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

Vernon Healy Again Warns Investors About Pitfalls of Non-Traded REITs

Securities attorneys at Vernon Healy continue to warn investors about buying into non-traded REITs as they watch those who bought shares in Behringer Harvard Short-Term Opportunity Fund I LP join the growing ranks of investors – many of them retirees -- suffering REIT losses.

According to an Investment News article about Behringer Harvard losses, “At the end of December, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.”

Some of those investors have begun to seek the help of regulators, contacting the Financial Industry Regulatory Authority and stepping forward with questions for the SEC.

Most investors are sold non-traded real estate investment trusts with the promise of “steady income.” However, Vernon Healy’s investigation of non-traded REITs has uncovered that the dividends received by investors every month are often made up of new investors’ money or from loans made to the REIT.

The investigation identified more than 10 non-traded REITs that have either severely restricted, or suspended all distributions indefinitely. This means that many non-traded REIT investors are currently stuck in the investment, and their only way out is to sell their shares in an inefficient secondary market at a deep discount.

Investors considering non-traded REITs should be aware that FINRA Regulatory Notice 09-09 requires REITs to re-assess the value of their shares no later than 18 months after the conclusion of the offering. Consequently, many non-traded REITs are now re-assessing share value and notifying investors that their shares are worth far less than what they paid for them, despite the initial sales pitch of price stability. Quarterly reports reviewed by Vernon Healy, reveal that this re-pricing has caused billions of dollars in investor losses. Despite the free-fall in value, many investors cannot sell their shares because the REIT has frozen redemptions.

Vernon Healy continues to urge investors to seek second opinions from investment professionals before investing in these very complex non-traded REIT products.  In October 2011, The Financial Industry Regulatory Association (FINRA), issued an investor alert cautioning investors on the dangers of non-traded REITs, including illiquidity risks, valuation methods, and excessive fees.

Be Wary of Sales Pitch Used by Financial Advisors Selling Non-Traded REITs

Many sellers of non-traded REITs tout their list of top high profile tenants, using them as a vehicle to convey to investors and potential investors a sense of investment security. In reality, however, the existence of high profile tenants in a large real estate holdings pool is by no means an assurance against REIT losses.

The above is true with Cole Credit Property Trust III. According to its 2009 and 2010 annual statements, Cole Credit Property Trust III reported an occupancy rate of 99 percent of its properties. Cole’s website shows pictures of current tenants such as Walmart, Home Depot, Walgreens, and Staples, to name a few. On Cole’s own YouTube channel, the head of Real Estate Investments for Cole Capital Acquisitions accentuates high profile tenants as a crucial strategy “to be able to pay dividends on a monthly basis.”  It is therefore understandable that investors might feel that investing in this non-traded REIT is a safe undertaking. 

But even with almost 100 percent of its properties fully occupied and leased, Cole Credit Property Trust III managed to report losses of almost $8 million in 2009.  Despite the reported losses, the Chairman and President of Cole Properties Christopher H. Cole decided that it was proper to announce in a letter to stockholders dated April 6, 2010, that the REIT was increasing its distribution rates from 6.5 percent to 7 percent.  From our perspective, the increased rate of distribution and the source of the distributions raise concerns, given the losses reported by this non-traded REIT.

We continue to have concerns about Cole Property Trust III in 2010 and 2011, year to date. To this day, public records reflect that Cole is far from covering its dividends with funds coming from operations. In its third quarter report for 2011, Cole Credit Property Trust III reported total revenues for $81,414,000 and operating expenses for $52,079,000; leaving a net income of $10,491,000. Nevertheless, Cole paid dividends to its shareholders of $46,755,845 or $36 million in excess of its net income. In other words, Cole Credit Property Trust III continues to pay most of its dividends with loans or proceeds from new investor’s money.

    Cole Credit Property Trust III’s business practices could be accentuated when its offering concludes on Sept. 22, 2012.  As a reference for investors, below is the 2010 year-end status of the other two Cole REITs now closed to new investors, according to annual reports filed by Cole with the SEC.

--   Cole Credit Property Trust  -approximately 100 percent of all properties leased-

--   Initial offering 2004. Now closed to investors.

--   Re-priced shares from $10 to $7.65 (34 percent decline in price assigned by the REIT)

--    Declared a net income loss of $2,626,000.

--    Distributions reduced from 7 percent to 5.5 percent. More than 67 percent of all distributions were treated by this REIT as a return of the investors’ capital.

--    Redemptions suspended indefinitely.  As a practical matter, investors cannot redeem their shares unless they sell them in the secondary market at a deep discount.

--    Leverage ratio of the REIT’s portfolio: 60 percent, i.e. the ratio of debt to total gross real estate assets.

