Category Archives: Non-traded REITs

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

Real estate powerhouse Tony Thompson and the independent directors of a non-traded real estate investment trust are going head to head over why the dividend of the TNP Strategic Retail Trust was cut last month and what the management of the REIT is going to be moving forward.

As reported April 12 by Investment News, Thompson is known among independent broker/dealers for his role as a leading seller of tenant in common 1031 exchanges before the real estate crash of 2007-08.

Earlier this year, Thompson and the broker/dealer manager of the TNP Strategic Retail Trust, TNP Securities LLC, found themselves at the center of an investigation by the Financial Industry Regulatory Authority (FINRA) for failing to deliver documents in a FINRA inquiry.

In a letter to investors dated March 27, Thompson, who is chairman and co-chief executive of the TNP Strategic Retail Trust, said the three independent directors on the board, Jeffrey Rogers, Phillip Levin and John Maier, “voted to not pay [first] quarter 2013 dividends. I opposed this decision and was not part of the board meeting.”

According to the Investment News article, Thompson stated in the letter – which was not filed with the Securities and Exchange Commission (SEC) – that the distribution cut was the result of the directors inflating expenses.

“I believe extraordinary expenses are one of the primary causes for the independent directors’ decision not to pay a current distribution,” Thompson wrote. “These expenses include attorney fees related to the independent directors’ ‘special committee’ activities, the special committee’s director fees, default interest” and other costs, including salaries of accountants.

The board has since filed a shareholder letter with the SEC refuting Thompson’s assessment and that his letter was riddled with errors, including the actual number of properties owned by the REIT.

The board also is trying to fire as the REIT’s manager another company controlled by Thompson, TNP Strategic Retail Advisers LLC, and find a new adviser.

It seems the bad news just keeps getting worse for longtime real estate dealer Tony Thompson. Now, Thompson’s non-traded REIT – the TNP Strategic Retail Trust – is cutting its dividend.

In a recent filing with the Securities and Exchange Commission (SEC), the REIT cited short-term liquidity issues, including an accelerated maturity date of loans, lender fees and the cost of potential litigation with lenders, as the cause behind the halt in distributions.

As reported March 19 by Investment News, the loan compliance issues with its lenders means the TNP Strategic Retail Trust will not pay a dividend in the first quarter of 2013 and may not pay any type of distribution for 2013.

“Although our board of directors will continue to evaluate our ability to resume paying distributions, given the uncertainties noted, stockholders should not assume a resumption of distribution payments during the remained of 2013,” the company said in the SEC filing.

It was only a few short months ago that Thompson was touting TNP’s rising value to potential investors. In January, Thompson sent a note to broker/dealers declaring that the net asset value of the TNP Strategic Retail Trust was 6% higher than its share price. That kind of discrepancy between a REIT’s selling price and its NAV could be dilutive to shareholders and provide brokers with a strong sales pitch to potential investors.

That’s not the only problem facing Thompson. In January, after raising money in 2008 and 2009 for Thompson National Properties LLC, the company defaulted on $21.5 million of the private notes from that offering. Last month, the Financial Industry Regulatory Authority (FINRA) announced it was investigating Thompson and his broker/dealer, TNP Securities LLC, for failing to turn over documents, thus potentially violating FINRA rules.

Suitability, misrepresentation and complex investment products like structured notes, non-traded REITs, and private placements played a key role for the increase in fines and disciplinary actions brought by the Financial Industry Regulatory Authority (FINRA) against firms and brokers in 2012. Last year saw 4% more disciplinary cases than in 2011, as well as an increase in fines by 15%.

A recent study conducted by Sutherland Asbill & Brennan LLP showed 2012 as the fourth consecutive year of growth in the number of cases filed by FINRA and the second consecutive year of growth for the amount of fines.

In total, FINRA filed 1,541 disciplinary actions in 2012 and assessed $78.2 million in fines, the study says.

In addition to the increase in fines, the study revealed that FINRA is becoming more aggressive when it comes to getting restitution for aggrieved investors. Last year, FINRA ordered firms and representatives to pay a record $34 million in restitution, up 80% from $19 million in 2011.

Leading the list of enforcement actions by FINRA in 2012 were suitability and due-diligence cases. A total of 117 suitability cases were brought by FINRA in 2012, a 10% increase from the 106 cases reported in 2011 and nearly double the amount in 2008 and 2009.

Of the 62 due-diligence cases filed in 2012, FINRA issued $12.8 million in fines.

