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SEC Opens Formal Investigation Into JDN Realty

The REIT says the move to a formal investigation of accounting irregularities was expected.

JDN Realty


, a troubled real estate investment trust (REIT) with once-strong development ties to retail powerhouses such as




, is under formal investigation by the

Securities and Exchange Commission


Craig Macnab, CEO of the Atlanta-based developer of community shopping centers, spent the last several days attempting to soothe and persuade analysts and investors that the SEC's escalation of its examination was expected and is the final step toward resolving the

investigation into accounting irregularities at the REIT.

Macnab confirmed late Tuesday that the SEC had upgraded its inquiry from informal to formal. "That is correct and we are not surprised," he said in an exclusive interview with

. "This is what we expected from Day One and it lets us begin the process of putting this behind us." Macnab, formerly an outside board member, took the helm of the company in April, two months after the board ousted top executives in connection with the irregularities.

JDN's director of investor relations, Charles Talbert, said the SEC move was typical. "This is the normal progression. The investigation cannot be finalized until the investigation is formal, and the move gives the SEC broader powers to investigate."

Talbert said a formal inquiry allows the SEC to compel testimony from potential witnesses who may otherwise have been unwilling to cooperate. He said that includes former JDN employees who left or were terminated in connection with the irregularities. "That is the key power they gain," says Talbert. "Everyone internally has talked. From our standpoint that's not a negative. It's a positive, it progresses and we can get this over with. We have cooperated from the beginning."

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A formal investigation also gives the SEC wide-ranging enforcement powers including the ability to levy fines and issue "cease and desist" orders regarding illicit company actions. While possible, one analyst who follows the company thinks the company's self-enforcement actions will go a long way toward satisfying the SEC. "I'm not downplaying the significance of a $350,000 to $500,000 fine," said the analyst who requested anonymity. "But that would probably be the extent of it. There is nothing bad left to put a halt to."

The major players in the accounting irregularities, company fonder J. Donnie Nichols and two development officers, were

fired in February. Nichols' wife, Elizabeth, recently left her post as president. Macnab and Talbert could not confirm whether any of the fired employees or officers are targets of the SEC's possible move to compel testimony.

Nichols and the two development officers -- Jeb L. Hughes and C. Sheldon Whittelsey IV -- were fired after it was revealed that Nichols approved secret payments to Hughes and Whittelsey between 1994 and 1998. As a result of the nearly $5 million in undisclosed compensation, the company was forced to restate earnings and investors lost complete confidence in the company, sending the stock swooning, losing nearly 60% of its value.

Climbing Back, Step-by-Step

Macnab has done a yeoman's job of trying to right the ship. And he knows the job ahead is difficult. "We are making solid progress measured by one small foot in front of another," he said. "And, at the end of the day any management, including this management, is measured by how we build value for shareholders."

Macnab said the company is focusing on regaining its foothold and reputation as a solid real estate development company. That includes the strained relationship with both Wal-Mart and Lowe's. The secret development payments were in conjunction with projects for JDN's prime customers, which placed significant strain on the relationships. JDN entered into a

settlement agreement with both tenants, which resulted in a $13.1 million charge to the company.

Macnab hopes that both companies will be willing to return as customers but, if not, JDN will move forward with tenants that remain in the fold. "If we execute and deliver on time we will have satisfied customers

who will give us new projects," he said. "We currently have a healthy 40 projects under construction, which is a big number for us. It is important we effectively manage these to satisfy everybody: our shareholders, our tenants, and our customers. If we do that ... everyone will be happy."

However, Macnab says there is room for improvement. "We need to augment the existing pipeline with new projects, which we are in the process of doing," he said. "I would say our relationship with the major tenants is satisfactory."

While Macnab is upbeat on the future, an analyst with insight into the company says the current relationship remains rocky. "Right now, Lowe's and Wal-Mart are nowhere to be seen," he says. "That could change and Craig is doing the right things, but it's down the road."

While Wall Street analysts remain cool to JDN and its prospects, the stock has gained nearly 20% in recent weeks. Still, analysts remain cautious. "I still think the time frame where you can harvest value is a ways away," says the first analyst." He cites the uncertainty over pending shareholder lawsuits and capital restrictions that keep JDN on a tight leash.

Macnab acknowledges the problems and the challenge. "We are working toward what we need to do. Our problems are generally behind us. We are a fundamentally sound company. We have an action plan we have to execute."

For shareholders, Macnab's candor is a moral victory that may well lead to more.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.