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September 22, 2015

LPL Financial LLC Fined Again Over Sale of Non-Traded REITs

Thumbnail image for lpl.jpgAs previously reported in this blog, LPL Financial has recently been faced with numerous fines from various regulators and also securities lawsuits from unhappy investors over the firm's uncontrolled sale of non-traded REITs and leveraged ETFs.

Multi-State Task Force Concludes LPL Overly Sold REITs to Individual Investors

Today, LPL reached yet another million dollar settlement--this time with a Task Force of state regulators. The Task Force investigation determined that LPL sold non-traded REITS in excess of the requirements set forth in the REIT prospectuses, various state concentration limits and LPL's own guidelines. The investigation also concluded that LPL's supervisory system was inadequate. Under the settlement, LPL will remediate investor losses for all sales of non-traded REITs from January 2008 through December 2013 that exceeded the requirements of the REIT prospectuses, applicable state concentration limits or LPL's own guidelines. The Task Formed by the North American Securities Administrators Association (NASAA) included securities regulators from California, Texas, Colorado, Nevada, Maine, Ohio and Virginia.

Related blog posts:

  1. LPL Financial Ordered to Pay $10 Million Fine and $1.7 Million in Restitution to Customers for Supervisory Lapses (May 6, 2015)

  2. Alcala Law Firm Files FINRA Arbitration Claim Against LPL Financial Over Risky Investments (May 1, 2015)

  3. Regulators Fine LPL Financial LLC $950,000 Over Unsuitable Alternative Investments Sales (March 24, 2014)

January 8, 2015

More Accurate Share Price Reporting to be Required for Non-Traded REITs and DPPs

For many financial consumers, the new rule changes requiring stockbrokers to provide more reliable pricing information for REITs (real estate investment trusts) and DPPs (direct participation programs) will be a case of "too little, too late." After the market crash of 2008, our securities law firm was inundated with inquiries from investors who had purchased non-traded REITs offered through real estate companies such as American Realty Capital, Berhinger Harvard, Inland American, KBS Real Estate-typically at a price of $10.00 per share. In many cases, the $10 per share price never changed from month-to-month, despite the fact that the real estate market was suffering catastrophic losses, giving investors a false sense of security about their REITs value.

Starting in April 2016, rule changes designed to better protect financial consumers will go into effect. Although the new changes won't put any restrictions on the sale of REITs and DPPs to financial consumers, the changes will require greater disclosure of the per share estimated value of the REIT or DPP. A summary of the rule changes is provided at the end of this blog post.

Investors Should Proceed With Caution When Considering a Non-Traded REIT Investment

While FINRA is taking steps to better protect investors, investors should still be careful and follow the tips FINRA has created for when an investor is considering unlisted REITs.
Investors should avoid putting their entire investment into one REIT or the same family of REITs because their initial investment is not guaranteed and may increase or decrease in value. Investing proceeds from one unlisted REIT to another should be carefully considered because it may only be in the best interest of the sales representative who receives a commission for the transaction.

  • Investors should not base their decision to invest on the current distributions of an unlisted REIT because they are not guaranteed. REIT distributions can be suspended or stopped completely because they can be partially or entirely funded by cash from investor capital or borrowings.

  • If an investor reinvests their distributions they should be aware that their reinvestments may be illiquid for a long period of time because they are subject to the same redemption policies as other investments.

  • Getting money out of an unlisted REIT can be extremely difficult because the redemption policies can change at any time. Therefore investors that will want their money back in the near future should avoid unlisted REITs.

  • As an investor do not rely on claims that an unlisted REIT is going public because the process is lengthy and may actually never happen. If the REIT does go public then the trade price could be less than its current valuation.

  • It is in the best interest of older investors to not invest a large portion of their retirement income into an unlisted REIT.

Even though FINRA is taking steps to improve the transparency of unlisted REITs the investment itself has not changed and is still inappropriate for most conservative or moderate risk investors.

Overview of FINRA/NASD Rule Changes

[1] Financial Industry Regulatory Authority (FINRA) Rule 2310

To help increase the transparency of unlisted REITs FINRA amended Rule 2310(b)(5) to prevent any member from participating in a public offering of a REIT or DPP unless the issuer has disclosed three things:

  • The DPP or REITs per share estimated value in the DPP or REIT periodic reports

  • An explanation of how the value was determined; and

  • The date of the valuation

The amended Rule 2130(b)(5) also requires the issuer of the DPP or REIT offering to include in each customer's account statement the per share estimated value that is based on the assets and liabilities of the DPP or REIT and determined by or with the help of a third party valuation expert. The issuer must also provide a written opinion or report explaining the scope of the review and the valuation method used.

[2] National Association of Securities Dealers (NASD) Rule 2340

The amendments to NASD Rule 2340(c) require firms to disclose how much money is taken out for fees and commissions for each investment by including them in the calculations of the share value. To calculate the new share value the amendment provides two different methods: a net investment approach or an appraised value method.

