REIT Attorneys - Helping Investors with non-traded REIT losses and frozen investments

Vernon Healy claim: nontraded REITs, Medical Capital Notes, oil & gas programs and other bogus “alternative investments” decimate retired couple’s $1 million nest egg

A reckless stockbroker with CapWest Securities Inc. negligently urged a retired couple to plunge more than $1 million of their nest egg into so-called income producing “alternative investments” that turned out to be bogus Ponzi schemes and highly speculative real estate investments, according to a claim filed today by the Vernon Healy law firm. 

The Florida couple now faces foreclosure on their home. A retired small businessman and homemaker, they have seen their monthly retirement income from these investments drop from $8,000 to $600 per month.
 
The couple’s financial devastation is the result of following the plan devised by their CapWest Securities Inc. “retirement planning specialist” who claimed to have special expertise in working with retirees on safe investments and income producing “alternative investments,” the claim states. 

The non-traded REITs, or private REITs, and real estate partnership deals the couple invested in have to a large extent shut down redemptions and suspended distributions, thus essentially depriving the couple of access to almost half of their retirement savings.  The nontraded REITs include Desert Capital, Inland REIT, KBS REIT, and the IMH Secured Loan Fund.  In addition, the couple was sold two private real estate LLC programs: Clovis Senior Living LLC, which was shut down by Oregon regulators, and Blue Rock 1355 First Ave. LLC. 

The couple’s CapWest Securities stockbroker pledged that both he and his employer conducted due diligence on the investments, according to the claim. But three of the investments have now been shut down as Ponzi schemes by the SEC and one of the real estate investments has been shut down by Oregon state regulators.

The three Ponzi schemes in which the couple were urged to invest were Medical Capital Notes, Provident Royalties’ Shale Oil Royalties program, and Striker Petroleum.       

“Ponzi schemes like Medical Capital fed brokers ultra-high commissions so they could sell these alternative investments to the public and collect a steady stream of money from new investor victims,” said investor rights attorney Chris Vernon. “Reckless and greedy firms like CapWest Securities should be held accountable for creating a pipeline for these products and then pushing them on financially vulnerable retirees.”     

Basic due diligence by CapWest Securities and its stockbroker would have called into question Medical Capital’s business practices: Medical Capital’s CEO had been sued for fraud in the 1990s and he had his insurance license revoked by California regulators; Medical Capital’s financial statements had never been audited; and Medical Capital loaned $90 million of investors’ money for hospital purchases to a company called IHHI whose CEO had been sued for fraud and embezzlement at a previous job, according to the claim.

On the private REITs, the CapWest stockbroker never advised the couple that the REIT could suspend redemptions and monthly distributions — thereby locking up the retirees’ money — according to the claim.

The arbitration claim filed today before FINRA, the Financial Industry Regulatory Authority, accuses CapWest of breach of fiduciary duty, common law fraud and misrepresentation, and violations of the Florida Securities and Investor Protection Act and seeks recovery of the couple’s actual $1 million in damages, costs, attorneys fees and punitive damages. 

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct. Vernon Healy securities attorneys are experienced in arbitration and litigation and the firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as other complex business litigation and arbitration.

For more information contact,
Chris Vernon, attorney at law

Vernon Healy
Naples, Florida
www.vernonhealy.com
239-649-5390
Toll Free: 1-877-649-5394

Investor Caution: Brokers pushing billions of dollars of illiquid, non-traded REITs that lockup unwitting retirees’ money

Billions of dollars are pouring into the coffers of non-traded REITs thanks to fat commissions and even kick back schemes offered to the brokers and firms hawking them.

At Vernon Healy, we’ve cautioned investors about the dangers of these high-risk and mostly illiquid investments and reported that securities regulators are increasingly alarmed at the tactics used to sell these products to retail investors. Misrepresentations about these REIT products, which aren’t publicly traded on a regular market exchange, continue to proliferate to the detriment of public investors.

