Articles Posted in REITs

 

Raymond James and Robert W. Baird Are Charged With Compliance Failures

The Securities and Exchange Commission said that Robert W. Baird and Co. and Raymond James & Associates (RJF) will pay $250K and $600K, respectively, to settle charges accusing them of compliance failures in their own wrap free programs. Both firms resolved the charges without admitting or denying to them. They did, however, consent to the regulator’s orders, which found that they violated the Investment Advisers Act of 1940 and Rule 206(4)-7.

According to the SEC’s investigation, Raymond James and Robert W. Baird did not put into place the necessary policies and procedures that would have allowed them to figure out how much in commissions  their clients were charged when sub-advisers “traded away” with a brokerage firm that was not part of the wrap fee programs. As a result, said the regulator, the advisers could not let clients know the “magnitude of the costs” nor did the firm consider these commissions when trying to figure out whether the wrap fee program or sub-advisers were appropriate for clients. Because of this, claims the SEC, some clients did not know that they were paying for more than the single wrap fee for investments that were bundled.

 

Two ARCP Ex-Accounting Executives Face SEC and Criminal Charges For Allegedly Inflating the REIT’s Performance

Brian S. Block and Lisa P. McAlister are facing criminal and civil charges for allegedly overstating the performance of the American Reality Capital Properties (ARCP), now called VEREIT Inc. The two former ARCP accounting executives are accused of inflating a key metric that investors and analysts used to evaluate the publicly-traded real estate investment trust.

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Raymond James and Robert W. Baird Are Charged With Compliance Failures
The Securities and Exchange Commission said that Robert W. Baird and Co. and Raymond James & Associates (RJF) will pay $250K and $600K, respectively, to settle charges accusing them of compliance failures in their own wrap free programs. Both firms resolved the charges without admitting or denying to them. They did, however, consent to the regulator’s orders, which found that they violated the Investment Advisers Act of 1940 and Rule 206(4)-7. 
According to the SEC’s investigation, Raymond James and Robert W. Baird did not put into place the necessary policies and proceeds that would have allowed them to figure out how much in commissions their clients were charged whenever sub-advisers “traded away” with a brokerage firm that was not part of the wrap fee programs. As a result, said the regulator, the advisers could not let clients know the “magnitude of the costs” nor did the firm consider these commissions when trying to figure out whether the wrap fee program or sub-advisers were appropriate for clients. Because of this, claims the SEC, some clients did not know that they were paying for more than the single wrap fee for investments that were bundled.
 
Two ARCP Ex-Accounting Executives Face SEC and Criminal Charges For Allegedly Inflating the REIT’s Performance
Brian S. Block and Lisa P. McAlister are facing criminal and civil charges for allegedly overstating the performance of the American Reality Capital Properties (ARCP), now called VEREIT Inc. The two former ARCP accounting executives are accused of inflating a key metric that investors and analysts used to evaluate the publicly-traded real estate investment trust

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Secretary of the Commonwealth of Massachusetts William Galvin is ordering seven brokerage firms to pay $238K in fines for their involvement in the proxy fraud committed by Realty Capital Securities. The broker-dealers are:

· Voya Financial Advisors Inc. (VOYA)
· Invest Financial Corp.
· FMN Capital Corp.
· Platinum Wealth Partners Inc.
· Newbridge Securities Corp.
· TKG Financial
· Pariter Securities

Galvin claims that brokers at the firms worked with RCS to cast the bogus proxy votes involving American Realty Capital Healthcare Trust II and American Realty Capital Trust V—both nontraded real estate investment trusts—and Business Development Corp. of America, which is a nontraded business development company. The state’s securities division claimed that RCS employees pretended to be shareholders so they could cast proxy votes to the benefit of management. The votes were key in the merger between American Realty Corp., which is a Real Capital Securities affiliate, and Apollo Global Management. The deal was linked to a larger deal of $378M between AR Capital and Apollo.

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The Financial Industry Regulatory Authority is accusing VFG Securities of failing to supervise brokers to make sure that clients’ portfolios did not become overly concentrated in illiquid investments. In its complaint against the brokerage firm, the regulator said that from 11/10 to 6/12, VFG made nearly 95% of revenue from the sale of nontraded real estate investment trusts and direct participation programs. An audited financial statement with the SEC said that by 6/30/12, the broker-dealer had nearly $4M in revenues for that past year.

The self-regulatory organization said that VFG Securities owner Jason Vanclef wrote a “The Wealth Code,” which he used as sales literature to market investments in direct participation programs and nontraded REITs, in order to bring potential investors. He purportedly claimed in the book that nontraded REITs and nontraded direct participation programs provide capital preservation and high returns—a claim that is misleading, inaccurate, and not in line with information in the prospectuses for the instruments sold by VFG Securities. Such investments are typically high risk to the extent that an investor may end up losing a substantial part of if not all of his/her investment.

Vanclef also wrote in the book that by investing in the instruments that he recommended, investors stood to earn 8-12% results and consistent returns. FINRA said that he and the firm did not give readers a “sound basis” upon which to assess such claims.

In an interview with Vanclef, InvestmentNews said that FINRA has been “persecuting” him, ever since VFG underwent an exam in 2012. That is the year when the self-regulatory organization started concentrating more of its attention on illiquid alternative investment sales. Vanclef is accusing the regulator of “character assassination.”

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The Massachusetts securities division is widening its probe into alleged proxy voting fraud at Realty Capital Securities to include independent broker-dealers and advisers that sold RCS alternative investments, including nontraded real estate investment trusts. According to Massachusetts Secretary of the Commonwealth William Galvin’s complaint against RCS, firm employees communicated with other brokerage firm agents and talked about how to procure proxy votes. Massachusetts securities division spokesperson Brian McNiff said that these employees would send these agents a broker-dealer authority letter without verifying if they “had authority to vote client shares.”

