Articles Tagged with real estate investment trusts

shutterstock_191231699The securities lawyers of Gana LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Marcious Dickerson (Dickerson). According to BrokerCheck records Dickerson has been the subject of 3 customer complaints. The customer complaints against Dickerson allege securities law violations that including unsuitable investments, misrepresentations, and breach of fiduciary duty among other claims.   Many of the most recent claims involve allegations concerning non traded real estate investment trusts (Non-Traded REITs).

As a background since the mid-2000s Non-Traded REITs became one of Wall Street’s hottest products. However, the failure of Non-Traded REITs to perform as well as their publicly traded counterparts has called into question if Non-Traded REITs should be sold at all and if so should there be a limit on the amount a broker can recommend. See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I

Non-Traded REITs are securities that invest in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Investors are also often ignorant to several other facts that would warn against investing in Non-Traded REITs. First, only 85% to 90% of investor funds actually go towards investment purposes. In other words, investors have lost up to 15% of their investment to fees and costs on day one in a Non-Traded REIT. Second, often times part or almost all of the distributions that investors receive from Non-Traded REITs include a return of capital and not actual revenue generated from the properties owned by the REIT. The return of capital distributions reduces the ability of the REIT to generate income and/or increases the investment’s debt or leverage.

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shutterstock_128655458The securities lawyers of Gana LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Nancy Daoud (Daoud). According to BrokerCheck records Daoud is subject to 6 customer complaints. The customer complaints against Daoud allege securities law violations that including unsuitable investments and misrepresentations among other claims.   Many of the most recent claims involve allegations concerning non traded real estate investment trusts (Non-Traded REITs) and business development companies (BDCs).

As a background since the mid-2000s Non-Traded REITs became one of Wall Street’s hottest products. However, the failure of Non-Traded REITs to perform as well as their publicly traded counterparts has called into question if Non-Traded REITs should be sold at all and if so should there be a limit on the amount a broker can recommend. See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part I

Non-Traded REITs are securities that invest in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Investors are also often ignorant to several other facts that would warn against investing in Non-Traded REITs. First, only 85% to 90% of investor funds actually go towards investment purposes. In other words, investors have lost up to 15% of their investment to fees and costs on day one in a Non-Traded REIT. Second, often times part or almost all of the distributions that investors receive from Non-Traded REITs include a return of capital and not actual revenue generated from the properties owned by the REIT. The return of capital distributions reduces the ability of the REIT to generate income and/or increases the investment’s debt or leverage.

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shutterstock_143094109The securities lawyers of Gana LLP are investigating customer complaints filed with The Financial Industry Regulatory Authority (FINRA) against broker Daniel McPherson (McPherson). According to BrokerCheck records McPherson is subject to two customer complaints. The customer complaints against McPherson allege securities law violations that including unsuitable investments, misrepresentations, and breach of fiduciary duty among other claims.   The claims appear to relate to allegations regard direct participation products and limited partnerships such as equipment leasing and non-traded real estate investment trusts (Non-Traded REITs). Other products complained of include oil and gas private placements and tenant-in–common (TIC) investments.

Our firm has written numerous times about investor losses in these types of programs and private placement securities. All of these investments come with costs that make profiting from the investment extremely unlikely. For example, investors are destined to lose money in equipment leasing programs like LEAF Equipment Leasing Income Funds I-IV and ICON Leasing Funds Eleven and Twelve. The high costs and fees associated with these investments make significant returns virtual impossibility. Yet for all of their costs investors are in no way compensated for the additional risks of these products.

Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client. In order to make a suitable recommendation the broker must meet certain requirements. First, there must be reasonable basis for the recommendation the product or security based upon the broker’s investigation and due diligence into the investment’s properties including its benefits, risks, tax consequences, and other relevant factors. Second, the broker then must match the investment as being appropriate for the customer’s specific investment needs and objectives such as the client’s retirement status, long or short term goals, age, disability, income needs, or any other relevant factor.