Consider this alarming industry-touted data that shows that the non-traded REIT industry’s aggressive marketing campaign appears to be working: Organizers of the 2009 IMN Non-traded REIT Industry Symposium released information saying that $9 billion flowed into non-traded REITs in 2008, with $2 billion of that pouring in during the fourth quarter alone.

The industry also touts an industry-sponsored survey conducted on behalf of the IPA, a trade group for non-traded REITs, that says almost two thirds of financial advisors who regularly recommend non-traded REITs anticipate increasing sales volume to investors.

At Vernon Healy, we are increasingly hearing horror stories from investors who are now shocked to discover that their money is locked-up in an illiquid product because non-traded REIT fund managers have frozen redemptions.

Brokers and brokerage firms have turned to selling high-commission products like non-traded REITs. These high commissions paid by non-traded or unlisted REITs serve as a powerful motivator for brokers and brokerage firms to sell these products – especially in this economy. This creates a significant conflict of interest: Brokers and brokerage firms may shy away from objectively recommending products and strategies that are more appropriate and suitable — and instead push their clients to high-commission investment products.

If you are concerned about your non-traded REIT assets and the circumstances under which they were sold to you, please call Vernon Healy at (239) 649-5390.

Non-Traded REIT disaster: A retired couple’s story

After more than 40 years of marriage and running a business together, a Florida couple sold their business and earned proceeds of $500,000. It was May 2008 and the economy was cracking.

For years, the couple, now in their late 60s, had primarily reinvested in their business rather than the markets.  As a result, they sought assistance from a brokerage firm, and their broker assured them their portfolio would be invested in safe, low-risk products.

The broker proceeded to invest 60 percent of their portfolio in two non-traded REITs, KBS Real Estate Investment Trust I and KBS Real Estate Investment Trust II.

The result: Today the couple is without the income they need from their investments and they are locked out from withdrawing their money.

KBS announced that they have prohibited investors from withdrawing their money for the rest of the year from the two non-traded REITs the couple purchased. 

At Vernon Healy, we’re preparing to file an arbitration claim on the couple’s behalf based on the misconduct of the broker and the brokerage firm’s failure to supervise its broker in violation of SEC regulations, industry rules and applicable state and federal laws.

We’re seeing more and more investors in this horrible predicament. Our investigation shows that many brokers have been paid high commissions to sell non-traded REITs to their clients.

Commissions to brokers can be up to seven times the commissions paid on other types of investments, our investigation shows. In many cases, additional incentives such as trips have been offered to promote the sale of private REITs.

You can see how this conflict of interest can affect investors. Is your broker motivated by the high commission, or is your broker helping you find a product to suit your needs?

REITs are complicated products.  REITs often invest in commercial real estate, a sector that was already on the brink of significant problems by 2008. Non-traded, or private REITs, are illiquid investments because they aren’t traded on any stock market or exchange. This makes them a riskier product than publicly traded REITs.

Securities regulators, alarmed by soaring sales of non-traded REITs, issued a warning to brokerage firms earlier this year cautioning firms to refrain from misconduct involving non-traded REITs, or private REITs.

If you are concerned about your non-traded REIT assets and the circumstances under which they were sold to you, please call Vernon Healy at (239) 649-5390.

Analysts warn that REIT investors are at risk from expiring commercial real estate leases and vacancies

Despite the S&P’s one week flip flop on the rankings of commercial mortgage-backed debt for three bonds sold in 2007 (Bloomberg), financial analysts warn that commercial real estate has a rocky road ahead. Investors in unlisted REITs are likely to suffer most because in many cases they are now locked out of selling and reliant on the issuer to accurately and objectively value their illiquid assets.

Commercial property vacancies are up and rents are down, and CreditSights' REIT analyst Craig Guttenplan says lurking danger in the future for REIT investors will come in the form of expiring leases coupled with those falling rents.

Guttenplan writes: “Despite our expectations for a bottoming of (Commercial Real Estate) fundamentals in 2012 or 2013, we note that rental rates should remain at depressed levels for the subsequent few years relative to the recent boom period as fundamentals slowly strengthen.”

Compounding that negative outlook are additional commercial property vacancies that will no doubt follow bankruptcies due to the current economic climate.

