According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker John Notman (Notman) has been the subject to an astonishing 31 customer complaints along with two firm terminations for cause. The customer complaints against Notman allege a number of securities law violations including that the broker made unsuitable investments and misrepresentations and false statements among other claims. Many of the complaints involve Notman’s sales of tenants-in-common (TICs). These claims along alleged combined investor losses of well over $20,000,000.
Notman entered the securities industry in 1982. From March 2003, until September 2012, Notman was registered with Berthel, Fisher & Company Financial Services, Inc (Berthel Fisher). In September 2012, Berthel Fisher filed a notice of termination Form U-5 stating that the reason for terminating Notman from the firm was due to his failure to report certain financial disclosures.
As a background, TICs largely been sold unfairly as tax advantaged products that allow customers to defer capital gains taxes on appreciated real estate. TICs are private placements that have no secondary trading market and are therefore illiquid investments. In a typical TIC, the investor receives a fractional interest in the property along with other stakeholders and 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. Because these fees are often higher than 15%, there is often no way for the investment to be profitable for the investor.
TICs have come under fire by many investors and due to the failure of the TICs as a whole across the securities industry. Indeed, TICs have virtually disappeared as offered investments. According to InvestmentNews “At the height of the TIC market in 2006, 71 sponsors raised $3.65 billion in equity from TICs and DSTs…TICs now are all but extinct because of the fallout from the credit crisis.” In fact, TICs recommendations have been a major contributor to bankrupting brokerage firms. For example, 43 of the 92 broker-dealers that sold TICs sponsored by DBSI Inc., a company whose executives were later charged with running a Ponzi scheme, a staggering 47% of firms that sold DBSI are no longer in business.
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 or tax benefit offered to the customer.
Due to the declining sales of these products and securities industry’s increasing refusal to sell them to investors, the securities industry has implicitly acknowledged that the costs, fees, and risks associated with TIC investments outweigh any potential tax deferral benefit, a benefit that disappears at some point because eventually taxes have to be paid upon the sale of the TIC.
Investors who have suffered investment losses may be able recover their losses through arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of unsuitable TIC recommendations and other breaches of brokerage firm’s obligations to the customers. Our consultations are free of charge and the firm is only compensated if you recover.