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shutterstock_89758564The investment attorneys of Gana LLP are interested in speaking with clients of Detlef Schoeppler (Schoeppler). According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) Schoeppler has been the subject of at least 10 customer complaints, one criminal matter, and three judgments or liens. The customer complaints against Schoeppler allege securities law violations that claim unsuitable investments in various investment products including REITs, variable annuities, and mutual funds. The most recent complaint was filed in August 2012, and alleged $77,569 in damages due to claims that the broker recommended a variable annuity purchase in June 2011 that was misrepresented to the customer. In addition, the customer alleged that the fees were not fully disclosed and that there were trades made without the client’s authorization.

In addition, in July 2014, two tax liens were imposed on Schoeppler. One lien is for $184,519 and the other is for $182,691. A broker with large liens are an important consideration for investors to consider when dealing with a financial advisor. An advisor may be conflicted to offer high commission investments to customers in order to satisfy liens and debts that may not be in the client’s best interests.

Schoeppler entered the securities industry in 1996. Since June 1996, Schoeppler has been associated with Ameriprise Financial Services, Inc. out of the firm’s Tampa, Florida branch office location.

Many of the complaints involve the sale of variable annuities. Variable annuities are complex products that combine aspects of investing and insurance. The Securities and Exchange Commission (SEC) has released a publication entitled: Variable Annuities: What You Should Know encouraging investors to ask questions about the variable annuity before investing. Essentially, a variable annuity is a contract with an insurance company under which the insurer agrees to make periodic payments to you. The investor chooses the investments made in the annuity and value of your variable annuity will vary depending on the performance of the investment options chosen. The primary benefits of variable annuities are the death benefit and tax deferment of investment gains.

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shutterstock_70999552The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2013036001201) broker Garrett Ahrens (Ahrens) concerning allegations that the broker used false and misleading consolidated reports with clients.

According to FINRA’s BrokerCheck records Ahrens has been in securities industry since 1989. From June 1998 until August 2015, Ahrens was associated with LPL Financial LLC (LPL Financial). In August 2015, LPL Financial allowed Ahrens to voluntarily resign alleging that the broker potentially violated certain FINRA rules relating to the use of consolidated statements. In addition to the termination and FINRA complaint Ahrens has been subject to nine customer complaints over the course of his career. Many of the more recent complaints involve allegations of investments in limited partnerships, private placements, and non-traded real estate investment trusts (Non-Traded REITs) among other investments.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are also publicly traded REITs that are bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

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shutterstock_183011084The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Global Brokerage Services, Inc. (Global) over allegations that from approximately February 2011, to August 2013, Global failed to establish and enforce a reasonable supervisory system regarding the use of consolidated reports by registered brokers with the firm. FINRA found that Global’s brokers provided consolidated reports to their customers that lacked required disclosures and/or contained misleading information. ln addition, FINRA alleged that one the brokers disseminated consolidated reports that included his own inaccurate and potentially misleading valuations for non-traded REITs and other illiquid investments.

Global has been a FINRA member since 1995, employs fourteen registered representatives, and its main office is in Hunt Valley, Maryland.

FINRA found that certain of Global’s brokers created consolidated reports using Morningstar or Excel for distribution to their customers. FINRA alleged that Global failed to have written supervisory procedures specific to consolidated reports. Instead, FINRA determined that consolidated reports at Global were treated as correspondence requiring only a sample (10%) be reviewed on a quarterly basis.

FINRA also alleged that Global’s procedures also did not address necessary disclosures to customers. FINRA’s review of the reports concluded that they failed to provide complete and appropriate disclosures and excluded information needed to have a sound basis for evaluating the information in the consolidated reports.

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shutterstock_92699377This article continues to opine on an InvestmentNews article, describing the Securities and Exchange Commission’s (SEC) revisiting the accredited investor standard that determines who is eligible to invest in private placements. It is the opinion of this securities attorney who has represented hundreds of cases involving investors in private placement offerings that some of the IAC’s proposals are severely flawed and will only enrich the industry at investor’s expense.  While proposals to increase standards through sophistication tests and limiting the amount of private placement investments to a certain percentage of net worth are constructive, it is clear that some will attempt to use the review to water down the current requirements.  Below are some of the reasons why proposals to abandon the income and net worth approach and instead use a definition that takes into account an individual’s education, professional credentials, and investment experience will be a disaster for investors.

