Other investors in non-traded REIT are in the same boat. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

As reported in a story by the Wall Street Journal, Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA), in the WSJ story.

Dividend cuts also have been an issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

Other investors in non-traded REIT are in the same boat. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

As reported in a story by the Wall Street Journal, Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA), in the WSJ story.

Dividend cuts also have been an issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

Durham, James F. Cochran and Rick D. Snow now face 10 counts of wire fraud, one count of securities fraud and one count of conspiracy to commit wire and securities fraud. They are accused of running a Ponzi scheme that ultimately defrauded some 5,000 investors in Fair Finance Co. out of more than $200 million. Instead of paying investors, the men allegedly funded other businesses, as well as supported their own lavish lifestyles.

A trial is set for June 8.

As reported May 15 by the Indianapolis Star, the wiretapped phone conversations offer some interesting insight in the case. In one phone conversation that took place on Nov. 9, 2009, Cochran and Durham agreed to close Fair Finance’s Ohio office in two days with no prior notice to investors. According to the government filing, the men used Veterans Day as an excuse for closing, when in reality they were trying to hide the fact that there wasn’t enough money to pay Fair Finance customers when their investments came due.

“So we’re going to buy a day,” Cochran told Durham in a phone call, according to the transcripts. “And I told (a Fair employee) . . . make sure you don’t tell customers in advance.”

“Why?” Durham asked.

“He said ’cause they will run in on Tuesday,” Cochran replied.

“Oh yeah, good story,” Durham said, according to the transcript.

Ten days later, Durham and Cochran discussed what to tell a customer who was asking when he would receive interest payments. Cochran suggested telling the customer the redemptions were being processed.

“Don’t use that explanation too often because it’s really not true,” Durham told Cochran.

In yet another conversation, Durham and Cochran discuss how to blame delayed payments on “office miscommunication.”

“Yeah, we thought, yeah, just say it was a mistake, we told our office to put everything on hold until the authorization and they thought that meant put everything on hold,” Durham is heard saying.

“Yeah, I like that,” Cochran responded.

“So just a miscommunication,” Durham went on. “That’s how we’ll explain it.

News of the investigation was made public by Inland American in its quarterly report. As in other recent regulatory investigations into non-traded REITs, the SEC is focusing on specifics of Inland American’s fee structure.

According to a May 10 article by Investment News, Inland American stated in its quarterly report that the . . . “SEC is conducting a nonpublic, formal fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws.”

The report went on to reveal that the potential violations include “business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT.”

Inland American is one of five REITs to be sponsored by The Inland American Real Estate Group of Companies. A related REIT, Retail Properties of America (formerly known as Inland Western Retail Real Estate Trust) also has been in the news lately. In early April, the REIT went public with an initial share price listed at an equivalent of $3.20 per share. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price means they have lost some $65% of their original investment.

On Monday, Joseph J. Lampariello, former president of Medical Capital, pleaded guilty to wire fraud. He now faces up to 21 years in federal prison and a $49 million restitution order when he is sentenced on Jan. 14. Lampariello also pleaded guilty to failing to file a federal tax form.

So far, Lampariello is the only Medical Capital executive who has been criminally charged.

As reported May 7 by the Orange County Register, Assistant U.S. Attorney Jennifer Waier is not saying whether the investigation is continuing or whether Lampariello is cooperating with the government.

Medical Capital Holdings was charged with fraud by the Securities and Exchange Commission (SEC) in July 2009. From 2003 to 2009, the company raised almost $2 billion from investors under the guise it was using the money to buy discounted medical receivables. In reality, Medical Capital operated similar to a Ponzi scheme, with various MedCap entities buying fake receivables, often from older MedCap funds. The scam generated profits on the older funds’ books, along with commissions for MedCap execs, including Lampariello.

When the SEC entered the picture, more than $1 billion had been stolen from thousands of investors across the country.

In early April 2012, Inland Western went public at $8 a share. For investors who bought Inland Western at its original share price of $10 a decade ago, their investment is now worth approximately $2.90.

The dismal public debut of Inland Western (now renamed Retail Properties of America) doesn’t bode well for future IPOs of non-traded REITs.  As a retail investment, non-traded REITs have taken a beating in the financial media over the past year, with regulators – including the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) – launching repeated inquiries into the broker/dealers who sold the investments to investors.

In addition, FINRA has issued several investor notices on non-traded REITs. In those notices, FINRA highlights a number of concerns: the products’ limited valuation transparency, illiquidity, potential conflicts of interest, risks to an investor’s principal, and the high fees and commission they command.

If you’ve suffered significant losses in non-traded REITs, including Inland Western/Retail Properties of America, Inland American or Behringer Harvard REIT I, contact us to tell your story.

