Healthcare REIT CEO Accused of ‘Short Swing’ Trading Profit (1)

National Health Investors Inc. Chief Executive Officer Eric Mendelsohn broke a rule against short-term trading by insiders and then concocted a plan to avoid repaying the profits to the company when it was alerted to the violation, according to a lawsuit by two shareholders.

Mendelsohn sold 4,000 shares of the health care real estate investment trust on Feb. 24 and bought 2,000 shares on March 12, breaking a rule that prohibits officers and directors from profiting on “short swing” trades, or purchases or sales of stock within a six-month period, according to the lawsuit, which was filed Wednesday in federal court in Manhattan.

The share price of the Murfreesboro, Tennessee-based REIT, which owns senior housing properties and skilled nursing facilities among others, fell 44% during that period.

On March 19, a week after Mendelsohn bought the shares at the depressed price, National Health Investors said in a filing that the extent to which the coronavirus could affect its business and financial results couldn’t be predicted with confidence. It said occupancy at its properties could significantly decrease if the virus caused residents to move out, operators to delay the acceptance of new residents due to quarantines, or potential occupants to postpone their moves to senior housing facilities.

Short-Swing Rule

The short-swing rule is designed to discourage corporate insiders from profiting by using information learned as a result of their positions. The suit was filed on behalf of the company by shareholders Mark Rubenstein and Deborah Donoghue through lawyers Miriam Tauber and David Lopez, who have litigated similar suits seeking to recover profits from short-swing trading. The suit seeks to force Mendelsohn to repay the company profits from the trades, estimated at $60,600.

“While we do not comment on pending litigation, what we can share is that a shareholder of the company is seeking to recover a ‘profit’ Mr. Mendelsohn is alleged to have realized even though he canceled the transaction at his own expense,” National Health said in a statement. “The plaintiffs have not asserted a claim against the company.”

After the shareholders notified the company of the trades on March 13, Mendelsohn told his broker to transfer the purchase to his error account, saying he realized he had incurred a short swing liability. Instead, the broker charged his account $14,555 to cover the difference between the price of the shares Mendelsohn bought on March 12 and the price of shares the broker bought on March 16, according to the suit.

“The transfer was a sham, Mendelsohn assuming any loss the broker might incur in settling the purchase by going into the market and purchasing shares to cover,” the shareholders said in the complaint.

The case is Rubenstein v. National Health Investors Inc., 20-cv-3697, U.S. District Court, Southern District of New York (Manhattan.)

(Updates with company comment in sixth paragraph)

To contact the reporter on this story:
Chris Dolmetsch in Federal Court in Manhattan at cdolmetsch@bloomberg.net

To contact the editors responsible for this story:
David Glovin at dglovin@bloomberg.net

Peter Jeffrey, Joe Schneider

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