Articles Posted in REITs

Securities Fraud Roundup: FINRA Examiners See Rise in Brokers Engaging in Improper Activities, SEC Chairman Backs Stronger Enforcement of Civil Penalties Act, & About 800 Investor Fraud Scam Defendants Accounted for Since 2011

Published on: November 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association’s complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.

Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.

In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors

Published on: October 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering David Lerner Associates, Inc. to pay $14M for allegedly engaging in unfair sales practices involving its Apple REIT Ten and charging clients excessive markups. $12 million of this will be restitution to the investors that bought shares in the $2 billion non-traded real estate investment trust, as well as to clients that were overcharged. $2.3 million is FINRA’s fine against the brokerage firm for charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds.

According to the SRO, David Lerner Associates solicited thousands of clients to get them to buy shares in the Apple REIT TEN, of which it is the sole distributor. Elderly and unsophisticated investors were among its sales targets, even as it failed to do enough due diligence to make sure these investments were appropriate for these clients. Instead, the financial allegedly used marketing collateral that was misleading and showed customers performance results for closed Apple REITs without revealing that their incomes were not enough to support distributions to unit owners.

As part of the settlement, the financial firm has agreed to modify its advertising procedures. For example, for three years it will video record sales seminars involving 50 or more participants. It will also prefile its sales literature and ads with FINRA at least 10 days before they are made available for use. Additionally, per FINRA mandate, the brokerage firm will bring in independent consultants to look at proposed modifications to its supervisory system, as well as the training involving the pricing of municipal bonds and CMOs and the sale of non-traded REITs.

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study

Published on: August 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a study by The University of Texas at Austin McCombs School of Business and Blue Vault Partners LLC, most non-traded real estate investment trusts underperform compared to benchmarks. The study was released on June 1 and compared 17 “full-cycle” non-traded REITS that experienced liquidity events between 1990 and May 15, 2012 with two customized benchmarks. The benchmarks involved a portfolio of properties from the National Council of Real Estate Investment Fiduciaries and broad indexes of REITs that were publicly traded.

Per the study, only five of the REITs examined- Cornerstone Realty Income Trust Inc., Apple Suites Inc., Corporate Property Associates 10 Inc., Carey Institutional Properties Inc., and American Realty Capital Trust Inc.-outperformed the market indexes, meaning 71% of the REITs that were part of the study underperformed the customized benchmark. Only Apple Suites outperformed both. While the nontraded REITS made “respectable total returns”-10.3% was the average internal return rate-this was still 140 basis points below the two customized benchmarks, which both had returns of 11.7%. The study said that the main reason for this was fees. (With a standard 12% sales load or fee, the annualized return rate for the nontraded REIT goes up from 10.3% to 12.5%. That said, nontraded REIT fees could go as high as 15%.)

Even though the full cycle REIT sample on average underperformed their benchmarks, each REIT showed a positive total return to investors. A few of the other findings, according to the study:

• Non-traded REITs that had shorter time periods from inception to a full cycle event did better than ones that had longer holding periods.

• In looking at distribution yields to capital gains as a portion of total return, distributions made up 75% or greater of returns.

• When looking at “early Stage Investment Period” performances, about 1/3rd of nontraded REITs outperformed benchmarks based on NAREIT and NCREIF.

Nontraded REITS have been promoted to retail investors as investment vehicles that will allow them to purchase real estate that is institutional quality while having low volatility and greater than average current yields. That said, a maturation process caused by a number of big events has recently occurred, creating certain changes. Valuations of nontraded REITs have even gone down by 50%.

Unfortunately, many investors are not given a clear picture of the risks involved in non-traded REIT investments. This can lead to suspension of dividends, illiquidity, and huge REIT losses. Many investors of non-traded REITs were told they would be getting steady dividend income, as well as stock prices that wouldn’t fluctuate too much. That non-traded REITs are accompanied by commissions, larger broker fees, suspended buyback programs, and dividend cuts may come as a surprise.

