Unsuitable investments in Inland American Real Estate Trust and the Inland Western Retail Real Estate Trust have become a growing source of concern for more investors these days. In many cases, sales of Inland REITs were appropriate from the start for some investors. Why? Because the broker/dealers behind the deals failed to disclose all of the necessary information associated with the products, including the high commissions that the REITs commanded. In some instances, those fees exceeded 15%.

The Inland REITs are considered unlisted REITs; they do not trade on national stock exchanges. Redemptions in unlisted REITs are limited and almost always have a minimum holding period. If investors want to exit an unlisted REIT entirely, they usually can only do so at specified times.

Perhaps the biggest criticism of unlisted REITs has to do with their lack of transparency. Unlisted REITs also typically come with no independent source of performance data. Moreover, critics of unlisted REITs cite the often vague prospectus language regarding their formal exit strategies.

In recent months, we’ve heard from several investors who say their broker/dealer never discussed the various risks that investors take on when they purchase shares of an unlisted REIT. In reviewing these complaints, we’ve also discovered that some investors were kept in the dark about the fact that their investment in an unlisted REIT could literally be tied up for an undetermined amount of time in the event the REIT suspends its share-repurchase program.

That’s exactly what happened with Inland American, which suspended its buyback program in March 2009. Investors had two options: Hold onto their shares until buybacks become re-instated or attempt to sell their share, at a significant loss, on the secondary market.

If you believe your broker/dealer failed to provide adequate information concerning investments in the Inland American Real Estate Trust, the Inland Western Retail Real Estate Trust or another unlisted REIT, contact us.

Investors turned to the Behringer Harvard REIT for safe investing, but are now stuck holding essentially worthless positions.

In an attempt to avoid the risk of investing in the stock market, some investors chose real estate investment trusts (REITs). REITs are specialized entities that own or manage income-producing real estate. They are established to avoid corporate taxes, allowing pass-through taxation to the investors.

Financial advisors have recommended people invest a substantial portion of their nest egg in REITs, representing them as safe and conservative investments for retirement. The advisors may not disclose the REITs underlying financial condition and the risks of the investment becoming illiquid. One such example is the Behringer Harvard REIT I. This REIT never made any money and is now completely illiquid, thereby preventing investors from selling their positions. The REIT was sold to inexperienced and conservative investors, who are now stuck holding essentially worthless positions.

Failure to disclose these and other potential risks to investors could be violation of Securities laws and could also lead to a host of other viable legal claims, such as breach of fiduciary duty.

If you have suffered investment losses from REITs, contact us to tell us your story. We want to counsel you on your options.

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. 

Former Stifel, Nicolaus & Co. and AXA Advisors broker Kenneth Neely pleaded guilty on Nov. 4 to fraud charges connected to operating a Ponzi scheme in which clients from two brokerages - Stifel, Nicolaus & Co. and AXA Advisors - were lured into investing money in Neely’s St. Louis Investment Club and a non-existent real estate investment trust. Neely allegedly enticed investors - some of whom were church members, family and friends - in Missouri, California and Maryland with promises of “no risk” and profitable rates of return.

According to  to a cease and desist order filed by Missouri Secretary of State Robin Carnahan’s Office, Neely began raising money for his scam while working for Stifel, Nicolaus & Co. and AXA Advisors. The scheme, which began in January 2002 and continued until 2009, was kept afloat by Neely allegedly using some of the funds raised from new investors to pay investment returns to other investors. This is the hallmark of a Ponzi scheme.

Stifel Nicolaus and AXA Advisors were not named as respondents in Carnahan’s cease and desist order.

Carnahan’s office initially launched its investigation into Neely after receiving information from one of his former employers, AXA Advisors. On July 29, 2009, Neely was barred by the Financial Industry Regulatory Authority (FINRA) from operating as a broker.

Neely, 56, faces a maximum penalty of 20 years in prison and/or fines up to $250,000, as well as mandatory restitution to his victims, according to the St. Louis Federal Bureau of Investigation. Sentencing is set for January 29, 2010.

Investors who had accounts with Stifel, Nicolaus & Co. or AXA Advisors are encouraged to contact us and tell us your story. You may have a viable claim to recover your losses. Please leave a message in the Comment Box below or on the the Contact Usform.

For a growing number of investors in non-listed REITs, the past year has taken a nod from Hotel California: Moving in was easy, but now they can’t get out. As reported in the financial press, liquidity issues have forced six of the biggest REITs to halt their redemption programs recently.  Among them: Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Piedmont Office Realty Trust, Wells Real Estate Investment Trust II, Behringer Harvard REIT I and Cole Credit Property Trust II.  

For many investors, the potential risks and high costs of these REITs made them unsuitable and inappropriate investments from the outset, especially for investors who were elderly or retired. Unfortunately, some brokerages and financial advisers never disclosed these facts. Instead, lured by potentially big commissions and fees of up to 15%, they marketed and sold the products as safe, conservative investments that were similar to certificates of deposit.

In addition to liquidity problems, many non-listed REITs are suffering from valuation issues. This is especially true in the case of REITs with a high concentration of commercial real estate purchased just before and during the housing market crash of 2007.  As a result, more investors are now holding an illiquid investment or, at best, have no idea of the investment’s actual value. 

Inland American Real Estate Trust is a prime example. Investors who recently tried to sell shares in this REIT on the secondary market were reportedly quoted prices of 40 cents on the dollar - despite the fact their statements continue to reflect double that amount. 

If you believe your brokerage or financial adviser misrepresented the characteristics of non-listed REITs like Inland American Real Estate Trust or failed to disclose its risks,please fill out the Contact Us form. Or leave a comment below, we want to consult you on your options.

Ameriprise Financial Services will pay $17.3 million to settle charges by the Securities and Exchange Commission (SEC) that it received undisclosed payments to sell real estate investment trusts (REITs) to customers.  According to the settlement with the SEC, which was announced July 10, sales of certain REITs provided the Minneapolis-based broker-dealer with $31 million in compensation.

“Few things are more important to investors than getting unbiased advice from their financial advisers,” SEC Enforcement Director Robert Khuzami said in a statement. “Ameriprise customers were not informed about the incentives its brokers had to sell these investments.”

REITs are entities that invest in different kinds of real estate or real estate-related assets, including office buildings, retail stores, and hotels. According to the SEC, neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of the REIT shares or about the conflicts of interest the additional payments created. 

In addition, the SEC found that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue-sharing payments, making them appear as legitimate reimbursements for services provided by Ameriprise.

Nontraded real estate investment trusts (REITs) apparently are a subject of interest by the Financial Industry Regulatory Authority (FINRA). A March 30 article in the Wall Street Journal reported that the independent regulator of the securities industry is seeking information from a number of broker-dealers about their sales and promotion practices of the entities. 

According to the Journal story, a letter dated March 20 was sent by FINRA to an “unknown number of brokerages” requesting details about nontraded REIT sales, as well as cash and non-cash incentives. Included in the letter was a request for detailed information regarding each nontraded REIT offered for sale, the number of shares sold to customers, the number of customers who each nontraded REIT and their age groups.  

The nontraded REITs in question include those that are registered with the Securities and Exchange Commission (SEC) but not on an exchange or over-the-counter market. They also include private REITs, which are sold using an exemption to registration.  

FINRA also wants information from broker dealers about payout schedules of registered representatives, blank customer applications, and risk monitoring reports that were used to track any activity in nontraded REITs, according to the Wall Street Journal. 

Broker dealers have until April 13 to respond to FINRA’s request for information about their dealings with nontraded REITs.