July 7, 2014

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny

According to state regulators, non-traded real estate investment trusts, structure products, and private placements, are some of the financial instruments that the states and insurance regulators are watching closely. First Deputy Commissioner of the Iowa Insurance Division Jim Mumford and Alabama Securities Commission director Joseph P. Borg recently spoke at a panel at the Insured Retirement Institute's Government, Legal and Regulatory Conference.

Borg noted that a growing number of agents are now selling unlicensed financial products, with insurance agents selling private placements and getting clients away from insurance products and into Regulation 506 of Regulation D. The rule establishes a safe harbor for securities’ private offerings. Such instruments are only supposed to be made available to accredited investors and non-accredited investors that have enough sophistication to be able to assess this type of investment. Agents, however, have tried to circumvent securities laws by claiming that a (nonexistent) attorney gave them a letter stating that the private offering actually wasn’t a security.

Also up for sale lately are self-directed IRAs and promissory notes. Structured products have also been quite popular, although unfortunately, Borg noted, many agents and brokers don’t even understand what they are selling.

Certain investments just aren’t for everyone. We represent investors that have suffered losses related to fraud involving non-traded REITs, mortgaged-backed securities, alternative investments, collateralized debt obligations, private placements, and other financial products. Contact our complex investment fraud lawyers today.

State regulators on high alert for complex investment and insurance sales, InvestmentNews, July 2, 2014

SEC Regulation 506 of Regulation D

More Blog Posts:
LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments, Stockbroker Fraud Blog, March 25, 2014

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules
, Institutional Investor Securities Blog, March 19, 2014

FINRA Suspends and Fines GlobaLink Securities Principal, Stockbroker Fraud Blog, September 19, 2013

May 24, 2014

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading

The Financial Industry Regulatory Authority is postponing when it will send to the U.S. Securities and Exchange Commission its proposed new rules that would give investors a more accurate overview of the costs involved in buying nontraded real estate investment trust shares. The proposed change to NASD Rule 2340, if approved by the SEC, would no longer allow brokerage firms to list a nontraded REIT’s per-share value at the common price of $10, which is the price that they are sold to clients.

Instead, the different fees and commissions that deal managers and brokers are paid would have to be factored in, which would lower each nontraded REIT’s share price in a customer’s account. Independent brokerage firms and their affiliated reps are the ones that would be most affected since practically all they sell is nontraded REITs. Unlisted private placements would also be impacted.

Although the comment period on the proposed rule changes ended in March, FINRA now says that it is not yet done looking at these comments. One group, the Investment Program Association, wants the proposed rule changes—in particular, the one that modifies to the way REIT valuations show up on client statements—delayed until 2015 so that nontraded REIT sponsors and brokerage firms that sell these investments have enough time to make their modifications so they are in compliance.

The SEC recently approved another rule change. This one will limit-self trading. FINRA Rule 5210 will mandate that firms implement procedures and policies that are reasonably designed to review trading activity and prevent self-trading from orders coming from a trading desk or algorithm. Self-trades raise concerns because they may not be a sign of real trading interest.

In other FINRA news, the SRO is modifying the design of Cards, its trading-surveillance system. The changes will give smaller brokers that don’t work with clearing firms greater flexibility to send commission and trade information either straight to FINRA or with the help of a contractor.

Cards is supposed to automate the SRO’s analysis of suspect broker activity, decreasing the agency’s dependence on live exams, which don’t always catch all violations. However, there were those who had problems with Cards, noting it would bring up data-security risks and privacy risks not just for brokers and investors. Big expenses over compliance could also be likely.

In a speech earlier this month, FINRA Chief Executive Officer Rick Ketchum said that based on meetings with brokerage firms to comprehend the benefits and costs of Cards, the agency has modified its original concept, including offering flexibility in data reporting to address cost complaints. The changes will be incorporated into a proposal to be issued this summer.

Our REIT Fraud lawyers represent investors seeking to recoup their losses.