Blue Vault Partners and The University of Texas at Austin McCombs School of Business Release Results from Performance Study of Nontraded REITs, PRWeb, August 28, 2012

Most nontraded REITs underperform market, Investment News, June 10, 2012

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Texas Appeals Court Says Letter of Intent for Sale of Fiduciary Financial Services of Southwest Stock to Corilant Financial is Not an Enforceable Contract, Stockbroker Fraud Blog, August 17, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012 Continue Reading ›

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Inc. arbitrator Alvin Green is ordering David Lerner Associates Inc. to pay claimants Florence Hechtel and Joseph Graziose $24,450 for the Apple REITs that they bought from the firm. They will get the money after returning the Apple REIT 9 shares to the company. The Apple REIT is the 14th largest nontraded real estate investment trust in the US. David Lerner & Associates also will have to reimburse them their $425 FINRA claim filing fee.

According to Graziose and Hechtel, the financial firm misrepresented the Apple REIT 9, as well as breached its fiduciary duty and contract to them. Other Apple REIT investors have made similar claims. However, of the hundreds of arbitration claims (there are also securities lawsuits) that have been pending, this is the first one to go to hearing.

Per FINRA, since 1992 David Lerner & Associates has sold close to $7 billion in Apple REITs, making about $600 million in revenue from the sales (60-70% of the firm’s business since 1996). It is the only distributor of Apple REITs.

Last year, the SRO charged the financial firm with soliciting investors to buy Apple REIT Ten shares (a $2 billion non-traded REIT) without performing a reasonable investigation to make sure the REITs were suitable for these clients. Many of its Apple REIT investors are not only unsophisticated investors but also they are elderly. David Lerner & Associates also allegedly offered misleading information about the distribution online.

Several months ago, FINRA also sued firm owner David Lerner for similar alleged misconduct, including misleading clients about the valuation and risk involved in their Apple REIT Tens. The complaint against Lerner follows statements he is accused of making to investors after FINRA made its charges against the financial firm.

Per the amended complaint, Lerner wrote to over 50,000 clients to “counter negative press.” This letter also talked about a potential opportunity for Apple REIT shareholders to take part in a listing or a sale on a national exchange to get rid of their shares at a reasonable price. Also, at a seminar he hosted Lerner allegedly made statements to investors that were misleading.

For the last nine months, our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD, LPP has been investigating claims on behalf of investors who sustained losses in Apple Real Estate Investment Trusts that they bought from David Lerner Associates. For many investors, these non-traded REITs were unsuitable for them.

First Apple REIT case goes against Lerner, Investment News, May 23, 2012

FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading Returns, FINRA, May 31, 2011

More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors

Published on: April 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Many investors of Retail Properties of America, Inc. (RPAI) suffered huge losses after the real estate investment trust’s IPO opened with an $8 offering price. Formerly known as Inland Western REIT, Retail Properties not only made its public debut at an offering price below the expected $10-$12 pre-offering price, but also some reverse-stock-split engineering had to happen for the price to even hit $8. Also, for investors that originally bought the REIT at $10/share almost 10 years ago, the split-adjusted value of the stock was under $3. These results could cause nontraded REITs that have been thinking of going public to have second doubts about making such a move. Real Properties is the third biggest shopping center REIT in the United States.

An IPO is usually good news for an nontraded REIT. Unfortunately, in this case, Retail Properties’ longtime investors will need a lot of assistance from the public markets in order to get a good return on their original investment. Our stockbroker fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP are currently investigating claims involving Retail Properties Inc./Inland Western REIT.

Although Real Properties saw its shares leap 9% soon after trading started on April 5, a huge rally will have to happen for original investors to break even. This can be attributed in part to the complicated formula of reverse stock splits for this IPO. That same day, the stock closed at $8.76.

The Real Properties IPO had gone for a 10-for-1 reverse stock split plus a recapitalization of existing common stock that created a 2.5-for-1 reverse stock split. The company also offered just a quarter of the shares during the initial offering. Three follow-up stock sales are to take place over the next year and a half.

Following the IPO, Real Properties CEO and president Steven Grimes sent a letter to shareholders talking about how the economy has done damage to the real estate market and he doesn’t know when/if recovery will happen. According to Investment News, problems with this particular REIT started to come up as early as 2005, when the fund stopped bringing in capital. The subsequent market crash didn’t help, which was when Real Properties discovered that there were properties in the portfolio were overpriced and overvalued. Debt maturity problems and legacy issues were also matters of concern.

Investors of the illiquid nontraded REIT had no choice but to stay the course—even two years ago when dividend yields were reduced to 1% from 6.4% down. That figure is now at 2.5%.

Last September, Real Properties, then known as Inland Western, submitted its filing to the Securities and Exchange Commission. In the filing, the company said its share value was $6.95. This is 140% more than its IPO’s split-adjusted value and 30.5% under its original $10 price.

