any other governmental authority with respect to or as a result of the subpoena,” Silver Star said in its filing, noting that it was informed by the SEC's Fort Worth regional office Friday that the agency would be “requesting the production of certain documents.”
SEC enforcement actions against Silver Star and its management could result in sanctions, cease and desist orders, civil money penalties and barring of individuals from serving as company directors or officers, according to the filing. But it is unclear whether the SEC will take any action, the filing states.
The investigation comes as Silver Star and its former CEO and founder Allen Hartman spar in court and in the media. The Houston-based REIT suffered another blow this week when an investor backed away from plans to buy an Irving office campus out of bankruptcy from its Hartman SPE unit as it shifts away from office toward self-storage.
Silver Star is attempting to remove Hartman from its board and is suing him for $50M for alleged fraud, breach of fiduciary duty and illegal meddling in the attempted sale of its assets. Hartman is fighting back with claims of his own that the executive committee, led by co-CEO Gerald Haddock, acted illegally by changing bylaws to “entrench and re-elect themselves” without shareholder approval.
Hartman also claims the REIT's executive committee is avoiding holding a meeting that would liquidate the company and return capital to stockholders, something Hartman claims the business charter required to be complete by April 2023.
Hartman last week won a preliminary injunction against Silver Star's consent solicitation which would have confirmed three board members to the executive committee, circumventing its annual shareholder meeting, TRD reported.
Haddock and Hartman did not immediately respond to requests for comment Tuesday. But in a press release submitted to the SEC the same day it disclosed the investigation, Silver Star called Hartman's claims “meritless” and vowed to “vigorously defend against them.”
The release reiterates the company's commitment to self-storage, adding that any actions that slow that process, namely, selling off assets as Hartman is pressing for, are not in the best interest of shareholders.
“The best way to protect and build shareholder value is to oppose these unwarranted efforts to liquidate the Company, which would result in a fire sale of assets,” Haddock said in the release.
But at least one sale Silver Star hoped would go through was thwarted this week. A $12.5M deal for the 170K SF Westway One office building in Irving fell through after the buyer pulled out, according to The Dallas Morning News.
Westway One owner, Hartman SPE, is a Silver Star subsidiary that filed for Chapter 11 bankruptcy in September amid its restructuring and allegations Hartman had mismanaged the business.
The sale had been expected to help chip away at the REIT's then $217M in outstanding debt.
