Real Estate & Retail

BEHIND THE NEWS: Mall of America ruling cites Simon 'subterfuge'

May 9, 2005

A federal appeals court last month issued a ruling that gave affiliates of the Simon family some of what they wanted-a larger ownership stake in Mall of America. But the three-judge panel also gave them a lashing over dealings with their partner in the Minnesota mega mall, the Ghermezian brothers of Canada.

"This case presents the worst kind of self-dealing and subterfuge" by Simon affiliates, the court wrote.

Ouch.

At issue was a deal Simon Property Group Inc., the family's publicly traded real estate investment trust, cut in 1999 to buy a 27.5-percent Mall of America stake from a third party, boosting Simon affiliates' ownership to 50 percent.

A federal judge two years ago ruled Simon affiliates violated their fiduciary duty to the Ghermezians by cutting the deal behind their backs. He forced Simon affiliates to sell the Ghermezians the 27.5-percent stake, as well as transfer to them the role of managing partner.

The appeals ruling, issued April 21, forces the Ghermezians to split the 27.5-percent stake with Simon affiliates. That will leave the Ghermezians and private or public affiliates of Simon with a 36.25-percent stake each, though the Ghermezians will remain managing partner.

'Significant benefit'

In response to a request for comment, Simon Property Group spokesman Les Morris issued a statement noting the ruling will leave the Ghermezians with the same ownership stake Simon affiliates had offered to sell them repeatedly since 1999.

"There is a significant benefit to us that that remedy has changed," Simon Property CEO David Simon added during a conference call with analysts April 29.

True enough. But even to Wall Street analysts, fair dealing counts for something.

During the call, a veteran-and gutsy-real estate analyst suggested the "scathing ruling" as well as legal fights on two other fronts "kind of points to a bit of a pattern, some may argue."

The analyst, Ross Nussbaum of Banc of America Securities, noted a lawsuit filed last August by mall developer Sheldon Gordon charging Simon withheld information as part of a scheme that allowed it to buy his 40-percent stake in Las Vegas' ritzy Forum Shops for $174 million, less than half what Gordon now contends it was worth.

In the suit, which a Simon spokesman called baseless, Gordon charged Simon "successfully stonewalled ... provided inaccurate information" and violated racketeering laws.

Nussbaum also noted the company's legal tangles with state attorneys general over the fees associated with the Simon gift card. In March, it settled a lawsuit filed by New York Attorney General Eliot Spitzer for $125,000.

"Have you sat back and said, 'You know, maybe we somewhat need to change our approach, in some ways?'" Nussbaum asked.

Conceding nothing

In an impassioned three-minute response, David Simon, 43, conceded nothing. He said the legal issues surrounding the gift card are honest differences of opinion, and that Spitzer would not have settled for such a paltry sum if he believed Simon had committed an "egregious violation."

As for the Las Vegas dispute, he noted it was Sheldon who chose to sell.

"I certainly don't think we've done anything wrong at all in any of those cases," he said. "A big company ... that has been successful is going to attract these kind of situations"

He concluded: "It's frankly a ridiculous question. But let's move on."

'03 ruling critical, too

The latest Mall of America ruling, written by appellate Judge Arlen Beam, wasn't the first to rap Simon affiliates for their dealings with the Ghermezians, former Iranian rug merchants who conceived the retail colossus in the 1980s but needed the Simons' muscle to make it reality.

In his 2003 decision, Minneapolis federal Judge Paul Magnuson wrote that phone conversations the Ghermezians secretly tape-recorded and other evidence submitted during the two-month trial "contain examples of behavior that can best be characterized as boorish, behavior one might expect to see on a playground but not in dealings between sophisticated business partners."

Last week, Nussbaum, the Banc of America analyst, felt compelled to address his exchange with David Simon, writing in a report: "We certainly don't think the Simons are bad guys."

Yet Nussbaum also held his ground: "Simon has recently been involved in more legal disputes than other REITs. The question was, in our view, worth asking."

Nussbaum could not be reached for additional comment. Whatever his take on the exchange, it hasn't changed his view on the fundamental strength of the company. In the report, he called Simon his top pick among mall stocks, and said its stock might rise to $66 to $71 a share in the next 12 months.
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