Non-Traded REITs

Investors Files Texas Securities Case Alleging Violations by United Development Funding IV

Published on: January 22, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Investors have filed a class action securities case claiming that the Texas nontraded real estate investment trust United Development Funding IV (NASDAQ:UDF) and certain of its officers violated federal securities laws. The complaint come a month after the Harvest Exchange website published a report accusing the Company of running a Ponzi-like scam. The UDF umbrella is accused of raising capital to bail out its earlier vintage entities.

On December 10, 2015, the day that the report went out, UDF’s shares dropped significantly. The Company then put out a press release disclosing that its UDF IV and UDF III have been cooperating for nearly two years with the U.S. Securities and Exchange Commission, which has been conducting a non-public probe since early 2014. Following that announcement, Company shares fell even further, negatively impacting investors.

The Texas securities case accuses the defendants of, from June 4 – December 10, 2015, failing to disclose that:

· New UDF companies gave older UDF companies substantial liquidity, letting them pay earlier investors.
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LPL Financial to Pay $750K in Nontraded REIT Case Involving Elderly Investor in New Hampshire

Published on: December 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

New Hampshire’s Bureau of Securities Regulation says that LPL Financial has consented to pay $750,000 to resolve charges involving the sale of nontraded real estate investment trusts to an elderly investor. The state says that transactions were not only unlawful but also they were suitable for the 81-year-old customer.

The state says that the sale of the nontraded REITs were unsupervised, causing the investor to sustain substantial losses in 2008. Aside from the $750K, which includes $250K to the bureau, $250K in administrative fees, and $250K to the investor education fund, LPL will offer remediation to any client in New Hampshire that bought a nontraded REIT through the firm since 2007 if the sale did not meet the firm’s product-specific limitations or guidelines.

Nontraded REITS
Nontraded REITs can be high-risk investments. They are liquid and may come with substantial front-end fees of up to 15%. Distributions are not guaranteed and are determined by the alternative investments’ board of directors. REITs are not traded on exchanges and there is a limited secondary market for them, which can make them difficult for investors to sell.
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LPL to Pay $3.2M Over Nontraded REIT and ETF Sales

Published on: September 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

LPL Financial (LPLA) has agreed to pay 3.2 million fine to settle penalties related to its sale of nontraded real estate investment trusts and leveraged exchange-traded funds. The settlements were reached with the Non-Traded REIT Task Force of the North American Securities Administrators Association and regulators in Massachusetts and Delaware. The firm sold the REITs at issue for six years beginning in 2008.

Under the agreement, LPL will pay $1.425 million in civil penalties for its purported failures to put into place a supervisory system that was adequate enough to handle its nontraded REIT sales and enforce written procedures related illiquid trust sales. The money will be divvied up between the District of Columbia, 48 states, the U.S. Virgin Islands, and Puerto Rico. By settling with NASAA, LPL is not denying or admitting wrongdoing.

Also, the Delaware Attorney General and the Massachusetts Attorney General have arrived at their own settlements with LPL’s Boston arm. The firm consented to pay $1.8 million for putting about 200 clients from Massachusetts in high-risk leveraged ETFs. The broker-dealer and Massachusetts had come to an earlier settlement about nontraded REIT sales two years ago.
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Royal Alliance Must Pay $1.4M To Retirees for Non-traded REIT, Variable Annuities Sales

Published on: July 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Inc. panel says that AIG Advisor Group (AIG) subsidiary Royal Alliance Associates Inc. must pay $1.4 million to three retirees who claim that the brokerage firm was negligent when supervising the sales of variable annuities and nontraded real estate investment trusts.

The investors, who were former AT & T Inc. employees, claim that ex-broker Kathleen Tarr recommended that they take a lump-sum buyout from the communications company instead of a lifetime annuity. The money was then put into non-traded REIT company Inland Real Estate, as well as different variable annuities.

Tarr’s BrokerCheck record shows that she has been named in about forty customer disputes and complaints. She was let go from Royal Alliance in 2010.

