Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study - which claims to be the first professional and academic report to analyze the structure of non-traded REITs - shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report - and one which has been touted in general by critics of unlisted REITs - is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors: 

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold - their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us. 

These are scary times for investors. Stories of stockbroker negligence, record Ponzi schemes, investment fraud, and client misrepresentation have become an everyday occurrence. It’s no wonder investors - seasoned pros and novices alike - are increasingly wary when it comes to seeking advice from an investment advisor or financial representative, questioning if anyone associated with Wall Street can be trusted nowadays. I’m reminded of a scene from the 1976 film Network in which fictitious newsman Howard Beale (played by the late actor Peter Finch) delivers his “mad as hell and I’m not going to take this anymore” speech.

Jo L. Wright no doubt felt the way of Finch’s character. Wright, a church secretary from Whitestown, Indiana, lost thousands of dollars in a bond fund formerly managed by Morgan Keegan & Company. Wright’s initial introduction to the Memphis-based brokerage was through her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in what she deemed “safe” and “secure” investments: a certificate of deposit and a savings account.

That all changed based on the recommendation of the bank manager and Morgan Keegan. Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund. Relying on the information provided by Morgan Keegan and her Regions Bank manager, she believed the fund was a safe, conservative investment and that any risk of principal loss was virtually non-existent.

In truth, Wright actually put her money into a high-risk and speculative financial product, one with significant ties to complex structured finance investments that included subprime mortgage securities. In no way was it the kind of investment that a conservative-minded investor like Wright should have been advised to purchase.

Wright didn’t know that, however, because her financial advisor allegedly didn’t tell her. Nor did Wright receive a prospectus about her investment before purchase.

Wright eventually filed a complaint against Morgan Keegan with the Financial Industry Regulatory Authority (FINRA), and in March 2009 was awarded $18,000 for the financial losses she suffered. Her case underscores several important issues, however, when it comes to investing your money and selecting a financial advisor.

First, it’s your money. That means investors need to do some due diligence of their own. This includes asking your financial advisor some tough questions. Chief among them: Where has your advisor worked in the past? Is there a pattern of multiple jobs in a short period of time? If the answer is yes, it could be a red flag.

Another key question concerns compensation. How is the financial advisor paid for his or her services? Is it based on an hourly rate, flat fee, or commission? In addition, find out if the advisor is given bonuses for selling certain investment products. If so, this clearly could be a conflict of interest if one of those products is pushed to become part of your investment portfolio.

Regions Financial Corp., whose brokerage arm is Morgan Keegan & Company, has revealed in its Aug. 5 10-Q filing with the Securities and Exchange Commission (SEC) that Morgan Keegan, Morgan Asset Management Company and three employees each received a Wells notice in July from the SEC’s office in Atlanta, alerting them to prepare for future enforcement actions for possible violations of the federal securities laws. 

A 10-Q is a quarterly report required by the SEC for publicly traded companies. Generally, firms file a 10-Q 45 days after the end of a quarter. The document itself contains similar information found in a company’s annual 10-K filing, but the 10-Q information usually is less detailed; moreover, in most cases, the financial statements in a 10-Q are based on assumptions, which typically require revisions in future accounting periods.

In addition to the SEC’s notice, Morgan Keegan received a second Wells notice in July - this one from the Financial Industry Regulatory Authority (FINRA). According to that notice, a preliminary determination had been made by FINRA, recommending discipline actions against Morgan Keegan for violating various NASD rules in connection to sales of certain investment products.

In both the SEC and FINRA notices, the “products” in question include a group of seven proprietary mutual funds that are facing a slew of arbitration claims by investors who suffered sizable losses in 2007 and 2008 because of investing gambles made by Morgan Keegan in risky debt and other mortgage-related holdings. 

In their claims, investors allege that Morgan Keegan misrepresented the funds as low-risk and high-yield products, when in reality the funds were tied to the most volatile components of the mortgage loan industry.

When that industry ultimately collapsed, investors lost 90% and more of their money in the RMK funds. According to the pending arbitration cases against Morgan Keegan, investor losses related to the RMK mutual funds total more than $2 billion.