Galvin, in his complaint, accused RCS of fraudulently gathering proxy votes to support real estate deals backed by AR Capital. He said RCS agents pretended to be shareholders and cast bogus votes for AR Capital-sponsored brokers. AR Capital is owned by Nicholas Schorsch and William Kahane. Schorsch is a principal shareholder in RCAS Capital, also known as RCAP, which is RCS’s parent company.

The state regulator has been probing Schorsch-related companies for the past year. In 2014, Galvin began a probe into RCS after American Realty Capital Property, which Schorsch controlled at the time, disclosed that it had purposely not corrected a $23 million accounting mistake.

This week, and in the wake of the charges filed by Massachusetts against RCS Capital, Fidelity Clearing & Custody and Charles Schwab and Corp. (SCHW) made the decision to step selling AR Capital products. Alternative investment products by AR Capital are marketed to advisers via Realty Capital Securities. Also, Cetera Financial Group said it would stop the sales of AR Capital-branded alternative investments, including REITs. The retail brokerage network announced the cessation a day after Galvin charged RCS with fraud.

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FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

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According to the amended complaint of an investor class action securities case, American Realty Capital Properties Inc. made over $900 million in commissions, fees and payments issued to company insiders after it started an acquisition binge to raise its share price and capital. The non-traded real estate investment trust purportedly started the buying frenzy, which lasted for three years, after completing its $69.8M IPO in 2011 and discovering that its share price was wallowing under the initial public offering price. The lead plaintiff in the case is the Teachers Insurance and Annuity Association of America, which is a retirement and annuities plan behemoth.

The securities lawsuit contends that because the lower than desired price was holding up ARCP’s ability to raise a significant amount of capital, the acquisition strategy allegedly involved artificially raising adjusted operation funds—a key metric for investors when evaluating an REIT’s performance. The plaintiffs believe that senior insiders at ARCP knew that the tactic was the only way to make the hefty fees. Over $917 million in payments went straight to ARCP insiders and the company’s affiliates.

Because of the acquisition binge, ARCP went from owning 63 properties and having $13 million in assets to owning over 4,400 properties and $21.3 billion in assets. The complaints claims that indirect and direct payments to ARCP insiders purportedly included $186.6 million subordinated distribution fees, and $333 million in fees and commissions. Some of the fees were allegedly triggered by ARCP’s buying of non-traded REITs American Realty Capital Trust IV Inc. and American Realty Capital Trust II, both defendants in the case. Other payments included $21.6 million for sales purportedly made to ARCP for equipment, fixtures, and furniture, $63.4 million for strategic advisory services, and $17.7 million for financing coordinating fees.

Even though the commercial real estate industry has recently rallied, shares of the nontraded real estate investment trust CNL Lifestyle Properties Inc. continue to plummet. According to the nontraded REIT’s filing with the SEC, as of the end of 2014 its board of directors approved a $5.20/share valuation—that’s a 24% decline from a year before when the share valuation had been modified to $6.85/share. Launched more than 10 years ago, CNL Lifestyle Properties original price was $10/per share.

Now the nontraded REIT has retained investment bank Jefferies LLC (JEF) to look at whether it makes sense to sell more of its properties or list on an exchange. Already, CNL Lifestyle Properties reached a deal in December to sell its senior housing assets portfolio to the Senior Housing Properties Trust for $790M. Proceeds from the sale will go toward paying debt, and possibly to shareholder distributions or strategic costs for enhancing properties in the CNL Lifestyle Properties portfolio.

The nontraded REIT is also considering whether to sell over a dozen ski resorts located all over the United States. Collectively, the properties are worth hundreds of millions of dollars. CNL Financial Group’s senior managing director, quoted on ABCNews.com, has said that the company is also looking at its theme parks and marinas as it explores its options.

Inland American Real Estate Trust Inc. (IARE) has lowered its estimated share value by 42.4%, because the company sold or spun off different assets over the last year. Among these were its hotel portfolios, now a listed real estate investment trust known as Xenia Hotels & Resorts Incorporated.

Inland American submitted a filing with the U.S. Securities and Exchange Commission, stating that $4 was its most current estimated share value. Prior to that, concluding 2013, the nontraded REIT said that its most recent valuation was at $6.94/per share value. Inland American Real Estate Trust Inc. said it was reducing its yearly distribution from 50 cents to 13 cents.

Inland American president and chief executive Thomas P. McGuinness noted that Xenia constituted a significant chunk of its assets, with each stockholder getting one share of Xenia common stock for every eight Inland American common stock shares held at end of business on January 20. That was the spin-off date. Because of this, stockholders of Inland American now own common stock shares in both Xenia and Inland.

The New York City Retirement Systems and TIAA-CREF have joined other institutional investors in suing American Realty Capital Properties (ARCP). They contend that the real estate investment trust violated federal securities laws when it allegedly made misleading and false statements that misrepresented the company’s business, as well as took part in a scam to fool the market and artificially inflate American Realty securities prices.

The claims are related to a $23 million accounting error that REIT made during last year’s first stated quarters, misstating the company’s adjusted operation funds. While ARCP eventually disclosed the mistakes, the plaintiffs claim that the company’s senior executives did not at first correct the error when it was discovered. The institutional investors believe that this was because executives wanted to get class members to buy American Realty securities at inflated prices.

TIAA-CREF and the $158.7 billion pension fund are seeking lead plaintiff class action securities status for their institutional investor fraud lawsuit.