REITs

Jeffrey Isaacs of Investors Capital Corporation Suspended Over Unsuitable Sale of Securities

December 30, 2013 | by Staff Attorney

Broker Jeffrey M. Isaacs (Issacs) of Investors Capital Corporation (ICC) was recently suspended and sanctioned by The Financial Industry Regulatory Authority (FINRA) over allegations that Isaacs made negligent material misrepresentations of fact in connection with the unsuitable sale of two private placements to ICC customers. In addition, after the customers complained to Isaacs, he settled their claims without notifying ICC.

From January 12, 2005, through December 12, 2011, Issacs was associated with Investors Capital Corporation. On December 12, 2011, ICC filed a Form U5 stating that Isaacs “submitted a voluntary request to terminate association with the firm while under investigation for failing to follow firm policies.” Thereafter, Isaacs was registered with TFS Securities, Inc. (TFS) from November 21, 2011 through December 15, 2011. On December 15, 2011, TFS filed a Form U5 stating that Isaacs’ termination was voluntary. Issacs’ BrokerCheck discloses that he is also employed by JB Financial Resources.

FINRA alleged that Isaacs negligently misrepresented two customers that an investment in the Insight Real Estate LLC 2007 Secured Debenture Offering (Insight) was a safe, low-risk investment, misstated its payment terms, and omitted material facts relating to the speculative nature of the investment. The customers invested $100,000 in Insight in reliance on Issacs’ representations. Thereafter, FINRA alleged that Isaacs negligently misrepresented to the customers that an investment in CIP Leverage Fund Advisors, LLC (CIP) was for moderately conservative investors and would pay interest to the investors on a monthly basis. In fact, the CIP was a speculative investment that paid interest only on an accrued basis with the final payment of principal. The customers also invested $100,000 in CIP in reliance on Issacs representations.

VSR Financial Services, Inc. and Donald J. Beary Fined Over Alternative Investment Sales

September 23, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), VSR Financial Services, Inc. (“VSR”), and Donald J. Beary (“Beary”) have reached a settlement concerning charges brought by the securities regulator that VSR violated customer concentration guidelines and otherwise failed to reasonably supervise its brokers in the sales of alternative investments. The settlement led to VSR paying a $550,000 fine and Beary being suspended from associating with a FINRA firm for 45 days and a $10,000 fine.

VSR is based in Overland Park, Kansas, has 211 branch offices, and employs approximately 460 registered personnel. Beary is a co-founder of VSR and is its executive vice-president, chairman of the board, and direct participation principal.

According to FINRA, from 2005 until 2010 VSR and Beary failed to adequately implement the firm’s supervisory procedures concerning concentration limits in customer accounts for alternative investments. The settlement details that VSR’s supervisory failures regarding concentration limits occurred because the firm used inaccurate statements reflecting the customer’s true concentration in alternative investments and because the firm used inaccurate risk ratings of products to increase allowable concentration levels.

Massachusetts Securities Regulator Subpoenaed 15 Brokerage Firms Over Products Sold to Senior Investors

September 21, 2013 | by Staff Attorney

In July 2013, William Galvin, the Massachusetts (MA) Secretary of the Commonwealth, began an investigation into “the marketing of complicated financial investments to older people.” In the process of the investigation, Galvin subpoenaed fifteen different brokerage firms in order to obtain information on investments that were sold to senior citizens in Massachusetts. The investigation sought to uncover the way the firms have sold “high-risk, esoteric products to seniors” as well as information on the firms’ compliance, supervision and training.

The firms that were included in the investigation were Morgan Stanley, LPL Financial, Merrill Lynch, UBS AG, Bank of America Corp., Fidelity Investments, Wells Fargo and Co., Charles Schwab Corp., and TD Ameritrade along with other firms. Galvin has stated that the investigation was not an indication of any wrongdoing on behalf of the brokerage firms. The purpose of the investigation was to get more information on brokers’ business practices in offering products to seniors and unsophisticated investors. Regulators have shown concern about “opaque products” advertised to unsophisticated investors looking for higher returns than what most interest rates have to offer. Brokers often pitch these types of products because they will usually get a higher commission rate than by selling other lower risk products such as mutual funds.

This recent investigation is a result of past inappropriate Real Estate Investment Trust (REIT) sales to seniors. Last year, the SEC probed the probe improper sale of REITs to seniors that led to five broker-dealers settling. The settlement for the improper REIT sales included $975,000 in fines and $8.6 million in restitution to the customers.

Broker-Dealers Settle with Massachusetts Securities Division Over the Alleged Improper Sales of Non-traded REITs

August 25, 2013 | by Staff Attorney

The Massachusetts Securities Division reached a settlement of $9.6 million with five independent broker dealers concerning allegations that the firms improperly sold non-traded real estate investments trusts (REITs) to hundreds of investors within the state. The firm’s fined include Ameriprise Financial Services Inc., Commonwealth Financial Network, Royal Alliance Associates, Inc. Securities America, Inc., and Lincoln Financial Advisors Corp. The Secretary of the Commonwealth of Massachusetts William Galvin announced that a part of the settlement would be used to distribute $6.1 million to investors as restitution.

A REIT is a security that invests in real estate directly either through properties or mortgages. REITs can be publicly traded on a national exchange or privately held. Private REITs are often referred to as non-traded REITs. Non-traded REITs have become increasingly popular as increased volatility in the stock market has led many investors to look for investment products that offer more stable returns. However, non-traded REITs may not be as safe and stable as advertised. Because non-traded REITs do not trade publicly the REIT itself determines its own asset values and only publishes updated valuations sporadically. Thus, a REITs volatility includes not only real estate market volatility but also management decisions and potentially leverage positions that investors may simply not be informed about.