“(T)enant bankruptcies can speed up the lease expiration timetable and force space that was once considered occupied for the longer term back on the market,” Guttenplan writes.

Though publicly traded REITs have seen a slight rebound thanks to shoring up their equity and eliminating some debt, the big picture for unlisted REITs is still dark (and going public decisions are often tainted by a big potential payday to the issuer through the sale of the management company to the new public company as part of the deal).

Investors, especially those facing retirement soon, are most at risk. And brokers and brokerage firms who sold them the unlisted REITs won bigger commissions at the expense of investors who can have little faith about the value of their investments and can’t sell to escape falling values.

The Vernon Healy law firm is investigating claims on behalf of investors surrounding misrepresentations about the safety and liquidity of unlisted REITs and the suitability of marketing of these products to certain investors, including older, risk-averse investors. For more information, contact Vernon Healy by phone at 239-649-5390 or by e-mail at info@vernonhealy.com.

SEC Charges Ameriprise with fraud for secret REIT payments

The Securities and Exchange Commission charged Ameriprise Financial Services, Inc. with fraud today and accused the Minneapolis-based broker-dealer of receiving millions of dollars in secret payments as a condition of offering and selling certain REITs to its brokerage clients.

Ameriprise agreed to settle the charges without admitting wrongdoing and pay $17.3 million, the SEC said.

According to the SEC order: “Ameriprise received approximately $30.8 million in undisclosed compensation in connection with Ameriprise’s offer and sale to its brokerage customers of certain real estate investment trusts (‘REITs’) between 2000 and May 2004 ... Ameriprise demanded this undisclosed compensation, which it referred to as ‘revenue sharing,’ in exchange for including the REITs on Ameriprise’s brokerage platform.”

 

Download SEC_Ameriprise_33-9051

Ameriprise also sold more than $100 million of unregistered shares of one REIT in violation of the registration provisions of the federal securities laws, the SEC said.

"Few things are more important to investors than getting unbiased advice from their financial advisers," Robert Khuzami, Director of the SEC's Division of Enforcement, said in a statement. "Ameriprise customers were not informed about the incentives its brokers had to sell these investments."

The SEC said its investigation is continuing.

The Vernon Healy law firm is currently investigating claims on behalf of investors surrounding misrepresentations about the safety and liquidity of unlisted REITs and the suitability of marketing of these products to certain investors, including older, risk-averse investors. For more information, contact Vernon Healy by phone at 239-649-5390 or by e-mail at info@vernonhealy.com.

Securities regulators eye fat commissions used to motivate brokerage firms to sell unlisted REITs to unwitting investors

Anyone contemplating an investment in a private or unlisted Real Estate Investment Trust, or REIT, should consider the motivations of the broker and brokerage firm hawking it. 

Unlisted REITs are investments that aren’t traded on the New York Stock Exchange or Nasdaq market. As such, they can be difficult for investors to sell and difficult for investors to value. To overcome marketplace concerns, the managers and operators of private REITs have offered brokers and brokerage firms high commissions to sell these products to retail investors.

At this point in history, most brokerage firms and brokers have seen revenues drop significantly from just a few years ago. Looking to fill the void, brokers and brokerage firms have turned to selling high-commission products such as unlisted REITs to maintain their incomes. High commissions paid by unlisted REITs serve as a powerful motivator for brokers and brokerage firms to sell these products.

This creates a significant conflict of interest: Brokers and brokerage firms may shy away from objectively recommending products and strategies that are more appropriate and suitable — but less lucrative than high-commission unlisted REITs for the broker and brokerage firm to sell.
 
This strong commission-based motivation to sell unlisted REITs has not gone unnoticed by regulators.  In March 2009, the Financial Industry Regulatory Authority (FINRA), began questioning multiple brokerage firms about their sales and promotion practices related to private or non-traded REITs.

Some unlisted REITS are registered with the Securities and Exchange Commission (SEC) and some are sold using an exemption to registration. FINRA is questioning what investors were led to believe by the brokerage firms and brokers who sold them these private REITs. 

