The 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.
According to a prospectus supplement the Non-Traded REIT had to restructure EG’s lease. The prospectus stated that it had entered into discussions with EG to modify the terms of our agreements and expect any amended leases entered into will include a partial reduction in annual base rent of around 70 percent of the current rent. The Non-Traded REIT further stated that there was no assurance that any of the forgoing options will be completed or that they will successfully address the problems affecting EG’s portfolio or that EG will not continue to experience financial problems.
The attorneys at Gana LLP represent investors in securities arbitration matters concerning a variety of investment related claims, including private placements and Non-Traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.