Securities Fraud and Shareholder Risks in CTO Realty Growth, Inc.: Evaluating Legal and Financial Implications for Investors

The recent class-action lawsuits and regulatory scrutiny surrounding CTO Realty Growth, Inc. (CTO) underscore a critical juncture for investors evaluating the company’s financial credibility and governance practices. At the heart of the legal and financial controversy lies a series of allegations that CTO manipulated its financial metrics, misrepresented dividend sustainability, and concealed operational risks through deceptive accounting practices. These claims, amplified by a June 2025 report from Wolfpack Research, have triggered a 5.42% stock price drop and a $1.2 billion market value loss [1][3]. For REIT investors, the case highlights broader risks associated with opaque financial reporting and the potential for regulatory intervention.

Credibility of Financial Disclosures: AFFO Manipulation and the "Sham Loan"

CTO’s financial disclosures, particularly its Adjusted Funds from Operations (AFFO) metric, are central to the ongoing litigation. The company reported AFFO of $0.47 per diluted share for Q2 2025, reaffirming its full-year guidance [1]. However, the class-action lawsuit alleges that CTO artificially inflated AFFO by excluding recurring capital expenditures and employing a “sham loan” to mask the collapse of a top tenant at its Ashford Lane property [2][4]. According to a report by Kirby McInerney LLP, this loan was structured to conceal declining cash flows, creating a false impression of financial health [2].

Wolfpack Research further criticized CTO’s AFFO calculations, arguing that the metric fails to reflect the company’s true liquidity constraints. The firm noted that CTO’s quarterly dividend obligations ($14 million) and recurring capital expenditures ($5.7 million) far exceed its reported cash reserves of $8.4 million [3]. This discrepancy raises questions about the sustainability of CTO’s dividend model and the reliability of its non-GAAP financial metrics [5].

Dividend Misrepresentation and Shareholder Risks

The lawsuit also accuses CTO of misleading investors about the sustainability of its dividends. From 2021 to 2024, the company allegedly relied on aggressive share dilution—increasing shares outstanding by 70% since December 2022—to cover a $38 million dividend shortfall [3][6]. This practice, while common in high-yield REITs, has drawn scrutiny for its potential to erode shareholder value over time.

For investors, the implications are twofold. First, the reliance on dilution suggests a lack of organic cash flow generation, which could exacerbate risks during economic downturns. Second, the Wolfpack report’s revelations triggered a sharp sell-off, illustrating how market confidence can rapidly erode when governance practices are called into question [3]. As stated by Pomerantz Law Firm, investors who purchased CTO securities between February 2021 and June 2025 face significant exposure, with lead plaintiff motions due by October 7, 2025 [4].

Broader Risks for REIT Investors and Regulatory Scrutiny

CTO’s case is emblematic of a broader trend in the REIT sector, where 32% of high-yield firms have faced scrutiny for opaque accounting practices [1]. The SEC’s involvement in this case—though not yet confirmed as a formal enforcement action—signals heightened regulatory attention to dividend sustainability and financial transparency. According to the SEC’s enforcement division, companies that fail to disclose material risks, such as liquidity shortfalls or deceptive accounting, may face civil penalties, disgorgement, or administrative proceedings [7].

For REIT investors, the CTO saga underscores the importance of due diligence. Metrics like AFFO, while widely used, must be scrutinized for exclusions and assumptions. Additionally, the use of “sham loans” or other off-balance-sheet arrangements to mask operational challenges is a red flag that warrants further investigation [2].

Conclusion: Navigating the Risks Ahead

As the legal and regulatory proceedings unfold, investors must weigh the potential for financial recovery against the risks of prolonged litigation and governance uncertainty. The outcome of the class-action lawsuits and any SEC enforcement actions will likely shape CTO’s future trajectory. For now, the case serves as a cautionary tale about the perils of overreliance on non-GAAP metrics and the critical need for transparency in REIT disclosures.

Source:
[1] CTO Realty Growth, Inc. Class Action Lawsuit [https://www.rgrdlaw.com/cases-cto-realty-growth-inc-class-action-lawsuit-cto.html]
[2] CTO Realty Growth, Inc. [https://www.kmllp.com/cases-investigations/cto-realty-growth-inc]
[3] Wolfpack Research Report: “CTO: The B. Riley of REITs” [https://www.whafh.com/case/cto-realty-growth-inc/]
[4] Pomerantz Law Firm Announces the Filing of a Class Action Against CTO Realty Growth, Inc. and Certain Officers [https://www.morningstar.com/news/globe-newswire/9519972/pomerantz-law-firm-announces-the-filing-of-a-class-action-against-cto-realty-growth-inc-and-certain-officers-cto]
[5] CTO Realty Growth Reports Second Quarter 2025 Operating Results [https://ir.ctoreit.com/news-releases/news-release-details/cto-realty-growth-reports-second-quarter-2025-operating-results]
[6] Securities Fraud in REITs: A Case Study of CTO Realty Growth [https://www.ainvest.com/news/securities-fraud-reits-case-study-cto-realty-growth-governance-risks-2508/]
[7] SEC Enforcement and Litigation [https://www.sec.gov/enforcement-litigation]