Massachusetts alleged that the firms engaged in a “pattern of impropriety” selling these “popular but risky investments.” Massachusetts alleged significant and widespread problems with the firms’ compliance policies, practices, and procedures in the sale of non-traded REITs. In addition, Massachusetts alleged that the firms failed to only sell non-traded REITs to qualifying investors. Massachusetts allegations concerning each firm are as follows:

Behringer Harvard REIT Fund Investor Losses Continue to Mount

August 22, 2013 | by Staff Attorney

Investors continue to suffer substantial losses from recommended investments in the Behringer Harvard REIT Funds. The Behringer Harvard REIT Funds including the Behringer Harvard Mid-Term Value Enhancement I, Behringer Harvard Short-Term Opportunity Fund I, and the Behringer Harvard REIT I and II (Behringer REITs) have sometimes been sold to investors as safe, stable, income producing real estate investment trusts. While the Behringer REITs were initially sold to investors for $10 per share, currently some of these REITs trade as low as approximately $2.00 on the secondary market. Worse still, some of the funds no longer pay a dividend or investors receive only a fraction of what their advisor initially told their clients they could expect the investment to yield.

The Behringer REITs are speculative securities, non-traded, and offered only through a Regulation D private placement. Unlike traditional registered mutual funds or publicly traded REITs that have a published daily Net Asset Value (NAV) and trade on a national stock exchange, the Behringer REITs raised money through private placement offerings and are illiquid securities. In recent years, increased volatility in stocks has led to an increasing number of advisor recommendations to invest in non-traded REITs as a way to invest in a stable income producing investment. Some non-traded REITs have even claimed to offer stable returns while the real estate market has undergone extreme volatility. Brokers are often motivated to sell non-traded REITs to clients due to the large commissions that can be earned in the selling the Behringer REITs.

Investors are now bringing claims against the brokerage firms that sold them the Behringer REITs alleging that their advisor failed to disclose important risks of the REITs. Some common risks that customers have alleged were not disclosed include failing to explain that Behringer REITs may not be liquidated for up to 8 to 12 years or more, that the redemption policy can be eliminated at any time, and that investor returns may not come from funds generated through operations but can include a return of investor capital.

Berthel Fisher Sued Over Failed Thompson National Properties 2008 Participating Notes Program

August 20, 2013 | by Staff Attorney

Investors have filed a class action complaint against Berthel Fisher & Co. Financial Services Inc. (Berthel Fisher) and CEO and founder Thomas Berthel for allegedly failing to perform due diligence on the Thompson National Properties (TNP) 2008 Participating Notes Program. TNP 2008 is a non-traded Real Estate Investment Trust (REIT) created by Anthony Thompson in 2008.

Unlike traded REITs, non-traded REITs do not trade on a securities exchange, are illiquid for eight years or more, have high broker commissions and fees, and are exposed to greater risks. In recent years, increased volatility in stock markets led many brokers to recommend REITs to investors as a way to invest in a stable income producing investment. Some non-traded REITs have claimed to offer stable returns while the real estate market has undergone extreme volatility. Both the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted that REITs may not be as safe and stable as sometimes claimed. In a Investor Alert, FINRA noted that a common sales tactic of brokers is to sell non-traded REITs claiming that they are able to eliminate volatility. However, since the REITs often determines the value of their own assets, investors may simply not be informed about the declining value of their investment.

The complaint against Berthel Fisher was filed on July 8, 2013 in the U.S. District Court in the Northern District of Iowa. Berthel Fisher was TNP 2008’s underwriter and managing broker-dealer. Berthel Fisher has been being accused of simply ignoring and failing to investigate red flags that pointed to misrepresentations and omissions. In addition, the complaint also alleges that Berthel Fisher’s TNP 2008 due diligence failures allowed the fund to act like a Ponzi scheme by paying old investors through funds raised by new investors. According to the complaint, Berthel Fisher managed to raise more than $26 million from 200 investors. However, the complaint alleges that Berthel Fisher provided many investors with outdated offering materials that misled investors and hid the catastrophic losses TNP had already suffered while soliciting new investor capital.

Customer Complaints Brought Against Andrew Rosenberg, Stuart Horowitz, NFP Securities, and Securities America Concerning Improper Investments

April 6, 2012 | by Staff Attorney

Andrew Rosenberg and Stuart Horowitz have been accused of selling unsuitable illiquid real estate investments through Andrew Stuart Asset Management, while be associated with NFP Securities, Inc. and Securities America Inc. These real estate investments include the Hennessy Financial Monthly Income Club also known as Capital Solutions Monthly Income Fund (Capital Solutions), Capital Solutions preferred Stock, True North Finance Preferred Stock (Capital Solutions), Warsowe Acquisitions Corp. Series 2 Debentures, Inland America Real Estate Trust, and G REIT, Inc.

The brokers allegedly told their customers that Capital Solutions was a “low risk investment” and it guaranteed a steady return through “short term secured loans.” The brokers also represented that Capital Solutions fund offered investors 12% returns. In one complaint, the brokers allegedly made representations that they were offering low risk investments to a 63-year-old father of five. The brokers went on to say that they too had their investments in Capital Solutions, in order to lure the client to invest. The client ultimately invested $300,000 into Capital Solutions.

Despite the broker’s statements, the investments were high risk and illiquid. In fact, the Capital Solutions (a/k/a Hennessey Fund) was a unregistered hedge fund that was involved in risky real estate loans. In September 2010, the Securities and Exchange Commission (SEC) sued the Hennessey Fund for being a Ponzi Scheme, whereby old investors in the Hennessey Fund were being paid by new investors. The case is, SEC v. True North Finance Corporation, f/k/a CS Financing Corporation, et al., Case No. 10-3995-DWF/JJK, (D. Minn).