--  Cole Credit Property Trust II  -approximately 94 percent of all properties leased-

--    Initial Offering 2005. Now closed to investors.

--    Re-priced shares from $10 to $8.05 (20 percent decline in price assigned by the REIT).

--    Distributions suspended and then reinstated in Sept. 2010 at 6.25 percent More than 64 percent of all distributions were treated by the REIT as a return of the investors’ capital.

--    2010 distributions included return of capital from unconsolidated joint ventures of $1.6 million, proceeds from the Offerings of $3.4 million, and borrowings of $18.7 million.

--    Redemptions were suspended indefinitely, and then reinstated with several amendments. Now, the REIT will not redeem in excess of 3 percent of the weighted average number of shares outstanding during the prior calendar year and the cash available for redemption is limited to the proceeds from the sale of shares pursuant to their share re-investment program (DRP) during such calendar year.

--    Leverage ratio of the REIT’s portfolio: 50 percent (i.e. the ratio of debt to total gross real estate assets).

Based on the performance of the two Cole REITs described above, investors may want to have an objective and competent investment professional closely evaluate Cole Credit Property Trust III, especially because 1) it is run and managed by virtually the same group or individuals, and 2) it is similarly promoted as seeking and having high-profile and reliable tenants.  

Vernon Healy continues to urge investors to seek second opinions from investment professionals before investing in these very complex non-traded REIT products.  Just three weeks ago, The Financial Industry Regulatory Association (FINRA), issued an investor alert cautioning investors on the dangers of non-traded REITs, including illiquidity risks, valuation methods, and excessive fees.

FINRA moves in right direction on non-traded REITs sold by David Lerner Associates

In a sudden move in the right direction, the Financial Industry Regulatory Authority (FINRA) filed a Complaint against David Lerner Associates, the sole underwriter for Apple REITs.

The complaint alleges, among other things, several violations in David Lerner’s due diligence and suitability obligations. FINRA contends that although Apple REITs are illiquid and heavily concentrated in one sub-sector, namely extended stay hotels, a substantial number of David Lerner Associates customers own two or more Apple REITs.

Since 1992, David Lerner Associates has sold investors more than $6 billion dollars’ worth of Apple REITs shares. Since most non-traded REITs, including Apple REITs, offer commissions that range between 10 percent and 15 percent, David Lerner Associates has seen profits from the sale of Apple REITs of approximately $600 million since 1996, according to FINRA.

The FINRA Complaint also warns that all Apple REITs have not adjusted their $11 per share valuations despite “substantial market fluctuations;” especially in the area where Apple REITs invest, namely commercial real estate. This is particularly troubling due to the fact that performance on these REITs has declined considerably. For example, according to the 2009 annual report, Apple REIT Six showed a 27 percent decrease in its funds from operations compared to 2008; Apple REIT Seven’s funds from operations declined 20 percent in 2009.

But even more shocking is the fact that the FINRA Complaint acknowledges that a substantial portion of distributions paid by all Apple REITs comes from loan proceeds. To top it off, all Apple REITs also include, as part of the distribution, a return of capital. In other words, part of the distribution all Apple REITs promote as income, is actually a return of the investor’s initial investment.

Even though there is no formal relationship between the Apple REIT companies and David Lerner Associates, it is hard to understand why Apple REITs continue to conduct business exclusively with David Lerner.  For the past 20 years, David Lerner Associates has received numerous penalties and fines.

In May 2004, the Securities and Exchange Commission issued a cease and desist order, which included a $50,000 fine for the recommendation and sale of illiquid Lerner-underwritten REIT securities that were unsuitable for customers on margin. Just a year later, David Lerner Associates was fined $115,000 by the NASD (now FINRA) for misleading advertising and sales literature that did not have factual support, making the statements “exaggerated, unwarranted, or misleading,” according to the NASD order of settlement.

At Vernon Healy we continue to investigate non-traded REITs sold by David Lerner Associates and others and we’ve filed a number of claims on behalf of investors.

To see the FINRA release about Tuesday’s complaint, click here.

Retiree loses much of $1.2 million nest egg on Behringer Harvard REITs, Vernon Healy Claim Asserts

A financial advisor looking to line his own pockets with high commissions rather than protecting the hard-earned $1.2 million nest egg of his Illinois businessman client improperly sold high risk Behringer Harvard REITs and other unsuitable investments to the man’s Trust, according to a claim filed today by Vernon Healy, the investor rights law firm. 

The non-traded REIT investments, which are now illiquid and worth far less than when the financial advisor sold them to the man, have robbed him of a secure retirement and left him wondering if he must now return to work, the claim asserts.

The man, who now lives in Florida, chose a financial advisor who he believed understood his need for protecting his nest egg for his upcoming retirement. 