Finra holds off sending nontraded REIT share price rule to SEC, InvestmentNews, May 20, 2014

FINRA Rule Change to Limit Self-Trading Approved, FINRA, May 2, 2014


Finra Trade-Surveillance System to Be Revised, Ketchum Says, Bloomberg, May 20, 2014

More Blog Posts:
SEC Roundup: The Regulator Charges Ex-Deloitte Chief Risk Officer with Auditor Rule Violations, Ex-Clearing Firm Officials With Regulation SHO Violations, & Rafferty Capital Markets with Illegal Trade Facilitation, Institutional Investor Securities Blog, May 23, 2014

SEC Warns About Investment Scams Involving Marijuana, Stockbroker Fraud Blog, May 24, 2014

AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

March 19, 2014

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules

The non-traded real estate investment trust industry want to delay the implementation of the Financial Industry Regulatory Authority disclosure rule until the end of 2015. The rule would require that investors be given more accurate data about the valuation of direct participation programs and nontraded REITs. This should provide investors a more accurate picture of how much it costs to buy nontraded REIT shares. Currently, the self-regulatory authority’s proposal would put the rule change into effect at the end of 2014, which would be about six months after obtaining Securities and Exchange Commission approval.

Almost all Nontraded REIT vendors are independent brokerage firms. Generating close to $20 billion in sales last year, which is twice as much as the year prior, broker-dealers and their representatives have gotten commission boosts due to their typical 7% commission.

If the disclosure rule is approved, broker-dealers would no longer be able to list a nontraded REITs per-share value at $10, which is the price their clients would typically pay. Instead, commissions and fees paid to dealer and broker managers would have to be factored. This would lower the share price on every customer account.

In a letter to the SEC, the Investment Program Association said it is asking for an 18-month implementation period to avoid unfavorable consequences not just for nontraded REIT industry and others that depend on unlisted DPPs and REITs as capital sources, but also for investors. The industry trade group wants to slow down changes to the way REIT valuations are presented on client account statements and give brokerage formers and Nontraded REIT sponsors more time to make adjustments to any new requirements. Already, contends IPA Chairman and Carey Financial President Mark Goldberg, the expected changes are having a negative impact on new offerings of Nontraded REITs and DPPs.

Goldberg says that the industry supports greater disclosure as well as the reduction of commissions. He also wrote that net investments should be calculated by just subtracting dealer manager fees and commissions. He believes this is in line with the “point of sale cost deduction approach” employed for other securities.

Commenting on the industry’s move to delay the implementation of the disclosure rule, Shepherd Smith Edwards and Kantas, LTD LLP Founder and stockbroker fraud lawyer William Shepherd said: “Any attempt to delay implementation of new rules to help investors know the true value of any investment is scandalous. Consumer protection groups have often been critical of FINRA, which is a trade association itself operated by the brokerage industry. Yet, financial advisory firms are fighting to keep from being subject even to FINRA regulation. By now opposing a requirement of greater disclosure of the true value of non- traded (and often unmarketable) REIT investments, we see just how far a financial investment trade organization will go to obscure information regarding problem investments such as many of these REIT’s!”

If you think that your non-traded REIT losses are a result of securities fraud, please contact our stockbroker fraud lawyers immediately. We represent retail and institutional investors in getting their non-traded REIT investment losses back.

Nontraded REITs want delay in Finra's proposed disclosure rule, InvestmentNews, March 14, 2014

Download the Investment Program Association's Letter (PDF)

More Blog Posts:

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

Securities America, Ameriprise, Among Independent Broker-Dealers Charged $10.75M by Massachusetts for Nontraded REIT Sales, Stockbroker Fraud Blog, September 4, 2013

Mortgage REITs See a Slump, Institutional Investor Securities Blog, August 14, 2013

February 14, 2014

FINRA Awards Nearly $1M in Florida Non-traded-REIT Cases

The Financial Industry Regulatory Authority has ordered two Retirement Securities Inc. and Sterling Enterprises Group Inc. to pay an individual and two trusts over $900,000 in a Non-traded real estate investment trust case. The individual is investor Kristopher Brownlow and the two trusts are the Martha H. Mason Trust and the Derek Mason Trust. Both Retirement Securities and Sterling Enterprises are no longer registered with FINRA.

The two trusts and Brownlow brought the case to the SRO, contending that they lost money because of the investments that Sterling Enterprises and Retirement Securities recommended to them. Per FINRA documents, the investments were made in REITS offered by Inland American Real Estate Trust Inc. and they were non-tradable. Inland Real Estate Trust Inc. is one of the biggest non-traded REITs with over $11 billion in assets.