The claimants, who are low-wealth, low-income seniors, believe that they should not have been encouraged to take a lump sum and place their funds into non-traded REITs and variable annuities involving an IRA. Even though they did not sustain out-of-pocket losses from the investment recommendations, the retirees purportedly lost out on earnings they would have made if only they had invested their money more reasonably or opted for the lifetime annuity. With the latter, an investor would have given over a lump sum figure in return for a guaranteed payout for the duration of his/her life.
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Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm

Published on: October 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

James “Jeb” Bashaw, the former star financial adviser at LPL Financial (LPLA) from Texas is now registered with International Assets Advisory, a small brokerage firm. LPL Financial fired Bashaw last month over allegations involving selling away. Then, for a while this month, he was with Wunderlich Securities Inc.

Selling away typically involves engaging in private securities transactions sans the required written disclosure or brokerage firm approval. It can also include borrowing from a client, as well as engaging in a transaction that is a potential conflict interest, again without the required disclosure in writing or firm approval.

Responding to the selling away allegations, Bashaw noted that he was “home supervised” and underwent more than a dozen perfect audits while affiliated with LPL. After his firing, Wunderlich took steps to hire Bashaw but there was a delay in transferring his license to the firm. In the end, the broker-dealer and Bashaw reportedly decided not to pursue a working relationship.

Net Asset Value of Tony Thompson’s Former Nontraded REIT Strategic Realty Trust Plunges

Published on: July 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Investors in Strategic Realty Trust Inc. have been notified that the NAV of the nontraded real estate investment trust has dropped almost 30% from $10/share to $7.11/share. The REIT, previously known as TNP Strategic Realty Trust Inc., has a portfolio that includes over a dozen shopping centers.

Shareholders received a letter telling them that while the REIT has experienced significant property appreciation, different transaction costs have offset gains. This includes transaction costs at $1.54/share, organization and offering expenses at $1.23/share, capital returned to investors via distributions at $1.04/share, and other expenses.

Tony Thompson was the REIT’s head until last year when he was forced to step down as president and co-chief executive officer by the board. Several months ago, he relinquished his director position and stopped a proxy battle against the board. The real estate investment trust consented to purchase his more than 130,000 shares at $8/share.

FINRA Wants To Delay Implementing Rule Impacting Nontraded REIT Customers’ Statements

Published on: July 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority wants the Securities and Exchange Commission to grant a delay in the implementation of proposed changes to rule 2340, which impacts customer account statements. The self-regulatory organization had originally asked for the modifications to go into effect six months after the SEC approves the rule change. Now, FINRA wants to give nontraded REIT sponsors and brokerage firms 18 months to adjust to the revised guidelines.

Nontraded REITs are currently not required to show an estimated per-share valuation until 18 months after the sponsors cease to raise funds. Under the proposed rule change, broker-dealer client account statements would eliminate the existing practice of listing at $10 the value, for every share, of a nontraded REIT. This is usually the price that registered representatives sell them at.

The rule change would factor the different commissions and fees that dealer managers and brokers get. It would lower the price per share for every private placement or nontraded REIT found on the account statement of a customer.

LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments

Published on: March 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says that LPL Financial, LLC must pay a fine of $950,000 for supervisory deficiencies involving the sale of alternative investment products, such as oil and gas partnerships, non-traded real estate investment trusts, managed futures, hedge funds, and other illiquid pass-through investments. By settling, the independent broker-dealer is not denying or admitting to the FINRA charges. LPL however, has agreed to an entry of the self-regulatory agency’s findings.

A lot of alternative investments establish concentration limits and certain states have even stipulated their own concentration limits for alternative investment investors. LPL also has set its own limits.

According to FINRA, however, from 1/1/08 to 7/1/12 LPL did not properly supervise the sale of alternative investments that violated of concentration limits. The SRO contends that even though initially LPL employed a manual system to assess if an investment was in compliance with requirements for suitability, the brokerage firm sometimes relied on inaccurate and dated data. Later, when LPL put into place a system that was automated to conduct the reviews, the system was purportedly not updated to make sure current suitability standards were correctly reflected and the programming in the database was flawed.