  • Net Investment: Firms must disclose that part of a customer's distribution includes a net investment and that the net investment reduces the estimated per-share value on their account statement. The valuation is based on the percentage of the amount available for investment. If there is no amount available for investment provided then the firm must provide another equivalent disclosure.

  • Appraised Value: The estimated per share value included in the Issuer Report is based on a valuation of the assets and liabilities of the unlisted REIT. These valuations must be done at least annually and by a third-party valuation expert using an approach that follows standard industry practice.

  • Disclosures: To help address customer misunderstandings new Rule 2340(c)(2)(A) requires account statements that include a net investment to also disclose that part of the distribution includes a return of capital and that the return on capital reduces their estimated per share value. This requirement only apply to account statements that include a net investment where part of the distribution includes a return on capital.

New Rule 2340(c)(2)(B) require firms to disclose the nature of the REIT investment as well as the fact that the REIT is not listed on a national securities exchange, is generally illiquid, and the estimated value on the customer's statement may be higher than the price the customer actually receives for selling the security. These disclosures are required for all account statements that include per share estimated values for the REIT or DPP.

March 24, 2014

Regulators Fine LPL Financial LLC $950,000 Over Unsuitable Alternative Investments Sales

Thumbnail image for lpl.jpgToday, LPL Financial LLC reached a settlement with the Financial Industry Regulatory Authority (FINRA) over the firm's failure to adequately supervise the sale of non-traded REITs and other risky alternative investments. LPL's settlement with FINRA specifically mentioned former LPL broker Gary J. Chackman for his role in selling "dozens" of alternative investments that were unsuitable and exceeded the firm's guidelines, which he was able to conceal by using false customer financial information. Chackman has been the subject of numerous securities arbitration claims.

Last year, LPL agreed to pay a fine of $500,000 and approximately $2 million in restitution to Massachusetts investors for violating Massachussets suitability rules while selling non-traded REITs, including:

  • Inland American, Cole Property Trust II, Inc.

  • Cole Credit Property Trust III, Inc.

  • Cole Credit Property 1031 Exchange

  • Wells Real Estate Investment Trust II, Inc.

  • W.P. Carey Corporate Property Associates 17

  • Dividend Capital Total Realty

Related blog posts:

LPL Financial, LLC Under Fire for Sale of Non-Traded REITS

Investors Beware: Non-Listed REITs

March 14, 2014

Inland American Real Estate Trust Announces Tender Offer at $6.50 - $6.10 Per Share

Today, Inland American Real Estate Trust, a non-traded REIT, announced a $350 million tender offer at a price range between $6.50 to $6.10 per share. The offer expires April 11, 2014, at 5:00 p.m. (EST). Click here for detailed information about the terms of the tender offer.

At the $6.50/share tentative offering price, Inland investors that paid $10/share will realize a potential loss of $3.50/share--a 35% loss which is unacceptable to many conservative investors who did not appreciate or understand the risks associated with investing in a non-traded REIT. Many affected investors have already taken legal action to recoup their Inland REIT losses via arbitration under the program administered by the Financial Industry Regulatory Authority (FIRNA). Click here for more information about FINRA's arbitration process.

February 25, 2014

Berthel Fisher Fined $775,000 for the Inappropriate Sale of REITs and ETFs

Thumbnail image for violators.jpgYesterday, Berthel Fisher & Co. Financial Services, Inc. entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and agreed to pay a $775,000 fine stemming from sale of unsuitable investments, including non-traded REITs as well as leveraged and inverse ETFs. According to FINRA's BrokerCheck system, Berthel Fisher has been the subject of multiple enforcement actions initiated by FINRA and state securities administrators.

Regulators Stepping Up Supervision of Alternative Investments

Berthel Fisher is the latest of several brokerage firms to get swept up in FINRA's focus on the brokerage industry's sale of risky alternative investments to financial consumers and the failure to properly enforce suitability standards for those investments. The risks associated with investing in non-traded REITs and leveraged/inverse ETFs have been extensively covered in previous blog posts. For more information, see below:

Investors Beware of Non-Listed REITs

Are Leverages and Inverse ETFs Suitable for You?

What Are Leveraged and Inverse ETFs?

June 3, 2013

Commonwealth of Massachusetts Recovers Over $11 Million for Victims of Unsuitable REIT Sales

The Financial Regulator for the Commonwealth of Massachusetts recently announced a settlement with five brokerage firms--Ameriprise Financial Services, Commonwealth Financial Services, Lincoln Financial Advisors, Securities America and Royal Alliance Associates--over the unsuitable sale of a particularly risky real estate investment trust referred to as a "non-traded REIT" due to the fact that this type of REIT has limited liquidity and cannot be freely sold on the open market. See related blog post: Investors Beware: Non-Listed REITs

  • Inland Real Estate Trust, Inc.