Failed deals in non-traded real estate investment trusts (REITs) and private placements have plagued more investors in recent years, with problems ranging from suspension of share redemptions to inaccurate valuations to outright fraud. Such issues have garnered the attention of the Financial Industry Regulatory Authority (FINRA), which is now investigating real estate developer Tony Thompson and his broker/dealer, TNP Securities LLC, for allegedly failing to turn over certain documents to FINRA.

By failing to turn over documents about his business to FINRA, Thompson is in violation of industry rules that require firms and individuals to produce information when asked to do so by FINRA.

As reported March 12 by Investment News, FINRA initially made inquiries regarding the documents two months ago. At the time, Thompson was attempting to “goose sales for a non-traded real estate investment trust, the $272 million TNP Strategic Retail Trust Inc.”

During that same month, Thompson sent a note to broker/dealers hawking the TNP Strategic Retail Trust and proclaiming that its net asset value was 6% higher than its share price. Specifically, Thompson’s note read: “Closing Feb. 7, 2013! Necessity retail: Now is the time!”

As the Investment News article points out, discrepancies between a REIT’s selling price and its NAV could be dilutive to current shareholders and provide brokers with a pitch laden with urgency to sell.

That’s not the only problem on Thompson’s plate, however. He’s also dealing with huge financial troubles, including the default on $21.5 million of private notes that he sold in 2008 and 2009 to raise money for Thompson National Properties LLC.  Last year, that venture suspended interest payments to investors in a private placement – i.e. the TNP 12 Percent Notes Program – that was designed to raise capital for the firm. Many of the investors in the TNP 12 Percent Notes Program reportedly were elderly, retired or conservative investors living on fixed incomes.

According to a July 10, 2012, article by Investment News, 22 independent broker/dealers had agreements to sell the notes, which required a minimum investment of $50,000. Brokers earned a 7% commission on sales of the notes, according to a filing with the Securities and Exchange Commission (SEC).

If you invested and suffered financial losses with Tony Thompson, the TNP 12 Percent Notes Program, Thompson National Properties LLC, TNP Securities, or TNP Strategic Retail Trust, contact us to tell your story.

Non-traded real estate investments trusts, or REITs, have come back to bite brokers/dealers and investors alike in recent years. Most recently, LPL Financial announced that it would pay a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulator that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL will pay restitution of $2 million to Massachusetts investors who bought the seven non-traded REITs in question, as well as a $500,000 administrative fine.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

LPL Financial LLC has been ordered by the Massachusetts Security Division to pay restitution of more than $2 million to investors who bought shares of non-traded real estate investment trusts (REITs).

In addition to the restitution order, Massachusetts regulators levied a $500,000 administrative fine against LPL. As reported Feb. 6 by Investment News, the settlement stems to allegations that LPL failed to supervise brokers who sold investments in non-traded REITs. LPL also agreed to review all other non-traded REITs offered to Massachusetts residents and to make restitution to investors in the state whose transactions violated Massachusetts or company rules.

LPL Financial and Ameriprise Financial are big players in the non-traded REIT world. They account for almost 20% of the industry’s annual sales of $10 billion. Recently, regulators have put non-traded REITs on their 2013 priority watch list, reviewing how the products are sold and whether advisers and broker/dealers may be misrepresenting the investments to clients.

In its consent order with Massachusetts regulators, LPL admitted to a series of statements of fact around the sales of the REITs. In doing so, however, the firm neither admitted nor denied allegations stemming from the training and oversight of sales of the products.

Every year, the Financial Industry Regulatory Authority (FINRA) takes note of key regulatory and examination issues that it plans to prioritize in the new year. In 2013, those priorities include a number of hot-button - and familiar - financial products, from structured investments, to non-traded REITs, to business development companies, or BDCs.

In a recent notice to investors, FINRA highlighted the following products and issues, along with an explanation as to why they merit top placement on FINRA’s 2013 watch list.

Structured Products: These products may be marketed to retail customers based on attractive initial yields and, in many cases, on the promise of some level of principal protection, according to FINRA. Moreover, structured products are often complex, and have cash-flow characteristics and risk-adjusted rates of return that are uncertain or hard to estimate. In addition, structured products generally do not have an active secondary market.

Suitability and Complex Products: FINRA’s recently revised suitability rule (FINRA Rule 2111) requires broker/dealers and associated persons to have a reasonable basis to believe a recommendation is suitable for a customer. FINRA says it is particularly concerned about firms’ and registered representatives’ understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.

Business Development Companies (BDCs): BDCs are typically closed-end investment companies. Some BDCs primarily invest in the corporate debt and equity of private companies and may offer attractive yields generated through high credit risk exposures amplified through leverage. As with other high-yield investments - such as floating rate/leveraged loan funds, private REITs and limited partnerships - investors are exposed to significant market, credit and liquidity risks. In addition, fueled by the availability of low-cost financing, BDCs run the risk of over-leveraging their relatively illiquid portfolios, FINRA says.