At the dispute resolution hearing, the claimants argued that the investment advisors breached their fiduciary duty, were negligent, took part in common law fraud, violated the Florida Securities and Investor Protection Act, and breached contracts. Except for the allegation involving the Florida act, all allegations were thrown out.

The FINRA panel awarded $133,154 to the Martha Mason Trust and $719,971 to the Martha Mason Trust. Kristopher Brownlow was awarded $47,552.

Non-Traded Real Estate Investment Trusts
Non-traded REITs are very popular with investors in part because of high dividends. Unlike publicly traded REITs, nontraded REITs are sold and purchased by small investors by broker-dealers.

In just the last three months of 2012, investors infused about $3.3 billion into non-traded REITs. (Unfortunately, because a lot of these trusts suspended distributions, investors have found it tough to liquidate their holdings.) Last year, non-traded REITs raised $19.6 billion. Compare that to $10.3 billion in 2012.

Please contact our non-traded REIT fraud lawyers at The SSEK Partners Group today. We represent institutional and individual investors in recouping their investment losses.

Nontraded REITs Get Aggressive, The Wall Street Journal, January 14, 2014

FINRA’s $900K award in Tampa case raises issues about non-traded REITs, Tampa Bay Business Journal, December 26, 2013

Florida Securities and Investor Protection Act

More Blog Posts:

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

Broker-Dealer National Planning to Pay $6.2M FINRA Arbitration Award to Two Minnesota Investors Over REITs, Stockbroker Fraud Blog, December 3, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

August 14, 2013

Mortgage REITs See a Slump

Real estate investment trusts that purchase mortgage debt has taken a dive after an employment report that was better than forecasted spurred speculation that the Federal Reserve will begin to make its asset purchases smaller in size. According to data, the United States added 195,000 jobs in June, even though a median forecast in a Bloomberg News survey predicted only 165,000 new jobs. Meantime, mortgage securities backed by the government experienced their largest quarterly losses in 19 years during the three months leading up to the end of June. Certain mortgage REITs even had to use money that was borrowed to amplify possible returns.

Financial firms that purchase mortgage bonds and loans have been contending with speculation that the Fed will lower its $85 billion of monthly debt purchasing as the economy begins to look like it is improving. Unfortunately, a lot of mortgage REITs did not see the recent sharp rise in interest rates. These higher rates decrease the likelihood that homeowners will refinance their mortgage rates. To reflect the upped risk of holding high duration bonds in the long-term, the securities have dropped in value. That many of the REITs did not foresee the interest rates job could be an indictor that they were unprepared and have been complacent.

Mortgage REIT Fraud
Mortgage real estate investment trusts purchase mortgage-backed securities or mortgage that exist or lend money to the owners of real estate for their mortgages. These REITs are involved in investing and owning property mortgages while revenues primarily come via interests made on mortgage loans.

Our REIT lawyers represent investors that have sustained losses due to securities fraud. Contact Shepherd Smith Edwards Kantas, LTD, LLP today.

Rising Interest Rates Burn Mortgage REIT ETFs, ETF Trends, August 14, 2013

Mortgage REITs in the cellar, Investment News, July 8, 2013

More Blog Posts:
Brokerage Firms Change Hands as Insurers Divest In House Securities Firms, While REIT Manager Schorsch Buys First Allied Securities, Stockbroker Fraud Blog, June 14, 2013

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements, Institutional Investor Securities Blog, April 28, 2013

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

April 28, 2013

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements

The Financial Industry Regulatory Authority’s board of governors has a plan that could radically modify the way brokerage firms report illiquid investments’ value on the account statements of clients. The SRO, which wants to give investors more transparency in regards to the actual value of such investments, has been trying to modify its rules about REITs and private placement valuations on client statements for well over a year.

Earlier this month, in changes it is proposing to Rule 2340, the FINRA board presented two reporting alternatives for brokerage firms. With the first option, a brokerage firm wouldn’t need to have the per-share estimated value of an REIT or a private placement that is unlisted included in customers’ account statements. The second choice lets a brokerage firm chose from three options:

• A valuation done by an external service at least one time every three years.
• A valuation performed by a service that performs valuations according the methodology revealed in the prospectus.
• For a couple of years after the initial investment, a “net investment” valuation that is comprised of the offering price without cash that is distributed to investors and “organization and offering expenses” paid for via the offering or borrowing of proceeds.

