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

Lawyers at Vernon Healy have fought for decades on behalf of investors in non-traded REITs

With a revived popularity and a renewed sales pitch, non-traded REITs are once again in the spotlight and brokers continue to target investors looking for a good yield, low risk investment.   The attorneys at Vernon Healy have been on the forefront of the fight against the broker-dealers who have been promoting and selling these defective products for more than a decade.

Sadly, in the midst of the recent financial crisis, non-traded REITs have now caught a second wind and are more popular than ever. Based on Vernon Healy’s past and present experience, many non-traded REITs continue to show fatal flaws, massive conflicts of interest, and excessive fees and commissions that, in the long run, expose investors to unnecessary risks and expenses in light of the likely returns.

If you are an investor considering non-traded REITs, we strongly urge you to seek a second opinion before investing in a non-traded REIT.

For investors who have already purchased non-traded REITs, the securities attorneys at Vernon Healy can help you evaluate a potential claim. What follows is one example of many showing how the law firm of Vernon Healy assisted an investor client with a non-traded REIT claim. In 1998,  securities attorney Chris Vernon exposed the flaws of non-traded REITs through multiple FINRA arbitration cases (formerly NASD arbitration).  Vernon successfully recovered losses suffered by retirees as a consequence of their investments in the defunct Inland Monthly Income Fund III REIT.

In one of the cases, a Florida retired couple, looking for a source of steady income that would fit their conservative approach, contacted a lower-tier broker-dealer. The brokerage firm recommended the retired couple invest in the Inland REIT, which, unbeknownst to the couple, charged very high commissions — of up to 8 percent — in connection with the sale.

On top of the very high fees and commissions, the Non-traded REIT was packed with conflicts of interest. For example, 7 percent of the gross offering proceeds were paid to the advisor of the company, Inland Real Estate Advisory Services Inc., which is a wholly-owned subsidiary of Inland Real Estate Investment Corp., the issuer of this investment. Regrettably, the investigation conducted by Vernon revealed disconcerting transactions and dealings that occurred within the Inland REIT sold to the retired couple, and most of these problems continue to occur inside many non-traded REITs today.

With respect to the investment described above, two of the Inland REIT properties were lost through foreclosure. Four of the 38 Inland sponsored partnerships, which in turn were owned by 21 other Inland-sponsored partnerships, gave up their properties by providing the mortgage holders deeds in lieu of foreclosure. The possibility of cash-flow distributions to limited partners in those 21 partnerships was precluded. In addition to the 38 partnerships, other Inland partnerships experienced problems and much of the property owned by the limited partnerships was lost to first mortgage lenders who seized control of the property. Despite the distressing events cited above, the Inland REIT continued to offer unsustainable distributions that exceeded its net income, as its 1996 annual statement showed.

The brokerage firm alleged that the Florida retired couple —despite having a profile and investment objectives of “fixed income” and “long term growth” — received written materials that fully disclosed the risks involved in purchasing this type of investment and that any losses were caused by unforeseeable events.  

During the course of the arbitration, Chris Vernon was able to demonstrate to the panel that these types of investments should not be pitched to, or sold to retirees because of the high risk involved. At the end of a five day arbitration hearing, the panel sided with the retired couple and rendered an award not only against the brokerage firm, but also against the branch manager and the owner of the brokerage firm.

For more information, contact Vernon Healy about how the firm may be able to help you with a non-traded REIT claim.

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's investment fraud 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.

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.