Exchange-Traded Funds and Notes: In many instances, retail investors may not fully understand the differences among exchange-traded index products (i.e., funds, grantor trusts, commodity pools and notes) and the risks associated with these investments, particularly those that employ leverage to amplify returns. FINRA says it also is concerned about the proliferation of newly created index products that lack an established track record. Examples include products with valuations and performance tied to volatility, emerging markets and foreign currencies.

Non-Traded REITs: FINRA’s interest in non-traded REITs centers on the fact that many customers of non-traded REITs are unaware of the sales costs deducted from the offering price and the repayment of principal amounts as dividend payments in the early stages of a REIT program.

Private Placement Securities: Private placements will continue to be a key focus of FINRA’s investor protection efforts in 2013, with particular emphasis on sales and marketing efforts by broker/dealers. To improve its understanding of private placements, FINRA implemented Rule 5123, which requires member firms that sell an issuer’s securities in a private placement to individuals to file a copy of the offering document with FINRA.

FINRA also reminds member firms that the relative scarcity of independent financial information and the uncertainty surrounding the market- and credit-risk exposures associated with many private placements necessitates reasonable due diligence on prospective issuers. FINRA notes that due diligence should focus on the issuer’s creditworthiness, the validity and integrity of their business model, and the plausibility of expected rates of return as compared to industry benchmarks, particularly in light of the complex fee structures associated with many of these investments.

Independent broker/dealers continue to face a wave of legal and regulatory issues in 2013, with many expected to shutter their businesses.

As reported Jan. 20 by Investment News, the problems facing smaller B-Ds with 150 registered representatives or fewer include higher compliance costs, record low interest rates for money market accounts, competitive commission rates from large or discount broker-dealers and a tax increase that will cut available discretionary funds that investors can put to work in the stock market.

Small B-Ds make up the majority of firms registered with the Financial Industry Regulatory Authority (FINRA).  In the first 11 months of 2012, pressures on the industry reduced the number of FINRA-registered firms to 4,319 – down 97 firms from the prior year and a 14% decline since the end of 2007.

Regulatory and compliance issues are a key factor contributing to the reduction in smaller B-Ds. In a move to improve investor protections, the Securities and Exchange Commission (SEC) approved FINRA Rule 4524 in 2012, which mandated that broker/dealers file additional financial or operational schedules or reports as FINRA deemed necessary.

Many B-Ds to close up shop in the past few years have done so because of deals involving failed private placements, such as those connected to Provident Royalties LLC and Medical Capital Holdings LLC. The SEC charged both of those firms with fraud in July 2099, which in turn spurred a rash of investor lawsuits and arbitration claims. As a result, many broker/dealers were unable to contend with the litigation costs and subsequently shut down.

Non-traded real estate investment trusts (REITs) have traditionally been associated with independent broker/dealers – that is until last month when Merrill Lynch announced that its 17,000-plus registered reps would begin selling the Jones Lang LaSalle Income Property Trust to investors.

The move means Merrill Lynch becomes the first major wirehouse to sell a non-traded REIT. So far, the firm has raised about $50 million from interested clients.

Merrill Lynch’s foray into non-traded REIT territory is based on demand for an “attractive, direct core real estate investment product among mass-affluent investors,” said Keith Glenfield, head of alternative investments for Merrill Lynch, in a Jan. 2 article by Investment News.

“The primary investment objectives are designed to provide attractive current income, preserve and protect invested capital, achieve [net asset value] appreciation over time and enable stockholders to utilize real estate as a long-term portfolio diversifier,” Glenfield said.

Despite Merrill Lynch’s characterization of the Jones Lang Lasalle REIT as a safe source of income, investors may have plenty of reasons to be cautious. Non-traded REITs have been under the radar of state securities regulators for several years now, as have the sales practices of the broker/dealers that sell them.

Issues with non-traded REITs include their complex fee structure, high-risk factors, illiquidity and often inaccurate valuations. Moreover, early redemption of shares is typically extremely limited, and fees connected with their sale can be high and erode total return.

In 2012, the Financial Industry Regulatory Authority (FINRA) reissued an Investor Alert on nontraded REITs following an enforcement action against David Lerner & Associates. One of FINRA’s concerns with Lerner focused on the valuation irregularities that appeared on the monthly statements of investors who owned shares in Lerner’s Apple REITs. Specifically, shares of certain Apple REITs had been listed on the statements as $11 per share even after FINRA instructed broker/dealers in 2009 to adjust prices on the investments more frequently.