Among FINRA’s questions to brokerage firms selling unlisted REITs: Which REITs did the firm promote? How many shares were sold? How many customers of the firms were sold these products? What were the ages of the customers who bought these products? How much were brokers to sell these unlisted REITs? What documentation was obtained from the customer in connection with these sales? What compliance and supervision procedures were employed to monitor these sales to customers in terms of risks and activity in general?

As a precursor to questioning brokerage firms, FINRA issued a regulatory notice (09-09) in February 2009 regarding additional concerns about post-sale representations surrounding private and unlisted REITs. In the regulatory notice, FINRA reminded brokers and brokerage firms of some of their obligations to investors: Specifically, once unlisted REIT customers have owned their investment for a while, their monthly statements should begin to contain a reasonably current estimated per share value of the unlisted REIT investment.

Specifically, brokers and brokerage firms are prohibited from using a per share estimated value that’s based on data that’s more than 18 months old compared to the customer’s account statement date.  According to FINRA, “ … firms must not use par value in a customer account statement more than 18 months following the conclusion of an offering, unless an appraisal of the program’s assets and operations yields the same value.”

The staleness of data used to value these unlisted REITs is particularly important due to the illiquid nature of these investments.

In the current economic environment, the NASD Rule allowing an 18-month window is inadequate: With data that old, how can a broker or broker-dealer actually carry out their duties and obligations to the customer?  Additionally, even prompt data reporting without an 18-month lag time is suspect without a transparent and liquid market for trading the unlisted REIT shares.   

Vernon Healy is currently investigating claims on behalf of investors surrounding misrepresentations about the safety and liquidity of unlisted REITs and the suitability of marketing of these products to certain investors, including older, risk-averse investors. For more information, contact Vernon Healy by phone at 239-649-5390 or by e-mail at info@vernonhealy.com.

Unlisted REITs illustrate redemption and valuation risks for investors: Piedmont/Wells, Inland, Behringer Harvard, Cole, Desert Capital, Dividend Capital, Grubb & Ellis, Whitestone, and KBS

More and more investors in unlisted REITs are awakening to the “Hotel California” effect: They can’t get out of their REIT investment. 

According to “The Non-Listed REIT Blog,” a subscription newsletter covering non-listed REITs for due diligence analysts and others, six of the biggest REITs  have halted their redemption programs.  These six REITS are:  Piedmont Office Realty Trust, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II, Behringer Harvard REIT I and Cole Credit Property Trust II.   The same Non-Listed REIT Blog is also reporting that other REITS such as Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT have stopped redeeming or been unable to redeem all the submitted shares. 

Accompanying this illiquidity problem, are potential valuation problems.  For example,  after closing the redemption program, Piedmont/Wells reported a net asset value decline of 15 percent — from $8.38 to $7.40 per share — along with a dividend reduction.   

These examples highlight the valuation and liquidity risk issues faced by investors with unlisted REITs.  Arguments that private and non-traded REITs perform better than publicly traded REITs is cold comfort if an investor can’t redeem at par or above — or can’t redeem at all because redemptions have been frozen or limited to a small number of investors. 

A potential inability to trade and liquidate shares, coupled with a decreased dividend, places unlisted REIT investors in dangerous financial waters. These investors find themselves with essentially illiquid assets with decreasing yields in a deteriorating economic environment.  We believe this is an especially troubling situation with respect to REITs that have a concentration of commercial properties purchased around 2006 or 2007 in bubble areas such as Florida or California and/or REITs with weak commercial tenants and/or high leverage and low liquidity.   

The value of shares in a publicly traded REIT is more reliable and discernible because these investments are priced daily by way of investors’ purchases and sales in an open market. In contrast, shares of privately traded REITs with little or no market are priced by the same REIT managers and operators who selected properties for inclusion in the REIT portfolio. In essence, they are giving themselves their own report cards. 

What is most troubling about this pricing issue for unlisted REITs is that it enables incompetent or unethical financial advisors who heavily promote and sell these products to inappropriately downplay the true risks of these unlisted REITs simply because the prices don’t move daily on an exchange.   When this lack of price transparency is coupled with the high commissions that unlisted REITs pay to financial advisors to sell these REITs, the REITs are dramatically oversold to investors looking to avoid the risks of the equities markets, we believe.  