High Commission Products are Wall Street Favorites

Published on: November 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Nontraded real estate investment trusts are getting a lot of intention from Wall Street lately. One reason for this is that LPL Financial (LPLA), Ameriprise Financial Services (AMP), and other independent brokerage firms are continuing to raise billions of dollars for deals and in sales.

Already, independent broker-dealers are headed toward selling $20 billion in nontraded REITS in 2013, which is nearly twice the amount that were sold in 2012. According to LPL Financial, its commissions for nontraded REITs and other alternative investments has gone soaring, hitting $81.2 million in revenue from July to September. Even the Goldman Sachs Group Inc. (GS) has been going after alternative investments by seeking a partnership with the CAIS Group, which is an exchange for such products, including private equity funds and hedge funds.

Meantime, the Blackstone Group (BX) and KKR & Co., both private equity firms, are handling private-loan portfolios worth billions of dollars in nontraded business development companies involving sellers such as LPL and Ameriprise. And even REITs are getting involved, with Starwood Property Trust Inc. (STWD) investing $250 million into the Griffin Capital Essential Asset REIT Inc., which is a nontraded REIT, and purchasing 24.3 million shares in it.

North American Securities Administrators Association Releases 2013 List of Top Threats to Investors

Published on: October 22, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association has issued its yearly list of the top investor threats. The list is compiled through a poll of its member state securities administrators. With the enactment of Jumpstart Our Business Startups Act, which takes away the advertising restrictions when it comes to soliciting securities and other investments, now more than ever investors should be cautious.

The List:
Private Offerings (especially fraudulent private placement offerings, also known as Reg D/Rule 506 offerings): These are limited investment offers that are very liquid, poorly regulated, and have very little transparency. They are risky and might not be suitable for individual investors. Now, with the JOBS Act, these private placement offerings can be promoted to the general public, which means ads for them may be placed on billboards, social media, and other platforms even though not everyone who sees them is qualified to invest.

REITs: Real estate investment scams may involve new development projects or buying, or beleaguered properties. Non-traded real estate investment trusts that are owned by banks or waiting for foreclosure or short-sale can be problematic for customers, as can investment funds purportedly tied to interest in real property that has no equity and is very leveraged.

Ponzi Scams and High-Yield Investments: High-yield typically translates to greater risk. This type of investment program and Ponzi scams promise great returns and low risk while justifying why the opportunity is so great. Financial fraudsters will typically tout bogus credentials or belong to a certain organization or group and early investors get a return as they market to new investors. Such financial scams eventually collapse.

Affinity Fraud: This type of financial fraud targets members of a particular organization or group. Often, the fraudster is trusted because of the shared affiliation (ie. age demographic, membership, alma mater, ethnicity, religion, etc.)

Self-Directed IRAs Used to Cover up Fraud: Self-directed individual retirement accounts, which are typically safe investments, can be used to conceal a financial scam. Fraudsters may claim that the custodian of an account has more obligations than actual to investors, causing the latter to wrongly believe that their investments are protected from loss and/or legitimate.

High Risk Oil and Gas Drilling Programs: Energy investments that for some investors are becoming a preference over traditional bonds, stock, and mutual funds. They are very risky and really only appropriate for investors that can take huge losses. Unfortunately, some promoters will hide these risks and pressure customers to invest.

Proxy Trading Accounts: This can involve allowing individuals who say that they are experienced traders to manage or set up a trading account for you. It is not recommended for investors to let unlicensed persons have access to your brokerage account information or set up an account for you. Anyone who manages such an account for an investor should be properly registered and have a clean record.

Digital Currency: Virtual money such as PP Coin, Bitcoin, and others. Such coinage isn’t backed by tangible assets, not subject to a lot of regulation, and not government issued. Digital currencies’ value can be very volatile.

NASAA’s Top Investor Threats, North American Securities Administrators Association
Securities and Exchange Commission

Financial Industry Regulatory Authority

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