REITs

Customers File Dozens of Complaints Against Broker John Schooler

October 16, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker John Schooler (Schooler) has been hit with at least 26 customer complaints over his career. Customers have filed complaints against Schooler alleging securities law violations including that the broker made unsuitable investments, negligence, misrepresentations, breach of fiduciary duty, violation of blue sky statutes in several states, and fraud among other claims. The claims against Schooler involve various types of securities including private placements, direct participation programs and limited partnerships which include investments like oil & gas, non-traded real estate investment trusts (Non-Traded REITs), equipment leasing programs, and tenants-in-common (TICs). The majority these products are high commission based products that often pay broker commission of between 7-10%. As the research now shows these products are arguably always unsuitable for investors because they do not compensate investors for their substantial risks. See Controversy Over Non-Traded REITs: Should These Products Be Sold to Investors? Part II

Schooler entered the securities industry in 1993. From 1994, until July 2011, Schooler was associated with WFP Securities. From June 2011, until July 2011, Schooler became associated with JRL Capital Corporation. Finally, Since July 2011, Schooler has been associated with First Financial Equity Corporation out of the firm’s Scottdale, Arizona office location.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are publicly traded REITs that are bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

SEC Approves Changes to Value of Non-Traded REITs on Account Statements

November 6, 2014 | by Staff Attorney

The Securities and Exchange Commission (SEC) approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that will give investors greater insight into the costs of purchasing shares of non-traded real estate investment trusts (Non-Traded REITs).

As reported by InvestmentNews, the SEC approved FINRA’s proposal on October 10. The rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program (DPP) or a REIT on customer statements in addition to other related disclosures. The current practice is to list the value of Non-Traded REITs at a per-share price of $10, or simply the purchase price of the investment.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial real estate properties, residential mortgages of various types, or other specialty niche real estate markets such as strip malls, hotels, and other industries. REITs can be publicly traded and when they are, can be bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers and are illiquid, have no market, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning.

Brokerage Firms Halt Sales of American Realty Capital Related REITs

November 4, 2014 | by Staff Attorney

According to InvestmentNews, recently several brokerage firms including Securities America Inc., with 1,772 registered reps and advisers, and the four National Planning Holdings Inc. firms with 3,954 registered reps and advisers including INVEST Financial Corp., Investment Centers of America Inc., National Planning Corp., and SII Investments Inc., announced that they are temporarily suspending some or all of the non-traded real estate investment trust (Non-Traded REITs) sales sponsored or distributed by American Realty Capital and its affiliated companies.

These Non-Traded REITs include investments such as the Phillips Edison-ARC Grocery Center REIT II and Cole Capital Properties V. The decision to halt sales come as Nicholas Schorsch, ARC’s chairman, faces further investigation after it had been revealed that the traded REIT he controls, American Realty Capital Properties Inc., made a $23 million accounting error that resulted in the firing of its chief financial officer.

The firms halted the sales in order to conduct further due diligence on the Non-Traded REIT products. Suspending sales of these products will likely help protect the firms if it is later revealed that the irregularities are more widespread. Brokers have a duty to have a reasonable basis for recommending that Non-Traded REITs are suitable for investors. This means that the firm has investigated the product and believes that the information disclosed to investors has a factual basis. If a Non-Traded REIT, its parent company, or principals are under investigation for making material misstatements it would be difficult for the firm to later argue that it had a basis for believing that the information it provided to investors was accurate.

Non-Traded REITs Sales Grow As Shown in Second Quarter 2014 Rankings

October 21, 2014 | by Staff Attorney

Since the financial crisis the non-traded real estate investment trust (REIT) market has been a financial boon for the brokerage industry. A REIT is a security that invests typically in real estate related assets. Generally, REITs can be publicly or privately held. While publicly held REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold are private, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, non-traded REITs have become a darling product of the financial industry, mostly because of the fat fees brokers earn for recommending these speculative products.

Brokers selling these products sometimes claim that non-traded REITs offer stable returns compared to the volatile stock market. As the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted, these products may not be as safe and stabile as advertised.

InvestmentNews recently ranked non listed REITs by second quarter 2014 invested assets. As shown below, investment in these funds are substantial and continues to grow each quarter

