Law Firms File Class Action Suit Against CNL

The REIT's chairman, Thomas J. Hutchison, couldn't be reached by GlobeSt.com's publication deadline. CNL hasn't given the Securities and Exchange Commission a fixed date for the offering.

Publicly and anonymously, CNL staffers say the charges are groundless and the suit is meritless. But area hospitality consultants tell GlobeSt.com the suit will cost CNL "at least a million" before it is resolved.

The suit was filed by three prominent Northeast law firms on behalf of at least 100,000 CNL investors. The investors have bought about $3 billion of CNL stock since the REIT was formed in 1996, according to the suit. CNL Hotels & Resorts was formerly known as CNL Hospitality Properties Inc.

CNL officials tell GlobeSt.com that although the law firms claim to represent 100,000 CNL investors, only one investor, Mary M. Campbell of Omaha, NB, has formally charged CNL with alleged accounting improprieties. "They are hoping other investors will come forth as well, but that hasn't happened so far," the CNL spokesperson says.

The suit alleges CNL inflated its reported earnings and cash position prior to the IPO which had been planned since July 19. A representative for Hutchison denies the charge.

The suit was filed by Chimicles & Tikellis LLP of Haverford, PA; Goodkind Labaton Rudoff & Sucharow LLP and Wolf Haldenstein Adler Freeman & Herz LLP, both of New York. CNL investors not currently listed as plaintiffs in the suit have until Oct. 18 to join the court action by contacting any of the law firms. The investors will qualify to join the suit if they had purchased CNL stock between Aug. 16, 2001 and no later than Oct. 18, 2004.

Although the suit doesn't state specific monetary damages being sought from CNL and its affiliates, Nicholas E. Chimicles, a partner in Chimicles & Tikellis, says in a prepared statement his firm "has succeeded in recouping hundreds of millions of dollars of losses for its clients" in comparable class-action complaints.

The complaint charges CNL and its affiliates with violating federal securities laws, including Sections 11, 12 and 15 of the Securities Act of 1933, and Sections 14(a) and 20 of the Securities Exchange Act of 1934 and Rule 14a-9.

Specifically, the suit alleges CNL and its affiliates "utilized improper accounting practices and other manipulative devices to carry out a systematic scheme of materially inflating CNL's reported income and, thereby, created and maintained the appearance that CNL generated sufficient cash flow from operations to consistently pay dividends to shareholders at the levels promised in CNL's prospectuses."

The suit also alleges that "since at least 2001, cash from CNL's operations has represented a decreasing percentage of the funds used to pay dividends to its shareholders. These financial realities have been masked by accounting chicanery carried out by the defendants, which conduct violated generally accepted accounting principles and applicable federal law governing the sale of securities."

The suit argues and alleges "the success of this artifice has enabled CNL to continually attract additional investor capital through the sale of CNL stock at an inflated price of $10 per share. CNL has sold more than 300 million shares of stock at the same $10 per share price and that price has never been market-tested."

Besides CNL Hotels & Resorts, the other corporate defendants listed in the suit are CNL Hospitality Corp., the financial advisor to CNL Hotels & Resorts; CNL Financial Group Inc., the parent of all CNL subsidiaries; CNL Hotel Development Co., CNL Real Estate Group Inc., Five Arrows Realty Securities II LLC, CNL Hospitality Partners LP and RFS Partnership LP.

Individual defendants listed in the suit are James M. Seneff Jr., founder and chairman of CNL Financial Group Inc.; Thomas J. Hutchison III, chairman of CNL Hotels & Resorts; Robert A. Bourne, John A. Griswold, Charles E. Adams, Lawrence R. Dustin, Craig M. McAllaster and Robert E. Parsons Jr.