The majority of nontraded real estate investment trusts sell at $10/share and they generally stay at that value on a client’s account statement until a year and a half has passed since the REIT ceased to raise funds. This means that years may go by without a client being able to see that the nontraded REIT has a value that differs from that $10/share price.

However, when the recent credit crisis hit, some of the biggest nontraded REITs experienced steep drops in valuation each quarter, and advisers and investors found it difficult to figure out how, why, and to what extent the valuation declines occurred. The matter of the way a nontraded REIT should be valued (and a brokerage firm’s duty to make sure that valuation is stated on client account statements) has become a highly charged issued.

Also, to the dismay of FINRA, its examiners, who have studied quite a number of retail sellers of nontraded REITs in the last couple of years, have found that firms selling these instruments didn’t perform much reasonable diligence before selling them or failed to determine whether the product was appropriate for investors. In comments made to a Securities Industry and Financial Markets Association forum last year, FINRA executive vice present of member regulation sales practices Susan Axelrod said that when REITs have gotten into financial trouble, there were usually red flags that brokerage firms could have assessed first before making more sales.

Our REIT lawyers represent investment fraud victims. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra plan could upend illiquid investment reporting, Investment News, April 24, 2013

Public Non-Traded REIT Tip Sheet


Why nontraded REITs are in Finra's cross hairs, Investment News, October 1, 2012

More Blog Posts:
Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors, Institutional Investor Securities Blog, October 22, 2012

April 9, 2013

Many Investors Find that Securities Arbitration Can Be Better than Court

The dismissal of an Apple REIT class action lawsuit against David Lerner Associates Inc. in U.S. District Court for the Eastern District of New York should have little effect on the Apple REIT arbitration cases that are being resolved through Financial Industry Regulatory Authority arbitration. In fact, most investors are likely to recoup their losses via this avenue.

Per Bloomberg, Investors are contending that they were defrauded in the underwriting and sale of more than $6.8 billion Apple Real Estate Investment Trusts (REITs), which were marketed as suitable for conservative investors. Meantime, Lerner Associates earned over $600 million in commissions and fees as five Apple REITs made above $6 billion.

Last year alone, FINRA told David Lerner to pay $12 million in Apple REIT Ten restitution to investors. The financial firm allegedly targeted elderly investors, misleading them while failing to properly disclose the risks involved in the securities.

In this class action case, the judge threw out the plaintiffs’ arguments that the offering materials for the Apple REITs had misrepresentations. Yet, as Shepherd Smith Edwards and Kantas, LLP Founder and REIT Attorney William Shepherd points out, it isn’t so much that Lerner made representations about the real estate investment trusts but that they were not suitable for the investors that he is currently recommending.

This means that even if the risks were properly disclosed, if the investment was unsuitable for the client it was recommended to, there could likely be grounds for a securities case and resulting recovery.

“Securities class action cases can only be pursued under federal securities fraud laws,” points out Apple REIT Attorney Shepherd. “Securities arbitration claims can be sought under state securities laws, which are usually far better for investors. As well, such claims can be sought for breach of fiduciary duty, breach of contract, and even negligence. More importantly, the average recovery in securities class action cases is less than 10% of the investors’ losses. For these and other reasons, many investors’ cases fare better in securities arbitration than in court.”

Big win in court for David Lerner, Investment News, April 5, 2013

Class-action suit against David Lerner Associates dismissed, Newsday, April 4, 2013

More Blog Posts:
Prospective Securities Class Action Lawsuit Accuses David Lerner Associates Inc. Accused of Recycling Investor Capital and Using a Credit Line to Meet Dividend Payout, Stockbroker Fraud Blog, September 30, 2011

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors, Institutional Investor Securities Blog, October 22, 2012

October 22, 2012

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors

The Financial Industry Regulatory Authority is ordering David Lerner Associates, Inc. to pay $14M for allegedly engaging in unfair sales practices involving its Apple REIT Ten and charging clients excessive markups. $12 million of this will be restitution to the investors that bought shares in the $2 billion non-traded real estate investment trust, as well as to clients that were overcharged. $2.3 million is FINRA’s fine against the brokerage firm for charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds.

