Securities Lawyers Blog
According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.
Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.
TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.
In recent years, the sales of TICs by the brokerage industry has plummeted as many firms have declined to approve these speculative products to investors. The root cause of the decline is that many in industry have likely concluded that the risks of the product outweigh almost any potential benefit when their high costs are included.
In the case of Johanson, four customers have filed complaints against the broker’s employing firm, Sigma, concerning the suitability of TIC recommendations. These complaints focus on the reasonable basis and due diligence obligations of the suitability requirement that obligates a broker to perform and analysis of the investment being offered and to ensure that there is a reasonable basis for the investment being offered. As discussed, because TIC rarely, if ever, make financial sense due to their high cost and leverage, these customers have alleged that Johanson failed in his suitability obligations in recommending the TICs.
Investors who have suffered losses through investments in TICs may be able recover their losses through arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases where brokerage firms fail to supervise their representatives sale of unsuitable investment products, such as TICs. Our consultations are free of charge and the firm is only compensated if you recover.