In April, the initial public offering price was set at $8 a share for the Inland Western REIT, now known as Retail Properties of America. The price was well below the expected $10 to $12 pre-offering price. Moreover, some highly complicated reverse-stock-split engineering was required to even reach the $8 mark.

For investors who initially purchased the investment at $10 share a decade ago, the split-adjusted value of their investment following the IPO is less than $3. In other words, those investors lost some 65% of their original investment.

In another unexplained move, Retail Properties decided to offer only a quarter of the shares during Inland Western’s initial public offering. Three follow-up stock sales are planned over the next 18 months.

After the IPO, company president and chief executive Steven Grimes stressed in a letter to shareholders the impact of the economic recession on the real estate industry.

“It is uncertain if and when we will see a full recovery,” he states in the letter.

If you’ve suffered losses in Inland Western/Retail Properties of America, tell us your story. Maddox Hargett & Caruso currently is investigating unsuitable sales of non-traded REITs, including Inland Western, Inland American and Behringer Harvard REIT I.

As reported May 3 by Investment News, Sen. Jack Reed, D-R.I., chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, announced that he is continuing to monitor the complex financial products and plans to follow up on a hearing he held last year with another one in the near future.

Earlier this week, leveraged and inverse ETFs took center stage when the Financial Industry Regulatory Authority (FINRA) levied $9.1 million in penalties on four major banks – Citigroup Global Markets, Morgan Stanley & Co., UBS Financial Services and Wells Fargo Advisors – for their role in selling the risky investments to retail clients who, because of their conservative risk profiles, should never have purchased them.

According to FINRA, the brokerages failed to adequately educate their own representatives about the complexities – and inherent risks – of leveraged and inverse ETFs. The same representatives then marketed and sold the products to investors who were uneducated about the potential dangers that inverse and leveraged ETFs hold.

Exchange-traded funds are essentially baskets of investments – stocks, bonds, commodities, currencies and options – that track market indexes. In recent years, however, traditional ETFs have grown increasingly complex, delving into esoteric and risky areas that involve swaps, futures contracts and other derivative instruments.

Leveraged and inverse ETFs are two of the most risky ETFs. Leveraged ETFs are designed to deliver “multiples” on the performance of the index or benchmark they track. Its cousin, the inverse ETF, works in the reverse way by trying to deliver returns that are opposite of an index’s returns.

The problem that many investors make with leveraged and inverse ETFs is that they hold these investments for longer than one single trading day. Leveraged and inverse ETFs are not designed for long-term returns. Rather, their goal is to try and achieve their stated performance objectives on a daily basis. Holding a leveraged or inverse ETF for a longer period of time may result in a financial nightmare.

“The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers,” said J. Bradley Bennett, FINRA enforcement chief, in a statement.

“Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products,” he added.

 The break-down of the fines is as follows: 

• Wells Fargo - $2.1 million fine and $641,489 in restitution;
• Citigroup - $2 million fine and $146,431 in restitution;
• Morgan Stanley - $1.75 million fine and $604,584 in restitution; and
• UBS - $1.5 million fine and $431,488 in restitution.

Both the Securities and Exchange Commission (SEC), the North American Securities Administrators Association and FINRA have issued separate and joint warnings to investors about leveraged and inverse exchange-traded funds in recent months. Specifically, regulators are concerned about the increasing complexity of the products, their lack of transparency and their potential to cause significant financial losses to investors who do not thoroughly understand how inverse and leveraged funds actually work.

Leveraged ETFs seek to deliver “multiples” of the performance of the index or benchmark they track. Inverse ETFs do the reverse. They try to deliver the opposite of the performance of the index or benchmark being tracked.

According to findings in a new report by the Compliance Department consulting group, 93 broker/dealers closed their doors during the first three months of 2012, while 137 B-Ds shut down in the first quarter of 2011. Meanwhile, fewer new B-Ds are opening.  Forty-four new broker/dealers opened in the first quarter of 2012, compared to 57 for the same time period in 2011.

As reported May 1 by Investment News, the Financial Industry Regulatory Authority (FINRA) shows 4,428 broker/dealers were open in March, compared to 5,005 in 2007. That’s an 11% decline over five years.

Many of the problems facing broker/dealers are the result of legal and regulatory issues over private-placement investments involving Medical Capital Holdings and Provident Royalties, as well as tenant-in-common exchanges manufactured by DBSI.

In July 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud. On Nov. 8, 2010, DBSI filed for bankruptcy. Since then, many investors have filed arbitration claims with FINRA against the broker/dealers that sold them the failed products.

More recently, sales of private placements were responsible for the shuttering of broker/dealer Cambridge Legacy Securities LLC. On April 13, after losing a $1.5 million arbitration claim in March, Cambridge Legacy Securities filed its withdrawal request with FINRA.  A few days later, the firm sought bankruptcy protection.