According to the SRO, David Lerner Associates solicited thousands of clients to get them to buy shares in the Apple REIT TEN, of which it is the sole distributor. Elderly and unsophisticated investors were among its sales targets, even as it failed to do enough due diligence to make sure these investments were appropriate for these clients. Instead, the financial allegedly used marketing collateral that was misleading and showed customers performance results for closed Apple REITs without revealing that their incomes were not enough to support distributions to unit owners.

As part of the settlement, the financial firm has agreed to modify its advertising procedures. For example, for three years it will video record sales seminars involving 50 or more participants. It will also prefile its sales literature and ads with FINRA at least 10 days before they are made available for use. Additionally, per FINRA mandate, the brokerage firm will bring in independent consultants to look at proposed modifications to its supervisory system, as well as the training involving the pricing of municipal bonds and CMOs and the sale of non-traded REITs.

By settling, David Lerner Associates and its CEO and founder David Lerner are not denying or admitting to the FINRA charges. Even now they continue to maintain that the investments involved were suitable for their clients. They have, however, consented to an entry of FINRA’s findings. Also, Mr. Lerner has agreed to a one-year suspension from the securities industry, and then a two year-suspension from serving in a principal capacity, as well as a $250,000 fine.

Regarding the unfair prices charged on CMOs and municipal bonds, these were sold over a period of 30 months. For his alleged involvement, David Lerner Associates Head Trader William Mason has been suspended from the securities industry for half a year and sanctioned $200,000.

Meantime, dozens of investors are still waiting to resolve their Apple REIT lawsuits and arbitration claims that they’ve filed. If you are an Apple REIT investor that has sustained resulting losses, please contact our REIT law firm and ask for your free case evaluation.

Unfortunately, many investors of non-traded REIT were not been fully apprised of the illiquidity risks and other potential consequences involved, as well as the details involving commisisons, broker fees, suspended buyback programs. Our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD LLP represent investors throughout the US.

FINRA Sanctions David Lerner Associates $14 Million for Unfair Practices in Sale of Apple REIT Ten and for Charging Excessive Markups on Municipal Bonds and CMOs, FINRA, October 22, 2012

David Lerner Associates Ordered to Pay $14 Million, NY Times, October 22, 2012

More Blog Posts:
Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 28, 2011

Private REITs: The Need for Tougher Oversight?, Institutional Investor Securities Blog, June 28, 2011

April 17, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors

Many investors of Retail Properties of America, Inc. (RPAI) suffered huge losses after the real estate investment trust’s IPO opened with an $8 offering price. Formerly known as Inland Western REIT, Retail Properties not only made its public debut at an offering price below the expected $10-$12 pre-offering price, but also some reverse-stock-split engineering had to happen for the price to even hit $8. Also, for investors that originally bought the REIT at $10/share almost 10 years ago, the split-adjusted value of the stock was under $3. These results could cause nontraded REITs that have been thinking of going public to have second doubts about making such a move. Real Properties is the third biggest shopping center REIT in the United States.

An IPO is usually good news for an nontraded REIT. Unfortunately, in this case, Retail Properties’ longtime investors will need a lot of assistance from the public markets in order to get a good return on their original investment. Our stockbroker fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP are currently investigating claims involving Retail Properties Inc./Inland Western REIT.

Although Real Properties saw its shares leap 9% soon after trading started on April 5, a huge rally will have to happen for original investors to break even. This can be attributed in part to the complicated formula of reverse stock splits for this IPO. That same day, the stock closed at $8.76.

The Real Properties IPO had gone for a 10-for-1 reverse stock split plus a recapitalization of existing common stock that created a 2.5-for-1 reverse stock split. The company also offered just a quarter of the shares during the initial offering. Three follow-up stock sales are to take place over the next year and a half.

Following the IPO, Real Properties CEO and president Steven Grimes sent a letter to shareholders talking about how the economy has done damage to the real estate market and he doesn’t know when/if recovery will happen. According to Investment News, problems with this particular REIT started to come up as early as 2005, when the fund stopped bringing in capital. The subsequent market crash didn’t help, which was when Real Properties discovered that there were properties in the portfolio were overpriced and overvalued. Debt maturity problems and legacy issues were also matters of concern.