Morgan Keegan & Co., the Memphis-based brokerage firm owned by Regions Financial Corp., is facing hundreds of arbitration claims by investors who lost billions of dollars in seven RMK mutual funds that made risky investments in mortgage-related securities. Now Morgan Keegan is asking a Birmingham court to overturn several recent arbitration awards that ruled in favor of investors and their claims against the troubled brokerage.

Morgan Keegan filed its most recent motion to vacate on July 22 over a $220,000 award. According to an Aug. 4 story in the Wall Street Journal, Morgan Keegan is basing its appeal on the fact that the arbitration panel chairman should have been removed from the panel because he resided on a prior arbitration panel that also ruled against Morgan Keegan. 

In another appeal filed in May, Morgan Keegan asked the court to vacate a $628,000-plus award. In that appeal, Morgan Keegan accuses arbitrators of misconduct for not postponing a hearing during which the investors presented suitability claims. The investors, Morgan Keegan says, had “disavowed” such claims. 

A third motion to vacate also was filed in May in which Morgan Keegan accused an arbitration panel of exceeding its authority by awarding more than $187,000 in damages, attorneys fees and costs. Steven B. Caruso, a New York attorney with Maddox Hargett & Caruso, represents the investor in that case.

Arbitration appeals are considered unusual and difficult to win. Moreover, the strategy always comes with a price tag.

“Who pays for it?,” asks Caruso in the Wall Street Journal article. “The shareholders of Regions Financial.”

The possibility that Morgan Keegan will face civil charges from the Securities and Exchange Commission (SEC) is welcome news for thousands of investors who have filed arbitration claims against the Memphis-based brokerage for losses in a group of collapsed bond funds.  

Regions Financial Corp., the parent company of Morgan Keegan, announced in early July it had received a Wells Notice from the SEC for possible violations of securities laws involving certain mutual funds. The SEC sends a Well Notice to people or firms as a way to formally alert them to the possibility that enforcement action will be brought against them.  

For investors, the Wells Notice could be a boon to their legal cases against Morgan Keegan. According to a July 31 article in the Wall Street Journal, securities arbitrators may now be more inclined to order Morgan Keegan to provide investors with copies of certain documents that could assist in their claims. 

“That notification has to influence arbitrations when the issue of discovery of regulatory documents comes up,” said Steven Caruso, a New York-based attorney with Maddox Hargett & Caruso, in the Wall Street Journal.  

Even though the Wells Notice did not specifically name the funds in question, the SEC said they were managed by Morgan Asset Management Inc., which is part of Morgan Keegan. Seven former Morgan Keegan funds suffered massive financial losses in 2007 and 2008 because of their exposure to risky subprime securities and even more risky collateralized debt obligations. 

Between March 31, 2007, and March 31, 2008, losses in the RMK funds totaled more than $2 billion. 

In July 2008, Regions transferred management of several of the RMK funds in question to New York-based Hyperion Brookfield Asset Management.

Region Financial Corp.’s brokerage arm, Morgan Keegan, was sued on July 21 by the Securities and Exchange Commission (SEC) on charges that the Memphis-based firm left clients stranded with more than $1 billion in auction rate securities.

According to the SEC, Morgan Keegan failed to tell customers about the growing risks associated with auction rate securities. Instead, it reportedly encouraged brokers to ramp up their efforts to sell the instruments prior to the market’s collapse in February 2008.

The SEC is demanding that Morgan Keegan buy back any auction rate securities sold before March 2008 from retail investors and small businesses, as well as pay fines. In addition, the regulator wants Morgan Keegan to forfeit any proceeds from its auction-rate business. From June 2007 to February 2008, the SEC says Morgan Keegan earned more than $4 million in underwriting, brokerage and distribution fees.

 “Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said SEC Enforcement Director Robert Khuzami in a statement.

Already facing hundreds of arbitration claims and lawsuits over a group of collapsed mutual bond funds, Morgan Keegan & Company is now the subject of Well Notice by the Securities and Exchange Commission (SEC). The notice typically signals the likelihood that the SEC could file civil charges in the near future for possible violations of federal securities laws. 

As reported July 16 by the Memphis Daily News, Morgan Keegan’s parent company, Regions Financial Corp., disclosed in a regulatory filing on July 15 that its investment subsidiary, Morgan Asset Management and three unidentified employees received a Wells Notice from the SEC last week.

