Lightstone REIT Directors Must Face Suit Over $59.8M Undisclosed Conflict
A federal judge has ruled that investors may proceed with a class-action lawsuit alleging that the directors and advisers of three Lightstone Value Plus REITs failed to disclose a conflict of interest worth more than $59.8 million to their chairman before shareholders voted in 2022 to remove the funds’ liquidation deadlines.
U.S. District Judge Michael A. Shipp ruled Aug. 5 that investors adequately alleged the proxy statements and related solicitor calls omitted a material conflict of interest involving David Lichtenstein, the real estate investment trusts’ chairman and chief executive officer and, through affiliated entities, the owner of the funds’ external advisers. The case, filed in the U.S. District Court for the District of New Jersey, will move forward on all four counts, including breach of fiduciary duty against the director defendants and the advisory entities.
Plaintiffs allege that Lichtenstein, through three special-purpose entities, held subordinated participation interests in the REITs potentially worth more than $59.8 million – but those interests would have been rendered worthless had Lightstone Value Plus REIT II and REIT III liquidated on schedule, as their original charters required, by September 2024 and March 2025, respectively. According to the complaint, the 2022 proxy statements disclosed that Lichtenstein’s interests existed but did not disclose that they had no value unless the REITs’ duration was extended – a fact the court found could have significantly altered what a reasonable shareholder understood about the vote.
Shipp also found that phone solicitors hired by Lightstone made misleading statements to undecided shareholders between the REITs’ initial December 2022 annual meeting, when the amendments failed to pass, and a reconvened meeting in January 2023, when they passed. Investors allege solicitors told shareholders a “yes” vote was “the most likely path to liquidity,” when in fact it eliminated the liquidation deadline altogether. The court described the proxy materials as failing a basic disclosure standard, citing case law holding that “proxies should be lucid, and not a game of Clue.”
The charter amendments, which appeared on shareholder proxy cards as a single bundled line – “To approve an amendment and restatement of our charter” – also eliminated board fiduciary duties to shareholders, reduced quorum requirements to as little as 33% of votes entitled to be cast, restricted shareholder access to investor lists, and expanded indemnification protections for officers and directors.
The court did not resolve a separate dispute over whether REIT II’s vote met the required 50% approval threshold, finding the question immaterial to its ruling on the motion to dismiss.
The 2022 votes followed a similar 2017 vote, in which Lightstone Value Plus REIT I shareholders approved an indefinite extension of that fund’s duration using comparable “flexibility” language. Plaintiffs cite REIT I’s subsequent redeployment of capital into new development projects, including stakes in several Lichtenstein-affiliated Moxy-branded hotels, as evidence that Lichtenstein had no intention of pursuing liquidity regardless of which Lightstone REIT was involved.
Lightstone did not respond to AltsWire’s request for comment. AltsWire first reported on the proposed charter amendments in October 2022 and on the initial lawsuit filing in November 2024.
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