Whitestone REIT

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Case Summary

Company Name
Whitestone REIT
Stock Symbol
Class Period
May 9, 2018 to February 27, 2019
Motion Deadline
June 15, 2019
Southern District of Texas

The complaint charges Whitestone and certain of its officers with violations of the Securities Exchange Act of 1934.  Whitestone is a real estate investment trust (“REIT”) that owns and operates 57 commercial properties totaling 4.8 million square feet of gross leasable area in Texas, Arizona and Illinois.  In addition, through an investment in Pillarstone Capital REIT Operating Partnership (“Pillarstone OP”), Whitestone owns a majority interest in 11 properties comprising 1.3 million square feet of gross leasable area.

The complaint alleges that during the Class Period, defendants made materially false and misleading statements and/or failed to disclose adverse facts about Whitestone’s business and financial condition, including that, due to the Company’s lack of effective internal control over financial reporting, it was incorrectly recognizing assets and liabilities associated with its contribution to Pillarstone OP, and as a consequence, the Company’s financial statements for the 2018 fiscal year overstated Whitestone’s revenues, would need to be restated, and could no longer be relied upon.  As a result of this information being withheld from the market, Whitestone securities traded at artificially inflated prices during the Class Period, with its shares reaching a high of more than $14 per share.

Then on February 27, 2019, after the market closed, Whitestone announced in a Form 8-K filing with the SEC that its Audit Committee had concluded that “the Company’s unaudited consolidated financial statements as of and for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018 . . . included in the Company’s Quarterly Reports on Form 10-Q for [those periods] should be restated [and should] no longer be relied upon.”  According to the Company, in August 2018, it received a comment letter from the SEC requesting “an analysis of the Company’s determination that the contribution of all of the equity interests in 14 properties to Pillarstone OP in exchange for Pillarstone OP Units and the assumption of debt in December 2016 (the ‘Contribution’) did not meet the requirements for derecognition of the underlying assets under [certain accounting standards], and an explanation of the Company’s consideration of the immaterial accounting errors related to Pillarstone OP in its conclusion that disclosure controls and procedures and internal controls over financial reporting were effective as of June 30, 2018 and December 31, 2017.”  After discussions with SEC, the Company concluded it would “derecognize the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and w[ould] recognize the Company’s investment in Pillarstone OP under the equity method.”  On this news, the price of Whitestone shares fell more than 14% over the next two trading days.

On March 15, 2019, Whitestone filed its Annual Report on Form 10-K with the SEC.  In the Form 10-K, the Company stated that it had “identified a material weakness in its internal control over financial reporting as of December 31, 2018.”

Class Period: May 9, 2018 - February 27, 2019
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