REIT’s market debut a big dud, Investment News, April 8, 2012

More Blog Posts:

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

Private REITs: The Need for Tougher Oversight?

Published on: February 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Our institutional investment fraud lawyers have reported often on real estate investment trusts (REITs). Today we’d like to talk about private REITs.

An REIT is a trust, corporation, or association that owns income-producing real estate. Investors’ capital is pooled by REITs to buy a portfolio of properties. There are public REITs, which include ones traded on a national securities exchange and those that are not traded but are publicly registered. Then there are non-traded REITs, which cannot be found on a national securities exchange, but may be traded in a limited capacity in a secondary market. There is also another kind of REIT known as the private-placement, or private, REIT.

Private REITs, like their non-traded counterparts, are not traded on an exchange. They also come with significant risks. They are not subject to the disclosure requirements that public non-traded REITs have to honor. The fact that they are unlisted makes them difficult to value and insufficient disclosure documents makes it challenging for investors to make educated choices about their investment.

Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses

Published on: January 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News, an investor has written to FINRA to express her concerns about Behringer Harvard Holdings, LLC. D. Gayle Salyer says that within six years, the $50,000 that she invested in a real estate fund with them has decreased by $48,000. She has also written to the Texas State Securities Board to voice her concerns.

The real estate firm recently saw a number of its real estate funds and REITs drop in their estimated valuations. For example, ending last month the Behringer Harvard Short-Term Opportunity Fund I LP investors saw the fund’s valuation plunge to 40¢/share. Compare that to two years before when its valuation was $6.48/share. The fund used to have approximately $130 million in assets.

Salyer expressed dismay about the inadequate communication that she says she received from the real estate company regarding her losses. She claims that while the losses were recorded in her account statement, she was never given an explanation or warned that there was financial trouble.

Bob Aisner, who is Behringer’s CEO, has said that the Short-Term Opportunity Fund uses SEC filings and regular reports to make information available to the public. He noted that since the fund’s inception, investors have received $2.12/unit in total distributions. He also said that the fund got into trouble because of investments that were made in condominiums prior to the recession and due to the lack ability of financing for opportunistic assets in recent years. Aisner maintained that Behringher has been dedicated to the fund’s success, as can be seen by the $40 million in support it won’t be getting back.

FINRA has put out a proposed amendment about the valuation of illiquid investments. The revised rule would restrict for how long the initial, estimated value could be applied on the account statement of clients. It also would mandate that broker-dealers subtract the offering costs from that first valuation.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our team of lawyers, consultants, and others has over a century’s worth of combined experience in securities law and the securities industry. For over two decades we have represented thousands of investors throughout the US in arbitration and in state and Federal courts.

Our clients have collectively gotten back over $100 million. Over 90% of the parties that we have represented have gotten back either part or all of their financial losses. Our securities fraud law firm also represents international clients.

Behringer Harvard client wants answers after seeing fund drop by 96%, Investment News, January 24, 2012

Real Estate Investment Trusts, Investopedia

More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings

Published on: November 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

To settle FINRA accusations that it used misleading marketing materials when selling Wells Timberland REIT, Inc., Wells Investment Securities, Inc. has agreed to pay a $300,000 fine, as well as to an entry of the findings. However, it is not denying or admitting to the securities charges.

FINRA claims that as the wholesaler and dealer-manager of the non-traded Real Estate Investment Trust’s public offering, Wells approved, reviewed, and distributed 116 sales and marketing materials that included statements that were misleading, exaggerated, or unwarranted.The SRO contends that not only did most of the REIT’s sales literature and advertisements neglect to disclose the meaning of Wells Timberland’s non-REIT status, but also it implied that Wells Timberland qualified as an REIT during a time when it didn’t. (Although its initial offering prospectus reported that it planned to qualify as an REIT for the tax year finishing up at the end of 2006, it did not qualify until the one ending on December 31, 2009.) Also, FINRA believes that Wells Timberland’s communications about portfolio diversification, redemptions, and distributions included misleading statements and that the financial firm lacked supervisory procedures for making sure the proprietary data and sensitive customer information were properly protected with working encryption technology.

While non-traded REITs are usually illiquid for approximately 8 years or longer, certain tax ramifications can be avoided if specific IRS requirements are met. FINRA says that the Wells ads failed to ensure that investors clearly understood that an investment that is not yet an REIT couldn’t offer them those tax benefits.