“We knew it was just a matter of time before the SEC and probably other state regulators (brought) the hammer down,” said Indianapolis attorney Mark Maddox, in the Memphis Daily News article. Maddox is one of dozens of attorneys across the country who has won arbitration cases against Morgan Keegan in the past year for investor losses connected to the mutual funds.

The claims against Morgan Keegan involve at least seven bond funds (collectively known as the “RMK Funds”) that the Memphis-based company formerly managed and which plummeted in value because of the underlying investments made by Morgan Keegan. The investments included untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments. Losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

Meanwhile, investors in the RMK funds say Morgan Keegan misrepresented the funds as corporate bonds and preferred stocks, giving them the illusion of diversification and low risk levels. 

Tumultuous upheaval in the financial markets has led to a rash of arbitration claims from retail and institutional investors on charges their financial advisors and brokerages misrepresented the risk levels of certain investment products. Some of the central players in these claims: Morgan Keegan & Company and Charles Schwab.

In the case of Memphis-based brokerage Morgan Keegan, investor complaints involve a group high-yield bond funds that the company allegedly marketed and sold as conservative investment options - products designed to provide high yields without excessive credit risks. Instead, the RMK funds made large investments in illiquid and toxic securities, including asset- and mortgage-backed securities and collateral debt obligations (CDOs).

Other funds responsible for the influx of arbitration claims include Charles Schwab & Co.’s YieldPlus funds. 

For more than a year now, investors nationwide have complained to the Financial Industry Regulatory Authority (FINRA), as well as the Securities and Exchange Commission (SEC), that Charles Schwab represented the YieldPlus funds as investments similar to money-market funds, while failing to disclose the fact they held large concentrations of toxic products like mortgage-backed securities. Ultimately, these holdings caused the YieldPlus funds to lose up to 80% of their value.

As reported July 6 by the Wall Street Journal, aggrieved individuals who do file claims with FINRA for their investment losses are likely to experience a more “investor-friendly” process than in the past because of recent changes to how an arbitration hearing is conducted and the composition of the arbitration panel.

Specifically, FINRA launched a pilot program in October 2008 that allows 276 cases against 11 participating brokerage firms to be heard annually by an all-public, three-person panel versus having one of the panel members associated with the securities industry. The program is a win for investor advocates, who contend having an industry-affiliated arbitrator reside on an arbitration panel not only can create bias but also sway other panel members against the investor.

More investors are scoring legal victories in their claims against Morgan Keegan & Company and a group of proprietary mutual funds. As reported June 7, 2009, by The Birmingham News, 16 of investors’ 20 wins came in the past 25 arbitration hearings with the Financial Industry Regulatory Authority (FINRA). In April, the Memphis-based investment firm suffered six consecutive losses in arbitration negotiations with investors.

Many investors who have filed claims with FINRA lost up to 95% of their money the Morgan Keegan mutual funds.

The claims against Morgan Keegan involve several collapsed bond funds that plummeted in value following the onset of the mortgage loan crisis. The common theme in the majority of investors’ claims is that Morgan Keegan misrepresented the mutual funds as corporate bonds and preferred stocks, giving the illusion of diversification and low risk levels.

Later, losses in the funds - which entailed more than $2 billion between March 31, 2007, and March 31, 2008 - were traced back to the underlying investments made by Morgan Keegan. The investments included risky and untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other debt instruments.

Hyperion Brookfield Asset Management now manages the funds at the center of the ongoing litigation.

A Birmingham arbitration panel (FINRA Case Number 08-00926) ruled against Morgan Keegan & Company in a claim involving the RMK Select High Income-C Bond Fund. 

In March 2008, investors Richard and Carolyn Bland filed their claim with the Financial Industry Regulatory Authority (FINRA), charging Morgan Keegan of failing to disclose certain risks about the Select High Income-C Bond Fund, unsuitability, failure to supervise and breach of fiduciary duty.

On June 10, 2009, a FINRA panel awarded the Blands $21,000 plus interest, deciding Morgan Keegan failed to properly supervise trading activity in the claimants’ account, allowing all of their assets to be deposited into the Morgan Keegan Select High Income-C Bond Fund to the exclusion of other investments.