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Category Archives: Non-traded REITs

LPL To Pay More Than $3.4 Million To Settle Latest Two Probes

LPL Financial Holdings Inc. will pay more than $3.4 million to settle two separate regulatory probes into how the brokerage sold certain complex investment products.

In one instance, the Boston-based firm must pay $2 million to settle allegations by the Massachusetts Attorney General’s Office and the Delaware Justice Department stating LPL failed to supervise its financial advisers who caused clients to hold ETFs for extended periods. Leveraged ETFs are typically designed to deliver a multiple of an index’s performance each day, but results over longer periods can be far different from what the daily objective might suggest.

According to LPL spokesman, “LPL will make enhancements to its oversight of leveraged ETFs including implementation of a renewed training and monitoring program to ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans”.

The other instance, is with the North American Securities Administrators Association, which represents state securities regulators, LPL must pay civil penalties of $1.425 million for lapses regarding the firm’s sale of nontraded real-estate investment trusts.

, including the Financial Regulatory Authority and Securities Exchange Commission, for inadequate disclosure of risks and their high fees, which typically range from 12% to 15% at the time of sale.

LPL is the leading securities firm serving so-called independent investment representatives, who typically own their own local business and sell securities as a financial investor of a separate securities firm. In 2014, the firm spent $36.3 million to settle regulatory charges. These regulatory charges have weighed financially on LPL. They continue to resolve remaining compliance issues, resulting from a period of rapid growth.

Consulting Firm Reveals $50 Billion loss for Investors in Non-traded REITs

According to Craig McCann, principal of Securities Litigation & Consulting Group, shareholders are about $50 billion worse off for having put money into non-traded real estate investment trusts rather than exchange-traded versions. McCann said his calculation of a roughly $50 billion “wealth loss” to investors from non-traded REITs is detailed in a paper he co-wrote that will be published in a few months by Investments & Wealth Monitor, a trade journal of the Consultants Association, which offers credentials to brokers and financial planners.

After a review by the Wall Street watchdog revealed problems, The Financial Industry Regulatory Authority cautioned brokerage firms about the way they market non-traded REITs. Investing in a wide range of real estate from apartments to hotels to strip malls, Non-traded REITs tend to have higher fees for investors than publicly-traded REITs and can be tougher to cash in.

Is Inland American Going Liquid?

In 2012, one of the largest non-traded real estate investment trusts (REITs) – Inland American Real Estate – was the target of a Securities and Exchange (SEC) nonpublic, fact-finding investigation as part of an effort to determine whether it had violated certain federal securities laws. Now, Inland American could be in line for a merger or listing of its shares, according to a story reported last Friday in Investment News.

In a letter to shareholders, Inland American stated that, “In connection with our board’s review of an additional liquidity option for our stockholders, this letter serves as notice that we are suspending our current share repurchase program, which is available to stockholders in the event of death or for stockholders that have a ‘qualifying disability’ or are confined to a ‘long-term care facility…”

As reported in the Investment News story, Inland American has had its share of issues over the years, many of them tied to the 2008 financial crisis. Launched in 2005, Inland American was among a group of large non-traded REITs that suffered in the wake of fallen commercial real estate prices. Originally sold to investors by brokers at $10 per share, the REIT’s most recent estimated per share valuation at the end of December was $6.94 per share.

Stay tuned.

FINRA Bars Broker Over Non-Traded REIT Sales

In a rare move, the Financial Industry Regulatory Authority (FINRA) made the decision last week to bar an individual broker for violations of securities industry rules tied to sales of non-traded real estate investment trusts (REITs).

As reported by Investment News, former LPL Financial broker Gary Chackman was accused of falsifying documents related to sales of the REITs from 2009 to 2012. Chackman was registered with LPL from 2001 to 2012 when LPL terminated his registration for violating the firm’s policies and procedures concerning sales of the alternative investments.

Chackman “recommended and effected unsuitable transactions in the accounts of at least eight LPL customers, by overconcentrating his customers’ assets in [REITs] and other illiquid securities,” according to FINRA’s letter of acceptance, waiver and consent, dated Dec. 12.

“Additionally, Chackman falsified LPL documents to evade the firm’s supervision and caused the firm’s books and records to be inaccurate by submitting dozens of ‘alternative investment purchase’ forms that misrepresented his customers’ purported liquid net worth,” the letter said.

According to the Investment News article, Chackman’s BrokerCheck report lists three arbitration claims with settlement amounts of $747,000. He also faces a pending investigation courtesy of the Securities and Exchange Commission (SEC).

Non-traded REITs have been under the radar of FINRA, as well as several state securities regulators for some time now. The products generate high-commissions for the brokers and registered representatives that sell them to investors.

Earlier this year, William Galvin, Massachusetts Secretary of the Commonwealth, announced settlements with six broker/dealers for $21.6 million in restitution to clients over sales of non-traded REITs. The firms, which included LPL, have since paid fines of nearly $1.5 million.


Non-Traded REITs Sales Are Booming – But Big Issues Remain

Even though sales of alternative investments, especially non-traded real estate investment trusts (REITs), are experiencing a major upswing this year, investors are wise to remember the dark days of the past before completely jumping on the alternative investment bandwagon.