First, many private placements such as equipment leasing and non-traded real estate investment trusts (Non-Traded REITs) already skirt these rules and offer non-traded investments to those with income of $70,000 and net worth of $250,000. If you want to see what the world would be like without the $1,000,000 constraint on private placements, it’s already here and it’s not pretty.

Non-Traded REITs are a $20 billion a year industry that basically ballooned overnight. These non-traded investments act like private placements and charge anywhere from 7-15% of investor capital in the form of commissions and selling fees.  In addition, there is little evidence to support that these investments will largely be profitable for investors.  In fact, because non-traded REITs offer products with very limited income and net worth thresholds brokers have loaded up clients accounts to such an extent that the NASAA has proposed universal concentration limits to curb these abusive practices.  But as bad as many of these products are, many other private placements that would be allowed to be sold to investors under some of the IAC proposals are far worse.

Second, the largest threat to investors is the IAC’s proposal is to grant the brokerage industry the ability to recommend private placements based upon the industries own subjective assessment of the investor’s sophistication.  It has been my experience that the industry, in many cases, doesn’t accurately gather investor suitability information from their clients and is inherently conflicted in the information gathering process.  In reality, some brokers select the investor’s sophistication and risk tolerance based upon the investments the broker desires to sell instead of the investor’s actual investment acumen and goals.

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shutterstock_183010823The Securities and Exchange Commission (SEC) approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that will give investors greater insight into the costs of purchasing shares of non-traded real estate investment trusts (Non-Traded REITs).

As reported by InvestmentNews, the SEC approved FINRA’s proposal on October 10. The rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program (DPP) or a REIT on customer statements in addition to other related disclosures. The current practice is to list the value of Non-Traded REITs at a per-share price of $10, or simply the purchase price of the investment.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial real estate properties, residential mortgages of various types, or other specialty niche real estate markets such as strip malls, hotels, and other industries. REITs can be publicly traded and when they are, can be bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers and are illiquid, have no market, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Increased volatility in the stock market has led to a growing number of investment advisors to recommend REITs as a purported stable investment during unstable times. In addition, these products are far more lucrative for the brokerage industry than either publically traded REITs or many other types of investments. However, claims that REITs are stable have been shown to be false. The stability of Non-Traded REITs only exists because brokerage firms and issuers have control over the value of the security listed on an investor’s account statements and not because the security will actually sell at that value or is stable over time.

Enter the proposed FINRA rule change. As we first reported in February, FINRA outlined two proposed methodologies that firms can use to calculate the per-share estimated value for a DPP or Non-Traded REIT including a “net investment methodology” or an “appraised value methodology.”

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shutterstock_156562427Since the financial crisis the non-traded real estate investment trust (REIT) market has been a financial boon for the brokerage industry. A REIT is a security that invests typically in real estate related assets. Generally, REITs can be publicly or privately held. While publicly held REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold are private, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, non-traded REITs have become a darling product of the financial industry, mostly because of the fat fees brokers earn for recommending these speculative products.

Brokers selling these products sometimes claim that non-traded REITs offer stable returns compared to the volatile stock market. As the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted, these products may not be as safe and stabile as advertised.

InvestmentNews recently ranked non listed REITs by second quarter 2014 invested assets. As shown below, investment in these funds are substantial and continues to grow each quarter

