Kenneth Barroga, a dully registered broker and investment advisor representative with Crown Capital Securities, Inc., in Watsonville, California, has been the subject of several customer complaints and securities arbitration claims. ALF is currently conducting an investigation into Kenneth Barroga’s sale of unlisted Real Estate Investment Trusts (REITs). The Alcala Law Firm (“ALF”) is a California securities law firm specializing in securities arbitration, litigation and mediation. Please contact us for more information.
As 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.
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
Today, 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.
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).
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).
Yesterday, 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:
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.
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 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:
Our 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