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Archive for the ‘REITs’ Category


Ex-American Realty executives charged with securities fraud

U.S. prosecutors on Thursday announced criminal fraud charges against two former American Realty Capital Properties Inc executives stemming from a 2014 accounting scandal that wiped out roughly $4 billion of the real estate investment trust’s market value.

Former Chief Financial Officer Brian Block, 44, was charged with six criminal counts, including securities fraud, conspiracy and making false statements, according to U.S. Attorney Preet Bharara in Manhattan.

Lisa McAlister, 52, a former chief accounting officer, pleaded guilty on June 29 to four counts, including securities fraud and conspiracy, and is cooperating, Bharara said.

The U.S. Securities and Exchange Commission filed related civil charges against both defendants, seeking fines and officer and director bans.

Block was arrested on Thursday at his home in Hatfield, Pennsylvania. He was released on $1 million bond after appearing in the federal court in Philadelphia, prosecutors said.

The REIT, which has since changed its name to Vereit Inc. and is under new management, declined to comment. Vereit has said in past regulatory filings that it has been cooperating with investigators.

The accounting scandal that rocked American Realty Capital in 2014 represented a significant black eye for the nontraded real-estate investment trust business, which flourished during the years following the 2008 financial crash. Nontraded REITs, which purchased non-flashy commercial property, were popular with small investors because of the relatively high dividends they offered.

But they came under fire from regulators and others because of their high fees and weak disclosure. New regulations have gone into effect in recent years, but the industry’s fundraising efforts have been hurt by the negative publicity.

FINRA fines Berthel Fisher and affiliate $775,000 for supervisory failures

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc., of Marion, Iowa, a combined $775,000 for supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs). As part of the settlement, Berthel Fisher must retain an independent consultant to improve its supervisory procedures relating to its sale of alternative investments.

Brad Bennett, FINRA’s Executive Vice President of Enforcement, said, “A strong culture of compliance is an essential element of the proper marketing of complex products. Berthel’s supervision of the sales of non-traded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.”

FINRA found that from January 2008 to December 2012, Berthel Fisher had inadequate supervisory systems and written procedures for sales of alternative investments such as non-traded REITs, managed futures, oil and gas programs, equipment leasing programs and business development companies. In some instances, the firm failed to accurately calculate concentration levels for alternative investments, thus, the firm did not correctly enforce suitability standards for a number of the sales of these investments. Berthel Fisher also failed to train its staff on individual state suitability standards, which is part of the suitability review for certain alternative investment sales.

FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for certain sales of leveraged and inverse ETFs. The firm did not adequately research or review non-traditional ETFs before allowing its registered representatives to recommend them to customers, and failed to provide training to its sales force regarding these products. The firm also failed to monitor the holding periods of these investments by customers, resulting in some instances in customer losses.

In settling this matter, Berthel Fisher and Securities Management & Research neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Notice to LPL Financial, LLC Customers — Aidikoff, Uhl & Bakhtiari Launches Investigation of non-traded REIT recommendations — LPLA

Aidikoff, Uhl & Bakhtiari announces the launch of an investigation of the sales practices of LPL Financial, LLC in recommending non-traded REITs to their clients.  The investigation follows the recently filed complaint by the Commonwealth of Massachusetts Securities Division into similar non-traded REIT sales practices.  The Massachusetts complaint charged LPL with dishonest and unethical business practices.

“People who purchased non-traded REITS through LPL may have been led to believe they were suitable for conservative income seeking investors.  In fact, these investments were very different,” stated attorney Philip M. Aidikoff.

 “The Massachusetts complaint offers a behind the scenes look at business practices allegedly engaged in by LPL,” said attorney Ryan K. Bakhtiari.  “Investors should consider all of their options if they have suffered losses in non-traded REITs sold by their brokerage firm.” 

The Massachusetts complaint focused on seven non-traded REIT products:

  • Inland American
  • Cole Credit Property Trust II, Inc.
  • Cole Credit Property Trust III, Inc.
  • Cole Credit Property 1031 Exchange
  • Wells Real Estate Investment Trust II, Inc.
  • W.P. Carey Corporate Property Associates 17
  • Dividend Capital Total Realty

The individual brokers and advisors who sold non traded REITs are not targets of this investigation.   

Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters.  Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions.  More information is available at www.securitiesarbitration.com or to discuss your options please contact an attorney below.

Philip M. Aidikoff, pma@aublaw.com

Ryan K. Bakhtiari, rkb@aublaw.com

Aidikoff, Uhl & Bakhtiari

(800) 382-7969 Toll Free

Massachusetts files complaint against LPL for non traded REITs

LPL one the largest independent U.S. broker-dealers, was accused by Massachusetts regulators today of dishonest and unethical business practices and failure to supervise agents who made improper sales.

The complaint relates to sales of seven non-traded real estate investment trusts in violation of state and company rules, according to a statement from the state’s senior securities watchdog, Secretary of the Commonwealth William F. Galvin. LPL earned at least $1.8 million in commissions on the sales from 2006 through 2009, the state said.

The complaint seeks a cease-and-desist order, censure and restitution for investors.

FINRA sanctions David Lerner $14 million for unfair practices in sale of REIT

The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered David Lerner Associates, Inc. (DLA) of Syosset, NY, to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT) DLA sold, and to customers who were charged excessive markups. As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors. To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners. FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations.

 In addition, FINRA fined David Lerner, DLA’s founder, President and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers. To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a “fabulous cash cow” or a “gold mine,” and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a “windfall” to investors.

 FINRA also sanctioned DLA’s Head Trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.

Behringer Harvard REITs Continue Trend in Non-Traded REIT Market

Investors who placed their money in unlisted REITs, including Behringer Harvard, have been awakened to the myriad of issues related to the nature of these products. Unlisted, or non-traded, REITS differ from listed REITs in that they are not traded on an open market. Rather, non-traded REITs are sold to investors who then hold the product until the end of an investment term.

Behringer Harvard and other non-traded REITs contain a fundamental flaw which is many times not evident at the time of purchase: their value is set by the very companies which sell them. To clarify, a listed, or public, REIT is valued daily based on the market in which it is traded whereas a non-traded REIT’s value is determined by the staff of the REIT, or sometimes by a third party consultant paid for by the REIT which it is supposed to objectively value. Obviously, a conflict of interest can easily develop in the standard valuation procedure of a non-traded REIT.

Another issue with non-traded REITs is that if one chooses to sell their shares, it must do so in conformity with the procedures of the REIT. The usual procedure is to sell shares through a redemption program; however, many such programs have been suspended due to adverse financial conditions when many investors attempt to redeem their shares at once. The consequence to investors is that they are stuck in the investment until the redemption program is reinstated.

When sold Non-traded REITs, many were not informed of these obvious drawbacks to the product. Some have posited that it might have something to do with the somewhat common 15% commission given to the selling party, or the broker. Though regrettable, many investors may be able to recover losses in such products, including Behringer Harvard, through arbitration. For a more detailed analysis of REITs, click here.

 

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