The advisor recommended that the best course for his $1.2 million from the sale of his business was diversification in secure financial vehicles with the intention of wealth protection and growth, according to the claim. But the advisor failed to follow his own recommendations, instead concentrating more and more of the man’s Trust in ultra-high commission, high-risk, non-traded REITs, specifically in only one company – Behringer Harvard, according to the claim.

The financial consulting relationship that began with plans for diversification and wealth protection ended in 2007 with more than $830,000 of the $1.2 million nest egg invested in high risk Behringer Harvard REITs, the claim states. These REITs have suspended distributions and redemptions and are currently worth roughly 25 cents on the dollar on the limited secondary market. As well another $85,000 was also invested in Ridgewood Energy, another illiquid and in appropriate investment for the Trust, according to the claim.

As it now stands, the Trust that was put in place to provide a secure retirement for Vernon Healy’s client will be insolvent by 2012 due to the advisor’s investment recommendations, according to the claim.

The Vernon Healy Law Firm is conducting ongoing investigations into the sales of non-traded REITS, including Behringer Harvard, Cole REITs, Inland REITs and Apple REITs offered by David Lerner & Associates, to clients who need stability and wealth protection. Vernon Healy believes its investigations have revealed that non-traded REITs are one of the most defectively designed investment products on the market.

The Financial Industry Regulatory Authority (FINRA) filed a complaint Tuesday against David Lerner & Associates and charged the firm with selling shares in Apple REIT Ten, a $2 billion non-traded REIT, to elderly and unsophisticated investors without investigating whether it was suitable for them. The firm was also charged with giving misleading information about Apple REIT Ten distributions.

Vernon Healy has found that some non-traded REITs are financial engineering schemes that falsely entice new, often conservative investors with the promise of owning a piece of real estate that they would never otherwise be able to own while receiving a stream of income for years. Such sales pitches are bolstered by claims that these investments are not affected by stock market volatility. 

Part of the enticement comes from the robust returns that investors initially see. What they don’t know is that the distributions are often actually coming from more recent investors. Some REITs are actually borrowing to provide returns rather than generating them from the REIT’s operations.

In carrying out this operation of paying old investors with new investors’ money, Behringer Harvard was creating a false yield simply to make investing in its REITs more attractive to the investor seeking income from his investments, according to the claim.

Chris Vernon, founder of Vernon Healy, has spoken to and warned regulators in several states regarding the sale of these high-risk, ultra-high commission investments that unscrupulous financial advisors are pushing on traditionally risk averse clients, many of them retirees with irreplaceable nest eggs.

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 were among the first to caution investors about the dangers of non-traded REITs. The firm’s REIT attorneys have written about the dangers of these products in numerous articles. They are currently representing investors who have collectively suffered millions of dollars in REIT losses, and they have warned regulators about them.

CONTACT:  Vernon Healy
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
(239) 649-5390
Toll Free: (877) 649-5394
info@vernonhealy.com
http://www.vernonhealy.com
http://www.reitattorneys.com
http://www.protectinginvestors.com

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.

The sales pitch for non-traded REITs is back but don’t believe the hype

By Chris Vernon

In the universe of non-traded REITs, it looks like history is about to repeat itself and investors should be wary of any financial advisor pushing these risky products. Contrary to the “next big thing” claim by certain investment professionals hawking non-traded REITs, this is not the first time these products have infected fixed income investors’ portfolios.  

In the early to mid-1990s, as the US was coming out of a recession, my team represented multiple fixed income investors who were improperly sold these high commission products. We were so incensed by some of the activity, in more than one case we filed FINRA arbitration claims and obtained arbitration awards not only against the brokerage firm, but also against the owner of the brokerage firm that improperly sold the non-traded REITs.

“I’m disappointed to see that history is now repeating itself as more and more investors who sought low risk, income producing investments contact Vernon Healy regarding problems with non-traded REITS. They invested in these products only to find later on that redemptions could be suspended, dividends could be reduced or suspended, and their money locked up  just as dividends are reduced or suspended. Often, they are stuck with non-traded REITs that are losing value in the declining market for commercial real estate, and they can’t even sell to cut their losses.”

The recent sales pitch for these investments often urges retail investors to jump at the chance to buy commercial property at “fire sale” prices. The investors are told banks would normally do the lending for these properties but don’t because of the current economic climate. The truth is that no one knows for sure when commercial real estate will hit bottom, and investors holding these products stand to lose if, as many suspect, the freefall of commercial real estate values continues. Even more offensive in this new round of non-traded REIT pushing is that the effort to dump these risky products on retail investors may be the salvation of the big players in commercial real estate who see the trouble that is ahead for the sector.

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and investment losses due to broker incompetence and brokerage firm misconduct. The firm's securities attorneys focus their practice on complex business litigation, including financial litigation and securities 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.

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.