Pennsylvania Regulator Investigates Securities America and Landenburg Thalmann Non-Traded REIT Sales

The Pennsylvania Department of Banking and Securities requested that Securities America Inc. (Securities America) provide information concerning customer purchases of non-traded real estate investment trust (REIT) securities by Pennsylvania residents since 2007.  This information was provided by an annual report of Ladenburg Thalmann & Co. Inc. (Ladenburg Thalmann), the company that owns Securities America as well as two other independent broker-dealers.  According to Ladenburg Thalmann the company is unable to determine whether and the extent that the Pennsylvania Department of Banking and Securities may seek to discipline Securities America

A REIT is a corporation or trust that owns income-producing real estate properties.  REITs pool the capital of numerous investors to purchase a portfolio of properties that may include office building, shopping centers, hotels, and apartment buildings that the average investor would not otherwise be able to purchase individually.  Publicly traded REITs can be sold on an exchange and have the same liquidity as most stocks and bonds.  However, non-traded REITs are sold only through broker-dealers and are illiquid.  REITs are typically long term investments and investors should be prepared to hold onto non-traded REITs for up to 7 to 10 years and even longer under some circumstances.

The non-traded REIT industry sales doubled last year to $20 billion, from 2012.  Increased volatility in the stock market during the financial crisis led investment advisors to increasingly recommend REITs as a purported stable investment during unstable times.  However, the stability of non-traded REITs only exists because brokerage firms and issuers have control over the value how the value of the security is listed on an investor’s account statements and not because the security will actually sell at that value.  The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

It’s unclear the extent of Pennsylvania’s request and whether the regulator is looking at non-traded REIT sales only at Securities America or if the investigation is broader.  Each state sets different requirements for investors to be eligible for investing in non-traded REITs.  These requirements often involve a combination of net worth and/or income requirements sometimes coupled with a concentration limitation.

Pennsylvania’s investigation is the second time in recent years that Securities America has faced a state regulator over the sale of non-traded REITs.  Last year, Securities America was one of several broker-dealers fined by the Massachusetts Securities Division agreeing to pay millions of dollars of restitution to clients who bought non-traded REITs from 2005 to 2013.  In Massachusetts investigation, Securities America was fined $150,000 and agreed to pay nearly $8.4 million in restitution to clients. Massachusetts alleged widespread problems with adherence to the firms’ selling policies and the state rule that an investor’s purchase of non-traded REITs cannot be more than 10% of that person’s liquid net worth.

The attorneys at Gana LLP are experienced in representing investors concerning claims of inappropriate sales of non-traded REITs.  Our consultations are free of charge and the firm is only compensated if you recover.