Specifically, those days relate to some of the bad decisions made by a number of broker/dealer firms – many of which are now out of business or mired in legal issues and investor lawsuits – and the alternative financial products they sold to clients. Those products were tied to sponsor names like Medical Capital Holdings, Provident Royalties and DBSI Inc.

Medical Capital and Provident were charged with fraud by the Securities and Exchange Commission (SEC) in 2009, while DBSI, which raised $1 billion from investors by selling real estate investments via independent broker/dealers, filed for bankruptcy.

In the aftermath of those failed deals, some broker/dealers ramped up their due-diligence of alternative investments and began working with regulators to establish standards for valuation and account statement reporting. Their attempts to alter the public’s perception of such products may be working.  As reported by Investment News, alternative investments like non-traded REITs are estimated to bring in $20 billion of capital flows by the end of this year. That is twice as much as 2012.

Still, investors may be wise to proceed with caution before totally singing the praises of alternative investments. After all, many of these products – including non-traded REITs – continue to have the same issues as before: illiquidity, unreliable distributions, complex redemption structure and pricey commissions and fees.

The bottom line: History can and often does repeat itself. It’s a lesson perhaps worth remembering.

For Some BDs, Non-Traded REIT Sales Mean Huge Payday

Non-traded real estate investment trusts (REITs) are proving to be a cash bonanza for some independent broker/dealers in 2013, with the alternative investments bringing in a ton of money via commissions and fees. As reported recently in a story by Investment News, registered reps funneled a “mountain of client cash into non-traded REITs this year – an expected record $20 billion in sales.”

According to the Nov. 30 article, one of those BDs was LPL Financial, which reported a huge increase in commissions in the third quarter for sales of non-traded REITs and other alternative investments of160%, or $81.2 million.

Non-traded REITs and other private-placement alternative investments have not been without controversy over the past couple of years as several big-name sponsors – i.e. Medical Capital Holdings and Provident Royalties – turned out to be frauds. Countless broker/dealer firms that sold their clients on the products later shuttered their business, while others faced – and continue to face – a bevy of investor lawsuits and scrutiny from regulators.

Some firms, however, are apparently thriving in the alternative investment arena. Case in point: Capital Financial Services. Last month, the firm’s parent company, Capital Financial Holdings, noted a surge in income in its third-quarter earnings report – income that was tied to alternative investment sales.

“Interest and other income for the nine-month period ended Sept. 30, 2013, was $430,534, an increase of 149% from $172,632 during the same period in 2012,” Capital Financial Holdings reported. “The increases were due to an increase in the marketing income received related to alternative investment products.”

Capital Financial Services track record with alternative investments has been a rocky one. It was one of the top sellers of Provident Royalties LLC preferred shares, which later were accused by the Securities and Exchange Commission (SEC) of being fraudulent. In August 2011, Capital Financial and the Financial Industry Regulatory Authority (FINRA) reached a $200,000 settlement over Provident’s failed private placements.

Another firm with ties to failed private placements but whose bottom line is apparently on the upswing now because of new deals is Ladenburg Thalmann Financial Services. Ladenburg is the parent firm of three independent broker/dealers; last month it reported a 20% boost in commission revenue for the nine-month period ending in September due, in part, to alternative investment sales.

“The increase in commission revenue resulted primarily from increased sales of alternative investments, mutual funds and variable annuities in the 2013 period as compared to the 2012 period,” the company reported.

As reported in the Nov. 30 Investment News article, Securities America is one of Ladenburg Thalmann’s broker/dealer firms. Securities America also was the leading seller of Medical Capital private placements, with almost $700 million in sales. Like Provident Royalties, Medical Capital was charged with fraud by the SEC in 2009. The former owner of Securities America, Amerprise Financial, as well as Securities America itself, announced two settlements with Medical Capital in 2011 totaling $150 million.

Non-traded REITs and private placements are different products yet share several structure similarities, including high commissions and fees. They also are typically complex investments and, in some instances, tend to provide little disclosure information to brokers and investors alike.

In the aftermath of the Medical Capital and Provident Royalties fiasco, however, many broker/dealers have taken steps to improve the transparency polices and issues surrounding alternative investments like non-traded REITs. Some are working with regulators to create better valuation standards for more accurate account statement reporting. That’s good news for investors. Let’s hope it stays that way.

Columbia Property Trust IPO Bites Investors

Nontraded real estate investment trusts (REITs) have long been the subject of scrutiny by regulators for their valuation complexities,  illiquidity, risks and restrictive redemption structures – something investors in the Columbia Property Trust are now experiencing first hand.

As reported yesterday by Investment News, before the $5.7 billion REIT went public last week, Columbia Property Trust embarked on a reverse 4-for-1 share split, raising its price to approximately $29 a share, from just over $7.33. That means investors who bought into the REIT at $10 a share essentially were given the opportunity to cash out at a net asset value of around 45% less than the price they paid at the time of their initial purchase.

The Columbia REIT also has cut its distributions to shareholders twice since 2009.