  • Inland Western Real Estate Trust, Inc.

  • Inland American Real Estate Trust, Inc.

  • Inland Diversified Real Estate Trust, Inc.

Massachusetts imposes more stringent requirements on the sale of non-traded REITs to its residents and prohibits any investment exceeding 10% of the individual's liquid net worth. In addition to giving restitution to Massachusetts investors, the firms were required to pay administrative fines ranging from $400,000 to $25,000. According to the Secretary of the Commonwealth of Massachusetts, over $11 million will be returned to Massachusetts investors.


Disclosure: The Alcala Law Firm routinely represents clients who have pursued claims against their financial advisors for losses associated with non-traded REITS.

February 15, 2013

Merrill Lynch Enters the Non-Listed REIT Market

As noted in a recent blog post, we have seen an influx of cases involving non-traded Real Estate Investment Trusts ("REITs"). We have also been trying to spread the word about the hazards of these little understood investment vehicles through our blog postings. [See Investors Beware: Non-Listed REITs] With all the negative attention given to non-traded REITS, it came as a surprise to learn that Bank of America's Merrill Lynch subsidiary had recently begun offering the Jones Lang LaSalle Income Property Trust, Inc. to it's "mass-affluent" customers (i.e., investors with a net worth between $100,000 to $1 million, excluding their home).

Suitability: Moderate Risk Investors Need Not Apply

For a detailed discussion of suitability criteria and risk factors, be sure to read the prospectus. Below is a summary of the minimum suitability criteria established by this REIT:

  • The minimum amount that can be invested in this REIT is $10,000.

  • The REIT can only be sold to investors who have either: (1) a minimum net worth of $250,000; or (2) a minimum gross annual income of at least $70,000 and a minimum net worth of at least $100,000.

  • Investors may not invest more than 10% of their liquid net worth in this REIT, either alone or in combination with other similar illiquid investments.

Investors should not be lulled into a false sense of security about the safety of this REIT. Notwithstanding the REIT's stated investment objective to "preserve and protect our stockholder's capital investments," when push comes to shove, Merrill Lynch's attorneys will argue that the REIT's prospectus clearly stated that the investment "involves a high degree of risk" and that investors should only purchase this security if they can afford the "complete loss" of their investment. Thus, this investment is only suitable for investors who have a high risk tolerance.

Illiquidity: Consider a Publicly Traded REIT

As previously stated, there is no public market for this REIT. All sales are subject to the REIT's share repurchase plan which require investors to hold their shares for at least a year before they are available for repurchase. Furthermore, the REIT may suspend repurchases if there is a run on the bank and honoring repurchase requests would adversely affect operations of the REIT. This is exactly what happened to a number of REITs and other privately offered real estate investments that were adversely affect by the recession in 2008.

As we stated in a previous blog post: If you are convinced that a REIT is an appropriate investment, do what sophisticated institutional investors do and invest in a publicly traded REIT instead.

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.

See related blog posts:

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.


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.

December 24, 2012

LPL Financial, LLC Under Fire for Sale of Non-Traded REITS

lpl.jpgThe Enforcement Section for the Commonwealth of Massachusetts has filed an administrative lawsuit against LPL Financial, LLC for violation of securities laws in connection with the sale of non-traded REITs. [R-E-I-T is an acronym for "Real Estate Investment Trust."] The term "non-traded" refers to the fact that the REITs are not listed on a national stock exchange and investors have limited redemption rights. The Commonwealth is demanding that the firm make full restitution to Massachusetts investors who were improperly sold non-traded REITs. Following an investigation of 597 non-traded REIT transactions made by LPL, the Enforcement Section determined that 569 of those were made in violation of the prospectus requirements. For example, many of the non-traded REITs sold by LPL contained a requirement in their prospectuses limiting an individual investor's purchase to 10% of their liquid net worth. The Commonwealth's investigation focused on seven non-traded REITs sold by LPL:

  • Inland American, Cole Property Trust II, Inc.

  • Cole Credit Property Trust III, Inc.

  • Cole Credit Property 1031 Exchange

  • Wells Real Estate Investment Trust II, Inc

  • W.P. Carey Corporate Property Associates 17

  • Dividend Capital Total Realty

LPL Financial, LLC is the largest independent broker-dealer in the United States with 12,800 financial advisors. Although the administrative action taken by Massachusetts is primarily concerned with the sale of non-traded REITs to its own residents, LPL's financial advisors sold non-traded REITs to thousands of investors across the country. The Commonwealth of Massachusetts should be commended for their aggressive efforts to protect the rights of financial consumers. In the past, lawsuits such as the one filed by the Commonwealth of Massachusetts have encouraged investors nationwide to seek their own form of justice through individual securities arbitration claims.

See related blog post: