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2012: A Year in Review, Part 1

Non-traded REITs. Elder fraud. LPL Financial. Medical Capital Holdings. Tim Durham. Provident Royalties. Tenant-in-Common investments. Those were just a few of the investment topics to dominate the financial headlines in 2012.

In January, elderly investors found themselves caught up in scams involving Provident Royalties and Medical Capital Holdings. Both firms had previously been the subject of fraud charges by Securities and Exchange Commission (SEC) for scamming investors, many of whom were senior citizens, out of millions of dollars through bogus private placement deals.

A number of broker/dealers that sold investments in either Provident or Medical Capital found themselves facing regulatory investigations, as well as arbitration claims by investors. In late January, the Financial Industry Regulatory Authority (FINRA) ordered CapWest Securities to pay $9.1 million in damages and legal fees stemming from sales of private investments in both Medical Capital and Provident Royalties. The $9.1 million award is thought to be one of the single largest arbitration awards based on sales of failed private placements.

In February, tenant-in-common (TIC) investments and DBSI were big news. A one-time leader in the TIC industry, DBSI was now the focus of a criminal probe. DBSI founder and CEO Doug Swenson also faced charges of tax evasion, money laundering, racketeering and securities fraud.

DBSI, which filed for bankruptcy protection in 2008, left many of its 10,000-plus investors minus their life savings, while others took devestating financial losses. James Zazzaili, the court-appointed examiner in DBSI’s bankruptcy, stated that DBSI executives ran “an elaborate shell game, one that included improper and fraudulent use of investor money to prop up the company, to spend on pet projects, and to enrich themselves.”

In March, investors in several non-traded real estate investment trusts (REITs) received an unwelcome wake-up call when their investments unexpectedly declined sharply in value. Pacific Cornerstone Core Properties REIT fell by than 70%; investors in the non-traded REIT learned of the news via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, were now worth $2.25.

Other REITs that followed down similar paths Cornerstone in 2012 included the Behringer Harvard Short-Term Opportunity Fund I LP and the Behringer Harvard Opportunity REIT I.

In April, shoddy private placements deals and the lawsuits that later ensued were behind the shuttering of yet another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with FINRA. Several days later, the company sought bankruptcy protection.

April also witnessed the less-than-desirable IPO of Inland Western REIT. The REIT, now called Retail Properties of America, went public at $8 a share on April 5. The $8 per share price fell well below the expected price of $10 to $12. But that $8 valuation was the result of a 10-to-1 reverse stock split and distribution plan that may have cost pre-IPO investors as much as 70% of their initial investment.

In May, non-traded REITs again reared their ugly head when a FINRA arbitration panel ruled in favor of an investor’s claim against David Lerner Associates and the company’s Apple REIT Nine. FINRA further stepped up its scrutiny of the non-traded REIT sector in May by launching inquiries into several broker/dealers and their sales of the products.

In June, the SEC put life insurers on notice by instructing them to improve their product disclosures, protect legacy variable annuity clients and ensure that swapped benefits were indeed suitable for certain clients.

Investment scams involving financial aid, health insurance and Ponzi schemes also saw significant increases across the country in June.

Check back for Part 2 of our 2012 Year in Review wrap-up!

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