Securities Law Risks in REIT Investments: The CTO Realty Growth Case

Real estate investment trusts (REITs) have long been a cornerstone of diversified portfolios, offering investors exposure to real estate without direct property ownership. However, the recent scandal involving CTO Realty Growth, Inc. (CTO) underscores the vulnerabilities inherent in REIT governance and regulatory compliance. This case, marked by allegations of securities fraud and deceptive financial practices, serves as a cautionary tale for investors and a stress test for the sector's adherence to transparency standards.

Corporate Governance Failures: A House of Cards

CTO's troubles began with what Wolfpack Research described as "accounting shenanigans," including the use of a "sham loan" to conceal the collapse of a key tenant at its Ashford Lane property, according to an EdgarIndex case study. According to a Wolfpack report, the company allegedly manipulated its Adjusted Funds From Operations (AFFO)-a critical metric for REITs-by excluding recurring capital expenditures, a practice not commonly adopted by peers. This artificially inflated AFFO figures, misleading investors about the company's profitability and dividend sustainability.

The manipulation extended to dividend policies. Shareholders were led to believe dividends were stable, yet CTO reportedly resorted to aggressive share dilution-increasing the outstanding share count by 70% since late 2022-to mask a $38 million shortfall in operational coverage (the EdgarIndex case study documents this increase). Such practices not only diluted existing shareholders but also obscured liquidity challenges, violating the fiduciary duty of transparency expected of public companies.

Securities Law Violations: A Legal Quagmire

The allegations have triggered multiple class-action lawsuits under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 (as detailed in the EdgarIndex case study). These suits accuse CTO of making "false and misleading statements" about its financial health, including overstating the profitability of key assets and downplaying risks to dividend sustainability, according to a Third-News article. The class period spans February 18, 2021, to June 24, 2025, with a deadline of October 7, 2025, for shareholders to register for litigation, per a GlobeNewswire alert.

The SEC has not yet issued formal findings, but the lawsuits highlight systemic governance failures. For instance, CTO's management allegedly concealed tenant defaults through questionable accounting, such as reclassifying loans as capital improvements (the Wolfpack report raises this point). These actions, if proven, would constitute material misrepresentations under securities law, eroding investor trust and inviting regulatory scrutiny.

Market Impact and Investor Fallout

The fallout was immediate. Following the June 2025 Wolfpack report, CTO's stock price plummeted 5.4%, erasing $1.2 billion in market capitalization, according to an InvestorsHangout report. This sharp decline reflects not just the specific risks of CTO but broader concerns about REIT governance. Non-GAAP metrics like AFFO, while useful, become dangerous when manipulated-particularly in a sector where dividends are a primary return driver, as emphasized in InvestorsHangout key insights.

Investors are now left to navigate the legal aftermath. Shareholders who purchased CTO stock during the class period are being urged to contact law firms such as DJS Law Group and Glancy Prongay & Murray LLP to explore claims (see the GlobeNewswire alert). Yet the case raises a larger question: How many other REITs rely on similarly opaque metrics to manage investor perceptions?

Broader Implications for REIT Governance

The CTO case is a microcosm of governance risks in the REIT sector. REITs are uniquely structured to distribute most of their income as dividends, which incentivizes creative accounting to maintain payout ratios. However, as the Wolfpack report notes, the exclusion of recurring capital expenditures from AFFO calculations-a practice CTO allegedly adopted-deviates from industry norms and risks misrepresenting operational realities.

Regulators and investors must remain vigilant. The SEC's focus on non-GAAP metrics and dividend sustainability is likely to intensify, particularly as REITs face pressure to balance growth with transparency. For investors, due diligence must extend beyond traditional financial statements to scrutinize the assumptions behind metrics like AFFO and the sustainability of dividend policies.

Conclusion

The CTO Realty Growth case is a stark reminder that even well-established sectors like REITs are not immune to governance failures. As securities law enforcement agencies and courts adjudicate the claims, the broader lesson is clear: transparency is non-negotiable. For REITs, the path forward lies in aligning executive incentives with long-term value creation and ensuring that financial disclosures withstand scrutiny. Investors, in turn, must demand accountability-not just in words, but in the numbers that drive market trust.