Company 2Q invested assets ($M) Original share price Current share value Original distribution rate Current distribution rate 2Q14 FFO 2 payout ratio
Inland American Real Estate Trust $10,128.5 $10 $6.94 6.20% 5.00% 75%
Corporate Property Associates 17 Global $4,564.7 $10 $9.50 6.50% 6.50% 81%
Apple Hospitality $3,960.0 $11 $10.10 8.00% 7.25% 83%
Industrial Income Trust $3,747.6 $10 $10.40 6.00% 6.00% 100%
Tier REIT $3,455.8 $10 $4.20 7.00% 0.00% N/A
CNL Lifestyle Properties $3,343.4 $10 $6.85 6.25% 4.25% 108%
Griffin-American Healthcare REIT II $3,056.2 $10 $10.22 6.50% 6.65% 143%
Monogram Residential Trust $2,879.1 $10 $10.03 7.00% 3.50% 189%
Cole Credit Property Trust IV $2,833.0 $10 $10.00 6.25% 6.25% 145%
KBS Real Estate Investment Trust II $2,714.1 $10 $10.29 6.50% 6.50% 98%
Cole Corporate Income Trust $2,606.3 $10 $10.00 6.50% 6.50% 94%
Hines Real Estate Investment Trust $2,422.1 $10 $6.40 6.00% 2.90% 88%
American Realty Capital Trust V $2,233.5 $25 $25.00 6.60% 6.60% 86%
KBS Real Estate Investment Trust $2,058.0 $10 $4.45 7.00% 0.00% N/A
Landmark Apartment Trust $1,889.4 $10 $8.15 6.00% 3.00% 38%
Phillips Edison – ARC Shopping Center $1,846.9 $10 $10.00 6.50% 6.70% 129%
Steadfast Income REIT $1,592.7 $10 $10.24 7.00% 7.00% 165%
Strategic Storage Trust $731.5 $10 $10.79 7.00% 6.50% 120%
Signature Office $676.4 $25 $25.00 6.00% 6.00% 83%
Lightstone Value Plus REIT $643.2 $10 $11.80 7.00% 7.00% 69%

Many brokerage firms have come under fire for their non-traded REIT sales practices. For instance LPL Financial in particular has been accused by several regulators of failing to reign in their broker’s sales practices concerning alternative investments. On March 24, 2014, LPL Financial was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its brokers’ marketing of nontraditional investments.  LPL Financial was alleged to have deficient supervision in the sale of certain alternative investment products, including REITs, oil and gas partnerships, business development companies (BDC’s), hedge funds, and managed futures.

LPL Financial also paid a $500,000 fine to the Massachusetts Securities Division and was ordered to pay $4.8 million in restitution for supervisory and suitability related violations concerning non-traded REITs.  In total six firms paid $11 million in restitution and fines related to REIT sales. The other firms including Ameriprise Financial Inc., Lincoln National, Commonwealth Financial Network, Royal Alliance Associates, and Securities America.

The attorneys at Gana LLP are experienced in representing investors to recover their financial losses through the misrepresentation of non-traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.

shutterstock_103681238The Financial Industry Regulatory Authority (FINRA) sanctioned broker Thomas Sharp (Sharp) concerning allegations that Sharp violated NASD Rule 2210(d) by sending emails to potential investors in a non-exchange traded real estate investment trusts (Non-Traded REITs) that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with Ameriprise Financial Services, Inc. (Ameriprise) from 1987 through September 2013.

The Non-Traded REIT market has been a financial boon for the brokerage industry in recent years. A Non-Traded REIT is a security that invests mostly in real estate or property assets. While publicly traded REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold in the form of private placement offerings, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, brokers have recommended these products to many investors, in part driven by the fat fees they can earn.

Brokers’ selling practices have come under scrutiny because sometimes brokers claim that Non-Traded REITs offer stable, safe returns compared to the volatile stock market. However, the stability is only a result of the fund setting its own price and illiquidity, not because the product is immune to market fluctuation.

The FINRA rules require that all communications with the public be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating a security. FINRA found that between February and March 2009, Sharp sent emails regarding Non-Traded REITs to two potential investors. The emails were not fair and balanced and failed to provide a sound basis for evaluating the facts.

On February 20, 2009, Sharp sent the following email to customer LR, which stated in pertinent part that the Non-Traded REIT properties “are doing well even in this environment because they purchased them for a great price and people are flocking there as they are cutting back on their spending.” FINRA found that Shop’s email is not fair and balanced nor does it provide a sound basis for evaluating the facts related to the REIT. FINRA alleged that Sharp’s email omitted that the Non-Traded REIT’s largest property operator, EG, was experiencing significant financial difficulties.

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