Company	2Q invested assets ($M)	Original share price	Current share value	Original distribution rate	Current distribution rate	2Q14 FFO 2 payout ratio
Inland American Real Estate Trust	$10,128.5	$10	$6.94	6.20%	5.00%	75%
Corporate Property Associates 17 Global	$4,564.7	$10	$9.50	6.50%	6.50%	81%
Apple Hospitality	$3,960.0	$11	$10.10	8.00%	7.25%	83%
Industrial Income Trust	$3,747.6	$10	$10.40	6.00%	6.00%	100%
Tier REIT	$3,455.8	$10	$4.20	7.00%	0.00%	N/A
CNL Lifestyle Properties	$3,343.4	$10	$6.85	6.25%	4.25%	108%
Griffin-American Healthcare REIT II	$3,056.2	$10	$10.22	6.50%	6.65%	143%
Monogram Residential Trust	$2,879.1	$10	$10.03	7.00%	3.50%	189%
Cole Credit Property Trust IV	$2,833.0	$10	$10.00	6.25%	6.25%	145%
KBS Real Estate Investment Trust II	$2,714.1	$10	$10.29	6.50%	6.50%	98%
Cole Corporate Income Trust	$2,606.3	$10	$10.00	6.50%	6.50%	94%
Hines Real Estate Investment Trust	$2,422.1	$10	$6.40	6.00%	2.90%	88%
American Realty Capital Trust V	$2,233.5	$25	$25.00	6.60%	6.60%	86%
KBS Real Estate Investment Trust	$2,058.0	$10	$4.45	7.00%	0.00%	N/A
Landmark Apartment Trust	$1,889.4	$10	$8.15	6.00%	3.00%	38%
Phillips Edison – ARC Shopping Center	$1,846.9	$10	$10.00	6.50%	6.70%	129%
Steadfast Income REIT	$1,592.7	$10	$10.24	7.00%	7.00%	165%
Strategic Storage Trust	$731.5	$10	$10.79	7.00%	6.50%	120%
Signature Office	$676.4	$25	$25.00	6.00%	6.00%	83%
Lightstone Value Plus REIT	$643.2	$10	$11.80	7.00%	7.00%	69%

Many brokerage firms have come under fire for their non-traded REIT sales practices. For instance LPL Financial in particular has been accused by several regulators of failing to reign in their broker’s sales practices concerning alternative investments. On March 24, 2014, LPL Financial was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its brokers’ marketing of nontraditional investments. LPL Financial was alleged to have deficient supervision in the sale of certain alternative investment products, including REITs, oil and gas partnerships, business development companies (BDC’s), hedge funds, and managed futures.

LPL Financial also paid a $500,000 fine to the Massachusetts Securities Division and was ordered to pay $4.8 million in restitution for supervisory and suitability related violations concerning non-traded REITs. In total six firms paid $11 million in restitution and fines related to REIT sales. The other firms including Ameriprise Financial Inc., Lincoln National, Commonwealth Financial Network, Royal Alliance Associates, and Securities America.

The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their financial losses through the misrepresentation of non-traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.

Broker Thomas Sharp Sanctioned by FINRA Over Misleading Statements Concerning Non-Traded REITs

October 15, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Thomas Sharp (Sharp) concerning allegations that Sharp violated NASD Rule 2210(d) by sending emails to potential investors in a non-exchange traded real estate investment trusts (Non-Traded REITs) that were not fair and balanced and failed to provide a sound basis for evaluating the facts. Sharp was associated with Ameriprise Financial Services, Inc. (Ameriprise) from 1987 through September 2013.

The Non-Traded REIT market has been a financial boon for the brokerage industry in recent years. A Non-Traded REIT is a security that invests mostly in real estate or property assets. While publicly traded REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold in the form of private placement offerings, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, brokers have recommended these products to many investors, in part driven by the fat fees they can earn.

Brokers’ selling practices have come under scrutiny because sometimes brokers claim that Non-Traded REITs offer stable, safe returns compared to the volatile stock market. However, the stability is only a result of the fund setting its own price and illiquidity, not because the product is immune to market fluctuation.

Ameriprise Advisor Michael Hainsworth Sanctioned Over Misleading REIT Sales

May 29, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently sanctioned Ameriprise Financial Services (Ameriprise) broker Michael Hainsworth (Hainsworth) concerning allegations that the broker made certain misrepresentations and unbalanced statements in the sale of non-traded real estate investment trusts (REITs) by sending emails to potential investors that failed to provide a sound basis for evaluating the facts.

Hainsworth has been a broker in the securities industry since 1994. From 2007 through June 2009 Hainsworth was associated with Prime Capital Services, Inc. Thereafter, he was associated with brokerage firm Securities America, Inc. from July 2009 through September 2011. Finally, he was associated with Ameriprise from May 2009, through April 2012. Thereafter, Ameriprise filed a Form U5 Uniform Termination Notice stating that Hainsworth had been terminated from Ameriprise.

FINRA alleged that between May and October 2010, Hainsworth sent emails regarding a REIT to four potential investors. FINRA found that the emails were misleading and failed to provide a sound basis for evaluating the facts of the investment. In one email, Hainsworth stated that “My recommendation is to take $50,000 out of the market in your Trust account and $50,000 out of your IRA and allocate it to the…REIT…This pays 6.25 and matures Dec 3lst, 2015.”

Sales of Non-Traded REITs Contributes to Increased Broker Dealer Revenues

May 21, 2014 | by Staff Attorney

Despite the broad market’s recent volatility, 2013 brought the twenty-five largest independent broker dealers double-digit revenue growth on average, according to an Investment News report. After a weak 2012, these independent broker dealers roared to a 13.2% year over year increase in revenue, recording $18.46 billion in 2013 according to this year’s Investment News survey.