In our opinion, investors who believe they were not informed of the true characteristics and risks of unlisted REITS and/or investors who are in or near retirement with significant portions of their investable assets in nonpublic or private REITs should have their portfolios independently evaluated. 

Vernon Healy represents investors who have been the victims of negligence or unethical behavior by investment professionals and who have suffered significant investment losses.  For more information about Vernon Healy’s efforts on behalf of investors click here.

Private and unlisted REITs can place investors in a precarious financial position

As attorneys who regularly represent investors, we believe the unique problems and risks associated with unlisted REITs are now coming home to roost. Although unlisted REITs may tout the fact they have outperformed public REITs, we believe these products have added risks relating to valuation and redemption rights. 

 

These risks and concerns call in to question the appropriateness of these products for many investors, especially those with a limited liquid net worth or those with a significant portion of their remaining  net worth already invested in real estate.  We are also concerned about the accuracy and appropriateness of the marketing efforts employed by some “financial professionals” to sell these products to retail investors. 

 

How REITs work

Real Estate Investment Trusts, or REITs, such as those issued by Inland, Wells (now known as Piedmont), and KBS are “pass-through” entities for tax purposes that invest in real estate.  These types of investments offer an equity interest in a pool of real estate assets, including land, buildings, shopping centers, hotels, and office properties. 

 

Essentially, as an investor, you are giving your money to the REIT to go out and buy property that will conceptually generate enough appreciation or income to overcome costs that you might otherwise avoid by directly buying real estate for yourself.

Unlisted REITs include both private REITs and non-traded REITs that are not traded on a public market like the New York Stock Exchange or over the counter through Nasdaq.

 

Fatter commissions

A Feb. 25, 2009 Wall Street Journal article dubbed unlisted REITs controversial.
The controversy includes criticism by some analysts who point out that unlisted REITs are typically sold by brokers and brokerage firms who receive much higher commissions than they would receive from selling publicly traded REITs.  These higher broker commissions, typically paid by the unlisted REIT from the funds invested in the REIT, significantly reduce the amount available to invest and, by extension, reduce the ability of the REIT to generate returns. 

 

Difficulty Selling

The Wall Street Journal has also noted the increased liquidity risk of unlisted REITs compared to publicly traded REITs. 

 

According to a March 31, 2009 Wall Street Journal article entitled “Slip Sliding Away,” there are more than $200 billion of securitized mortgages on retail properties.  Over the past year, the delinquency rate on these securitized mortgages is up approximately 800 percent. This means eight times as many mortgage payments are more than 30 days past due than the number that existed just one year ago.

 

Due to concerns over the economy or a need for funds because of  current economic conditions, some REIT investors have decided to get out of their REIT investments. To their dismay, selling an unlisted REIT isn’t what many investors expected.  Although selling a publicly traded REIT is like selling a stock —  the sale goes through immediately — this is not so with unlisted REITs.

 

Financial professionals selling unlisted REITs may have represented that investors could redeem their investment after a holding period, which is typically a year’s time. But despite such representations, attempts to redeem may now be denied. This is because most unlisted REITs reserve the right to suspend redemptions or limit redemptions if too many investors try to redeem at once. 

 

The potential inability to trade and liquidate shares, coupled with likely decreased dividends, places unlisted REIT investors in a precarious financial position.  Assets that are essentially illiquid with decreasing yields in a deteriorating economic environment can hardly be counted on for future financial needs.

 

Seeking help

In our opinion, investors who believe they were not informed of the true characteristics and risks of unlisted REITs and/or who are in or near retirement with more than a small portion of their liquid assets in nonpublic or private REITs, should have their portfolios independently evaluated. 

 

Vernon Healy represents investors nationwide who have been the victims of negligence or unethical behavior by investment professionals and who have suffered significant investment losses.  For more information about Vernon Healy’s efforts on behalf of investors click here.