Shareholders Complain About Affiliate Leeching

BALTIMORE (CN) - Hundreds of millions of dollars that Altisource Residential earns is diverted to an affiliate so that the board chairman can prop up his investment, a shareholder derivative action alleges.

The Police Retirement System of St. Louis filed the Jan. 15 complaint in Baltimore City Circuit Court against various corporate iterations of Altisource (RESI), and its board members.

Altisource Residential Corp., or RESI, a Maryland-based real estate investment trust with offices in the Virgin Islands, was spun off along with Altisource Asset Management Corp. (AAMC) in 2012, according to the complaint.

Shareholders say RESI acquires and manages nonperforming mortgages and foreclosed homes.

The complaint alleges that RESI Chairman William Erbey, who owns 4 percent of RESI and 29 percent of AAMC, has been "pilfering" exorbitant management fees from RESI to feed his pet affiliate, to the tune of "millions of dollars," as well as "reasonable overhead expenses."

For example, RESI paid about $10 million in fees and expenses in 2013; in the first three quarters of 2014, AAMC charged RESI about $44 million in incentive fees, equal to 32 percent of the dividends paid to RESI shareholders.

This significantly exceeds the amount paid to Piper Jaffray and other management companies, according to the complaint. At the current rate, AAMC will allegedly be charging RESI incentive fees "over six times higher" than the market price for such services by 2016.

The Police Retirement System also points to a Catch-22 embedded in AAMC's contract. If RESI decides to terminate the contract in the third quarter of 2015, before its 15-year expiration, RESI would have to pay a farewell fee of $186.1 million, according to the complaint.

With RESI maintaining just $76 million in cash on hand as of September 2014, the need to terminate the contract and find a less extravagant manager is urgent, shareholders say.

The complaint notes that a May 2014 shareholder-demand letter belly-flopped in the face of an intransigent board hand-picked by Erbey. Bids by other vendors have allegedly been summarily rejected.

In addition to Erbey, defendants named in the suit are RESI directors James Mullen Jr., David Reiner, Robert Fitzpatrick and Michael Eruzione.

John Isbister and Daniel Katz of Tydings & Rosenberg represent the class, which seeks restitution, rescission of the contract with AAMC, and disgorgement of all profits by the directors earned through the contract with AAMC.

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