Columbia Property Trust began raising money 2004 before going public at $22.50 a share last week.

As noted in the Investment News story, Columbia Property Trust is one of several nontraded REITs to go public in 2013. Two other REITs – Chamber Street Properties (CSG) and Cole Real Estate Investments – also went public. Chamber Street Properties fell from $10.10 a share to $9.08 a share Tuesday.

Meanwhile, Cole Real Estate Investments is faring better, trading at $12.26 as of Tuesday morning.

B-Ds to Pay $10.7M to Investors Over Improper REIT Sales

Massachusetts securities regulators are continuing their focus on the sales practices of broker/dealers that market and sell non-traded real estate investment trusts (REITs), as five firms agree to pay $10.75 million in restitution to Massachusetts investors who bought the products from 2005 to today.

Secretary of the State William Galvin announced the REIT settlements yesterday. The five firms and their respective settlements include: Securities America, $7.6 million; Ameriprise, $1.6 million; Lincoln Financial Advisors Corp., $840,873; Commonwealth Financial Network, $533,500; and Royal Alliance Associates, $125,000.

This is the second round of settlements tied to improper sales of non-traded REITs. In May, the same five broker/dealers agreed to pay $6.1 million in restitution, along with fines of $975,000. In February 2013, Galvin’s office ordered LPL Financial to pay $2 million in restitution to clients in connection to non-traded REITs.

“These investments are popular, but risky,” Galvin said in a statement about the recent settlements. “Our investigation showed widespread problems with adherence to the firms’ own policies as well as the state rule that an investor’s purchase of REITs cannot be more than 10 percent of that person’s liquid net worth.”

Troubles Mount for Real Estate Investor Tony Thompson

The Financial Industry Regulatory Authority (FINRA) filed a complaint on July 30 against real estate investor Tony Thompson, alleging that he deceived and defrauded investors who bought $50 million in high-yield promissory notes sponsored by Thompson National Properties LLC.

Thompson is well known in the independent-broker-dealer industry for his real estate deals, including 1031, or “tenant in common,” exchanges.  He launched Thompson National Properties in 2008, raising $250 million from investors via a series of real estate-related offerings. Among them is a now-struggling non-traded real estate investment trust, TNP Strategic Retail Trust Inc., which eliminated dividends to investors this year.

FINRA’s complaint focuses on the level of disclosure regarding financial difficulties at Thompson National Properties in the PPMs, said Thompson’s lawyer, Thomas Fehn, in an Aug. 6 article by Investment News. Fehn contends those issues were appropriately disclosed.

According to the complaint, Thompson National Properties had provided a purported guarantee of principal and interest for three notes programs sold from 2008 to 2012 through a network of independent broker-dealers.  TNP Securities LLC, which is Thompson’s broker/dealer, also named in the complaint.

The three note programs in FINRA’s complaint include the TNP 12% Notes Program LLC, the TNP 2008 Participating Notes Program LLC and the TNP Profit Participation Program LLC.

As reported in the Aug. 6 story by Investment News, Thompson’s profile on Finra’s BrokerCheck system states that TNP Securities and Thompson “engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchaser” of the note securities. In FINRA’s complaint, one of those series of private notes is reported to be in default, while two others have stopped making payments to clients.

Thompson and TNP Securities are allegedly in violation of Securities and Exchange Act of 1934, as well as FINRA’s Rule 2020, which prohibits the use of manipulative, deceptive or other fraudulent devices by registered representatives and broker-dealers. They are also allegedly in violation of FINRA Rule 2010, which requires registered reps and broker-dealers to adhere to high standard of commercial honor and trade.

Thompson and TNP Securities are no strangers to FINRA. Both have been on the regulator’s radar for some time now over allegations of failing to cooperate in a FINRA investigation.



Broker/Dealer National Planning Corp. Cuts Sales of American Realty Capital Trust V

For the second time in less than a week, another broker/dealer announced plans to suspend sales of American Realty Capital Trust V, or ARC V. As reported July 19 by Investment News, the broker/dealer, National Planning Corp., cited continuing due diligence as the reason for the halt in sales.

Last Friday, Securities America told its registered reps it was no longer offering ARC V because of a risk of overconcentration.

National Planning Corp. said that its concerns over ARC V stem to another American Realty Capital REIT, American Realty Capital Trust IV. In June, that REIT announced plans to purchase 986 properties from an affiliate of General Electric Capital Corp. for $1.45 billion. The majority of those properties are fast-food and casual-dining establishments.

“Due to concerns with style drift, deviations from the prospectus and growing pains, which all have implications for [ARC V], NPC decided to suspend sales” of the REIT, said an e-mail to NPC reps from the firm’s products group. The same e-mail noted that NPC was adding to its selling list another American Realty Capital REIT, the Phillips Edison – ARC Shopping Center REIT II Inc.

“Based upon the GE transaction, the portfolio for [ARC IV] does not match the [REIT’s] stated strategy in terms of the average credit rating of the portfolio,” according to the e-mail. “Additionally, [ARC IV] appears to deviate from the marketed strategy in terms of the types of tenants and adding value through aggregation.”

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