Investors of the illiquid nontraded REIT had no choice but to stay the course—even two years ago when dividend yields were reduced to 1% from 6.4% down. That figure is now at 2.5%.

Last September, Real Properties, then known as Inland Western, submitted its filing to the Securities and Exchange Commission. In the filing, the company said its share value was $6.95. This is 140% more than its IPO’s split-adjusted value and 30.5% under its original $10 price.

Shepherd Smith Edwards & Kantas LLP Investigating Claims Involving Inland Western REIT, Now Known as Retail Properties of America, Inc., Yahoo Finance, April 16, 2012

REIT's market debut a big dud, Investment News, April 8, 2012

More Blog Posts:
Private REITs: The Need for Tougher Oversight?, Institutional Investor Securities Blog, February 25, 2012

Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses, Institutional Investor Securities Blog, January 24, 2012

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

Continue reading "REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors " »

February 25, 2012

Private REITs: The Need for Tougher Oversight?

Our institutional investment fraud lawyers have reported often on real estate investment trusts (REITs). Today we’d like to talk about private REITs.

An REIT is a trust, corporation, or association that owns income-producing real estate. Investors’ capital is pooled by REITs to buy a portfolio of properties. There are public REITs, which include ones traded on a national securities exchange and those that are not traded but are publicly registered. Then there are non-traded REITs, which cannot be found on a national securities exchange, but may be traded in a limited capacity in a secondary market. There is also another kind of REIT known as the private-placement, or private, REIT.

Private REITs, like their non-traded counterparts, are not traded on an exchange. They also come with significant risks. They are not subject to the disclosure requirements that public non-traded REITs have to honor. The fact that they are unlisted makes them difficult to value and insufficient disclosure documents makes it challenging for investors to make educated choices about their investment.

Only accredited investors generally can buy private REITs. According to Forbes.com, these buyers are generally told that prices and high-yields won’t change. Other challenges surrounding private unlisted REITs are that they usually involve higher fees, inadequate transparencies, and net asset values that may have gone down significantly from what the broker had initially promised. Also, private REITs may be extremely liquid, making it very hard or costly for an investor to get out.

While the Financial Industry Regulatory Authority has thought about cracking down on private REITS, Forbes.com says that the SRO hasn’t done a lot in this respect. Already, there have been in problems. FINRA filed a complaint against David Lerner & Associates last year for allegedly failing to determine whether a non-traded REIT was appropriate for investors and giving out misleading information about the Apple REIT Ten. David Lerner has denied the allegations. The financial firms claims it took care of the necessary due diligence and that all disclosures were not only in compliance with regulatory requirements, but also were accurate.

Over seven years the financial firm had earned over $600M in commissions and fees and five Apple REITs earned over $6B in proceeds. The REITs had been presented as safe for conservative investors. In June 2011, investors filed a securities fraud lawsuit over $6.8B in REIT underwriting and sales of Apple Real Estate Investment Trusts shares.

If you have suffered losses by investing in an REIT and you feel that you weren’t fully apprised of the risks involved or that a broker recommended that you invest even though this was unsuitable for you, contact our securities fraud law firm today.

For future reference, FINRA has advised that investors considering REITs:
• Find out how much the seller will get in commissions and fees for selling you the REIT.
• Watch out for sales material or pitches presenting you with simple reasons to invest in an REIT.
• Make the person soliciting you tell you why the REIT is an appropriate investment for you and explain will help you achieve your investment goals.
• Find out about fees related to the REIT.
• Make sure you are told how the distribution is being funded and whether part of that is the return of investor capital.
• Be clear about the risks involved in an REIT investment.
• Look over the prospectus and any supplements.

David Lerner Associates Is Sued by Investors Over $6.8 Billion REIT Sale, Bloomberg, June 20, 2011

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

When Will FINRA Get Serious About Unlisted REITs?, Forbes, February 17, 2012

More Blog Posts:
Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses, Institutional Investor Securities Blog, January 24, 2012

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

January 24, 2012

Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses

According to Investment News, an investor has written to FINRA to express her concerns about Behringer Harvard Holdings, LLC. D. Gayle Salyer says that within six years, the $50,000 that she invested in a real estate fund with them has decreased by $48,000. She has also written to the Texas State Securities Board to voice her concerns.