The overall strength of the S&P 500, gaining 29.6% in 2013 was one contributing factor to the 2013 success of independent broker dealers. The other factor however, was a flood of commissions generated from record sales of alternative investment products, namely non-traded real estate investment trusts (REITs). As Eric Schwartz, chief executive of Cambridge Investment Research explained, “There were two reasons for last year’s results. The stock market was up 30%, and there was an unusually high percentage of dollars in alternatives and REITs being sold. Remember, a number of REITs had public listings, and clients reinvested back into other REITs.”

According to the Investment News survey, the top ten independent broker-dealers with the most growth from alternative investments include: (1) Independent Financial Group; (2) Triad Advisors; (3) Royal Alliance Associates; (4) National Planning Corp.; (5) First Allied Securities; (6) Lincoln Financial Network; (7) Cambridge Investment Research; (8) Commonwealth Financial Network; (9) Ameriprise Financial Services; 10) LPL Financial.

Pennsylvania Regulator Investigates Securities America and Landenburg Thalmann Non-Traded REIT Sales

April 17, 2014 | by Staff Attorney

The Pennsylvania Department of Banking and Securities requested that Securities America Inc. (Securities America) provide information concerning customer purchases of non-traded real estate investment trust (REIT) securities by Pennsylvania residents since 2007. This information was provided by an annual report of Ladenburg Thalmann & Co. Inc. (Ladenburg Thalmann), the company that owns Securities America as well as two other independent broker-dealers. According to Ladenburg Thalmann the company is unable to determine whether and the extent that the Pennsylvania Department of Banking and Securities may seek to discipline Securities America

A REIT is a corporation or trust that owns income-producing real estate properties. REITs pool the capital of numerous investors to purchase a portfolio of properties that may include office building, shopping centers, hotels, and apartment buildings that the average investor would not otherwise be able to purchase individually. Publicly traded REITs can be sold on an exchange and have the same liquidity as most stocks and bonds. However, non-traded REITs are sold only through broker-dealers and are illiquid. REITs are typically long term investments and investors should be prepared to hold onto non-traded REITs for up to 7 to 10 years and even longer under some circumstances.

The non-traded REIT industry sales doubled last year to $20 billion, from 2012. Increased volatility in the stock market during the financial crisis led investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, the stability of non-traded REITs only exists because brokerage firms and issuers have control over the value how the value of the security is listed on an investor’s account statements and not because the security will actually sell at that value. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

Gana LLP Files Complaint Against H. Beck on Behalf of Client For Unsuitable Investment

April 4, 2014 | by Staff Attorney

The law offices of Gana Weinstein LLP recently filed a complaint against H. Beck, Inc., on behalf of a client accusing the investment advisory firm of making unsuitable recommendations and failing to properly supervise one of its representatives.

The Claimant in this case is a retired sixty-three year old from Hawaii, who sought to safely invest what was left of his retirement funds, after being hit hard in the down market of 2008. H. Beck, through one of its advisers, offered him high, risk-free returns, which the Hawaii native readily accepted. H. Beck, through one of its advisers, took nearly two-thirds of Claimant’s retirement savings and put them into the Inland American Real Estate Investment Trust (Inland) and the Lease Equipment Finance Fund 4 (LEAF).

LEAF is a limited partnership. Limited Partnerships are investment vehicles formed to acquire, operate, and sell assets for the benefit of the partners. Investors in Limited Partnerships, also known as limited partners, are entitled to receive distributions of operating cash flow as well as distributions from the sale or financing of assets as outlined in the partnership’s limited partnership agreement. Unlike stocks and bonds, Limited Partnerships are not listed on an exchange. They are illiquid assets with a relatively limited secondary market. Consequently, reliable pricing information is typically very difficult to obtain.

National Planning Corporation Broker Matthew Westfall Sanctioned Over Outside Business Activities and Non-Traded REIT Sales

March 28, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned broker Matthew Westfall (Westfall) concerning allegations that from June 2011, through December 2012, while associated with the National Planning Corporation (National Planning), Westfall engaged in business activities outside the scope of his employment with the Firm. FINRA found that Westfall solicited 18 customers to purchase lraqi Dinar currency as an investment without firm approval to engage in this outside business activity. In addition, FINRA found that National Planning had internal guidelines that limited the amount customers were permitted to invest in illiquid investments, such as non-traded Real Estate Investment Trusts (REITs). According to FINRA, Westfall submitted falsified documents that exaggerated the net worth for customers permitting investments in amounts that National Planning would have otherwise prohibited.

Westfall entered the securities industry in 1983. From 2003 until August 2010, Westfall was associated with Securities America, Inc. From September 2010 to December 2012, Westfall was associated with National Planning. Thereafter, in May 2013, Westfall became associated with Primex

FINRA found that Westfall engaged in an undisclosed outside business activity of selling Dinars to 18 National Planning customers. FINRA alleged that the 18 firm customers purchased $87,954 in Dinars through Wcstfall through a personal account that he had with an online company that sold Dinars. For these sales, Westfall received approximately $8,344 in compensation.