January 2013 Archives

January 23, 2013

ALF Pursues Securities Arbitration Claim Against Wells Fargo Advisors Over Sale of Dividend Capital Total Realty Trust

wells fargo wagon.jpgThe Alcala Law Firm, a California securities law firm that works with clients and attorneys nationwide, is currently representing a client in a FINRA securities arbitration proceeding seeking to recover investment losses associated with the Dividend Capital Total Realty Trust Inc. that was recommended by a Wells Fargo Advisors, LLC stockbroker. Dividend Capital Realty Trust is a Real Estate Investment Trust ("REIT") that is not-publicly traded--often referred to as a non-traded REIT. ALF continues to investigate sales practice violations by stockbrokers who improperly recommended the Dividend Capital Total Realty Trust and other non-traded REITs to investors. For many investors, non-traded REITs such as the Dividend Capital Total Realty Trust are unsuitable investments. For more information, please contact us.

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January 15, 2013

Investors Beware: Non-Listed REITs

Thumbnail image for home loan.jpgOur securities law firm has seen an influx of complaints involving Non-Listed Real Estate Investment Trusts (REITs) that were marketed and sold to investors looking for a moderate risk fixed-income investment offering an attractive yield. However, like most investments, high risk and high returns are closely related.

Investing in these types of REITs can be fraught with perils that most investors fail to appreciate until it's too late. The very complexity of a REIT investment is a risk factor in and of itself. Other risks include lack of liquidity and transparency. In short, investing in Non-Listed REITs is risky and is usually not suitable for investors seeking a conservative or even moderate risk fixed income investment. Most Non-Listed REITs can only be sold to investors who have a minimum net worth of $250,000 (excluding home equity, furnishings and automobiles). Even for qualified investors who are willing to assume more risk, Non-Listed REITs should only represent a small portion of an investor's overall portfolio.

The Liquidity Trap

Because Non-Listed REITs do not trade on a major exchange, investors will find it extremely difficult to sell their shares. The ability to redeem shares directly through the company is also very limited and subject to a reduction or penalty if an investor wants to get their money out in a short period of time, with typical holding periods ranging between 1-4 years. For example, if an investor wanted to redeem a $100,00 investment in the Dividend Capital Total Realty Trust REIT less than 1 year from the date of their investment, they would only receive $92,500. If they wanted to redeem 1-2 years after purchase, they would receive $95,000. The REIT keeps the difference.

The above discussion of risks is merely the tip of the proverbial iceberg. Always read the prospectus before investing. If you don't understand what you're getting yourself into, don't invest. If you're convinced a REIT is a good investment choice, follow the lead of more sophisticated institutional investors and invest in publicly traded REITs.

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The Bottom Line

An investment in Non-Listed REIT's is inappropriate for most conservative or moderate risk investors. Even knowledgeable investors who are willing to assume some of the risks involved, a publicly traded REIT is a better option; however, a large concentrated investment in real estate, including REITs, still raises suitability concerns.

The Alcala Law Firm would like to thank the assistance of attorney Joshua Pittel who contributed to this blog post.

Click here for more information about REITs.

January 8, 2013

Is FINRA's BrokerCheck Broken?

In my securities law practice, one of the first things I do after speaking with a new client is run a quick background check of the stockbroker using the BrokerCheck tool maintained by the Financial Industry Regulatory Authority (FINRA). FINRA is the self-regulatory organization that operates BrokerCheck, a publicly available database that is intended to help investors make informed choices when selecting a financial advisor. Individuals interested in obtaining a BrokerCheck report can do so online by visiting FINRA's BrokerCheck website and downloading a report that contains a summary of a prospective broker's professional qualifications, employment history and--most useful of all--a listing of customer disputes or disciplinary actions lodged against the broker. BrokerCheck is a powerful tool and I encourage all financial consumers to conduct a search before dong business with a broker or brokerage firm.

Expungement: BrokerCheck's Dirty Little Secret

obstacles.jpgWhat many investors don't know about BrokerCheck is that brokers can get customer disputes "expunged" or removed from their records in certain situations. Brokers that are involved in a securities arbitration claim can request that the arbitrators order the matter expunged. Expungement is given to protect brokers who are falsely accused of misconduct. Any decision to grant expungement must contain written findings specifically stating the reasons why expungement was ordered. The three reasons for which expungement can be granted are:


  1. The claim was factually impossible or clearly erroneous.

  2. The individual was not involved in the incident.

  3. The allegations are false.

I don't have a problem with having false or clearly erroneous claims expunged from a broker's files. However, it is a disservice to the investing public when arbitrators order expungement even if the broker was obviously involved in the incident and the allegations appear to have merit. When in doubt, arbitrators should always err on the side of public disclosure. Here are two examples of how the public can be misled.

In October 2012, an arbitration panel in Pittsburgh, Pennsylvania found that a broker and his employer were jointly and severally liable to the customer in the amount of $97,250. However, the arbitrators simultaneously granted the broker's request for expungement stating that his conduct "was not so egregious as to warrant a permanent stigma" on his record. This begs the question: How can a broker be jointly liable, yet be allowed to hide this fact from the investing public? Incidentally, this arbitration claim still shows up in BrokerCheck, as does a separate complaint alleged by another unhappy customer of this same broker.
In December 2012, an arbitration panel in Los Angeles, California granted expungement in a case that settled before hearing. The brokers requested a hearing solely on the issue of expungement. The investor did not participate in the expungement hearing or file any objections. After reviewing the evidence submitted by the two brokers involved, the arbitration panel granted expungement stating that there was no evidence that the brokers made any material misrepresentations or omissions to the customers. As a condition of settlement, brokerage firms sometimes require investors to refrain from objecting to any expungement requests.

I recently negotiated a settlement on behalf of one of our clients. The amount paid in settlement was significant because, in my opinion, the case had merit. Nevertheless, the investment advisor involved has asked the arbitrators to order expungement on the basis that the claim was "clearly erroneous." We are vigorously opposing the expungement request. I will update this blog post once the arbitrators' decision is received.

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Updated April 25, 2013: The expungement request was denied.