The real estate firm recently saw a number of its real estate funds and REITs drop in their estimated valuations. For example, ending last month the Behringer Harvard Short-Term Opportunity Fund I LP investors saw the fund’s valuation plunge to 40¢/share. Compare that to two years before when its valuation was $6.48/share. The fund used to have approximately $130 million in assets.

Salyer expressed dismay about the inadequate communication that she says she received from the real estate company regarding her losses. She claims that while the losses were recorded in her account statement, she was never given an explanation or warned that there was financial trouble.

Bob Aisner, who is Behringer’s CEO, has said that the Short-Term Opportunity Fund uses SEC filings and regular reports to make information available to the public. He noted that since the fund’s inception, investors have received $2.12/unit in total distributions. He also said that the fund got into trouble because of investments that were made in condominiums prior to the recession and due to the lack ability of financing for opportunistic assets in recent years. Aisner maintained that Behringher has been dedicated to the fund’s success, as can be seen by the $40 million in support it won’t be getting back.

FINRA has put out a proposed amendment about the valuation of illiquid investments. The revised rule would restrict for how long the initial, estimated value could be applied on the account statement of clients. It also would mandate that broker-dealers subtract the offering costs from that first valuation.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our team of lawyers, consultants, and others has over a century’s worth of combined experience in securities law and the securities industry. For over two decades we have represented thousands of investors throughout the US in arbitration and in state and Federal courts.

Our clients have collectively gotten back over $100 million. Over 90% of the parties that we have represented have gotten back either part or all of their financial losses. Our securities fraud law firm also represents international clients.

Behringer Harvard client wants answers after seeing fund drop by 96%, Investment News, January 24, 2012

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

Behringer Harvard Short-Term Opportunity Fund I LP

Real Estate Investment Trusts, Investopedia

More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009

Continue reading "Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses " »

November 23, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings

To settle FINRA accusations that it used misleading marketing materials when selling Wells Timberland REIT, Inc., Wells Investment Securities, Inc. has agreed to pay a $300,000 fine, as well as to an entry of the findings. However, it is not denying or admitting to the securities charges.

FINRA claims that as the wholesaler and dealer-manager of the non-traded Real Estate Investment Trust’s public offering, Wells approved, reviewed, and distributed 116 sales and marketing materials that included statements that were misleading, exaggerated, or unwarranted.The SRO contends that not only did most of the REIT’s sales literature and advertisements neglect to disclose the meaning of Wells Timberland's non-REIT status, but also it implied that Wells Timberland qualified as an REIT during a time when it didn’t. (Although its initial offering prospectus reported that it planned to qualify as an REIT for the tax year finishing up at the end of 2006, it did not qualify until the one ending on December 31, 2009.) Also, FINRA believes that Wells Timberland’s communications about portfolio diversification, redemptions, and distributions included misleading statements and that the financial firm lacked supervisory procedures for making sure the proprietary data and sensitive customer information were properly protected with working encryption technology.

While non-traded REITs are usually illiquid for approximately 8 years or longer, certain tax ramifications can be avoided if specific IRS requirements are met. FINRA says that the Wells ads failed to ensure that investors clearly understood that an investment that is not yet an REIT couldn’t offer them those tax benefits.

Last month, FINRA put out an alert notifying investors about the risks of public non-traded REITs. Non-exchange traded real estate investment trusts are not traded on a national securities exchange. Early redemption is usually limited and fees related to their sale can be high, which can erode one’s overall return. Risks involved include:

• No guarantee on distributions, which can exceed operating cash flow.
• REIT status and distributions that come with tax consequences
• Illiquidity and valuation complexities
• Early redemption that is limited and likely costly
• Fees that can grow
• Unspecified properties
• Limited diversification
• Real Estate risk

FINRA wants investors considering non-traded REITs to:

• Watch out for sales literature or pitches giving you simple reasons for why you should invest.
• Find out how much the seller is getting in commissions and fees.
• Know how investing in this type of REIT will help you meet your goals.
• Carefully study the accompanying prospectus and its supplements.

Finra Fines Wells Investment Securities For Alleged Misleading Marketing Materials, The Wall Street Journal, November 22, 2011

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

More Blog Posts:
Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs, Institutional Investor Securities Blog, November 19, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud, October 22, 2011

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