A Peek Inside a Private Offering

By Jerry Knight
Monday, December 5, 2005

Joe E. Robert Jr., the Washington area real estate mogul and philanthropist, has lots of friends.

So when he decided last year to start a real estate investment trust, many of the initial investors were friends of Robert and of Freidman, Billings, Ramsey Group Inc., the Arlington firm that does investment banking work for Robert and his real estate empire.

Friends like talk show hosts Oprah Winfrey and Laura Ingraham, Ringling Bros. and Barnum & Bailey circus owner Kenneth Feld, America Online co-founder James V. Kimsey and Douglas H. McCorkindale, chairman of Gannett Co.

In a private stock offering, those people and a couple of hundred others could buy stock in JER Investors Trust Inc. for $15 a share.

A year later, Robert opened JER Investors to the general public in an initial public offering, selling stock to anybody who wanted to buy it for $17.75 a share.

The share prices alone show there's a big difference between being an ordinary investor and being connected.

The difference is that investors who paid $17.75 a share during JER Trust's initial public offering last summer have lost money on their stock, which had slipped to $16.49 by the close of Friday's trading.

Investors who got in on the private placement at $14.95 a share are sitting on $15 million-plus in paper profits that they will soon be able to cash in.

JER Investors recently filed paperwork to register the privately sold stock in a secondary offering, allowing it to be traded on the New York Stock Exchange with the shares that were sold to the public.

When the new shares hit the market, JER Trust's stock price could fall further. That often happens when large new blocks of stock become available for purchase, although sometimes the market swallows additional shares without a hiccup.

JER doesn't have any choice about registering the private placement stock for sale. It promised to do so when investors bought the stock. But selling additional shares when your stock is already slipping is not a way to make those who already hold publicly traded shares happy.

There's nothing illegal, improper or even unusual about what's gone on at JER Investors Trust, but it gives Washington investors a close-to-home reminder of how the world works.

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