Broker Investigation: Robert Horning’s Sale of Tenants-in-Common (TIC) Real Estate Investments

shutterstock_153463763According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Robert Horning (Horning) has been the subject of at least 8 customer complaints. Customers have filed complaints against Horning alleging a number of securities law violations including that the broker made unsuitable investments, misrepresentations, fraud, breach of fiduciary duty, and false statements in connection with recommendations to invest in private placements such as tenants-in-common (TICs) interests, direct participation programs and limited partnerships which include investments like oil & gas, non-traded real estate investment trusts (Non-Traded REITs), and equipment leasing programs.

Horning entered the securities industry in 1993. From November 2004, until July 2009, Horning was a registered representative with Direct Capital Securities, Inc. Thereafter, since July 2009, Horning has been associated with Centaurus Financial, Inc. (Centaurus) out of the firm’s Los Angeles, California office location.

TIC investments have come under fire by many investors. Indeed, due to the failure of the TIC investment strategy as a whole across the securities industry, TIC investments 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.

Sales of TICs multiplied 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 to investors as appropriate section 1031 exchanges allowing the investor to deferral taxes on appreciated real property. 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.

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.