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PHILADELPHIA-A securities fraud class action complaint has been filed against GMH Communities Trust and two of its principals with the US District Court for the Eastern District of Pennsylvania. The complaint alleges that the defendants "embarked on a scheme to inflate the earnings of the company and to issue dividends in violation of loan covenants in order to drive the price of the stock higher."

The complaint was initiated by a person, identified in the document as Iris Martin, who purchased securities of GMH when the Newtown Square-based student and military housing specialty REIT made its initial public offering in October 2004 and is filed on behalf of her, individually, and "all others similarly situated." The latter applies to people who purchased securities of GMH during the "class period" of between Oct. 24, 2004 and March 10, 2006. The locally based law firm of Berger & Montague PC is representing the plaintiff.

The higher stock price, according to the complaint, "allowed the company to sell a secondary offering in October 2005 on more favorable terms. Defendants were able to accomplish their scheme by issuing a series of false and misleading financial results to the market. …Unbeknownst to the market, the company's strong earnings were the result of accounting manipulations," the suit alleges.

"We believe these claims are without merit," a GMH spokeswoman tells GlobeSt.com. "We cannot comment further at this time."

Gary M. Holloway Sr., chairman, CEO and president of GMH, and Bradley Harris, the REIT's SVP and CFO for the class period, are also named as defendants in the complaint. As previously reported by GlobeSt.com, in early March, Harris wrote a letter to the GMH audit committee alleging "a 'tone at the top' problem with company management" and citing "material weaknesses" in the company's internal controls.

As a result, the audit committee retained Ernst & Young and other independent counsel to begin an investigation, and GMH postponed its fourth-quarter and year-end 2005 earnings statement. On March 31, Harris' employment was terminated, and GMH issued a statement saying it expected its restatement of financials to occur no later than May 15. However, within hours of GMH's March 13 announcement of the postponement and investigation, shares of GMH stock plunged 25.7%. In the court filing, the plaintiff states, "As a result of defendants' wrongful acts and omissions, and the precipitous decline in the market value of the company's securities, plaintiff and other class members have suffered significant losses and damages." For previous coverage on GMH, click here.

Robin Switzenbaum, a lawyer with Berger & Montague, tells GlobeSt.com the complaint "is a preliminary filing and may be amended on further news." She adds that further news could be GMH's actual restatement of financials. Switzenbaum also says that, as a "first filer," her firm is required to issue a press release regarding the action. Since its release, she says, "we have been contacted by others," referring to people who bought GMH securities during the class period. Also, GlobeSt.com has learned that at least three other law firms have announced that a complaint against GMH has been filed with the court and are seeking to be contacted by people who bought GMH securities during the class period.

On March 1 of this year, GMH stock, which trades as GCT on the NYSE, hit a 52-week high of $17.10 a share. On March 21, shares fell to a 52-week low of $10.80. At the close of the exchange on Friday, April 7, the price of GCT stock stood at $11.35 a share.

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UPDATE: Class Action Suit Against GMH Questions Financials

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