Last month, FINRA put out an alert notifying investors about the risks of public non-traded REITs. Non-exchange traded real estate investment trusts are not traded on a national securities exchange. Early redemption is usually limited and fees related to their sale can be high, which can erode one’s overall return. Risks involved include:

• No guarantee on distributions, which can exceed operating cash flow.
• REIT status and distributions that come with tax consequences
• Illiquidity and valuation complexities
• Early redemption that is limited and likely costly
• Fees that can grow
• Unspecified properties
• Limited diversification
• Real Estate risk

FINRA wants investors considering non-traded REITs to:

• Watch out for sales literature or pitches giving you simple reasons for why you should invest.
• Find out how much the seller is getting in commissions and fees.
• Know how investing in this type of REIT will help you meet your goals.
• Carefully study the accompanying prospectus and its supplements.

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

More Blog Posts:

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud, October 22, 2011

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA

Published on: June 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

FINRA has filed securities charges against David Lerner & Associates, Inc. accusing the broker-dealer of not taking into account suitability when soliciting vulnerable investors-in particular, elderly clients, to buy shares in the non-traded, $2B Apple REIT Ten offering. The SRO is also accusing the broker-dealer of posting misleading information online about distributions.

DLA has been Apple REITs only underwriters for nearly two decades. The broker-dealer has sold almost $6.8B of the securities into about 122,600 customer accounts. The series has made $600M in fees and other earnings for the broker-dealer, making up 60 to 70% of the firm’s yearly business. Since January, DLA also has been sole underwriter for Apple REIT Ten, which has sold over $300M of a $2B offering of shares. DLA associates earn numerous fees, including 10% of all offerings.

The SRO says that for at least seven years, the closed Apple REITs have “unreasonably valued” their shares at $11 (notwithstanding performance declines, market fluctuations, and increased leverage). The REITs, which were launched from 2004 and 2008 and were used mainly used to buy extended hotel stays, have managed to keep up “outsized” distributions of 7-8% through leveraged borrowing and returning of capital to investors. The SRO contends, however, that DLA did not disclose on its website that the income from real estate was not enough to support these. FINRA also claims that DLA provides “misleading” distribution rates on its website for all past Apple REITs.

DLA is denying the allegations.

Finra Sues David Lerner Firm, Wall Street Journal, June 1, 2011
FINRA Charges Firm With Ignoring Suitability, Providing Bad Data on REITs, BNA, June 1, 2011
REITs

More Blog Posts:
Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009
W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation, Stockbroker Fraud Blog, March 25, 2008
UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011 Continue Reading ›

Ameriprise Must Pay $17 Million for REIT Fraud

Published on: July 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission says Ameriprise Financial Services has consented to pay $17.3 million to settle allegations that it received millions of dollars in undisclosed compensation in exchange for selling certain REITs (real estate investment trusts) to its brokerage customers.

The SEC says Ameriprise demanded and got “revenue sharing” payments to sell the REITs but neglected to disclose it was receiving the payments. The SEC is also accusing Ameriprise of violating a number of federal securities laws when it sold over $100 million in unregistered shares involving one specific REIT.

SEC Enforcement Director Robert Khumazi says the broker-dealer’s clients were not told that brokers had incentives to sell the REITs. He stressed the importance of investors being able to rely on unbiased advice from financial advisers.

The SEC charges come from REITs sales that took place between 2000 and May 2004. CNL Holdings Group, Inc. and W.P. Carey & Co. LLC created, advised, and managed the REITs named in the proceedings.

By agreeing to settle, Ameriprise is not admitting to or denying wrongdoing.

Shepherd Smith Edwards & Kantas LTD LLP represents Ameriprise investors with securities fraud cases against the broker-dealer. Stockbroker fraud attorney and firm founder William Shepherd says “Our law firm handles claims of all types for investors nationwide who lost in accounts at Ameriprise and other financial firms. Over 90% of our clients recover all or part of their losses. It is sad that many investors choose not to seek recovery from investment firms that commit fraud or and other wrongdoing. We offer a free consultation and most of our clients advance no fees or costs but instead pay these out of their recovery.”

Related Web Resources:
Ameriprise Pays $17.3M To Settle SEC Charges, Wall Street Journal, July 10, 2009
REITs, Investopedia Continue Reading ›