REITs

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.

Hantz Financial Services Sanctioned Over Non-Traded REIT Due Diligence Failures

March 27, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned and fined Hantz Financial Services, Inc. (Hantz Financial) $75,000 concerning allegations that between April 2004, until April 2011, Hantz Financial violated FINRA rules by failing to properly enforce its written supervisory procedures for conducting due diligence with respect to a non-exchange traded real estate investment trust (REIT) and by failing to establish and maintain a supervisory system reasonably designed for conducting ongoing due diligence of REITs.

Hantz Financial has been a member of FINRA since 1999 and is headquartered in Southfield, Michigan. The firm employees 276 registered representatives and conducts a general securities business.

A REIT is a corporation or trust that owns income-producing real estate. 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. Shares of non-traded REITs do not trade on a national securities exchange and are generally illiquid for periods of eight years or more. The risks of non-traded REITs are significant and FINRA has issued an Investor Alert warning investors of some of the potential risks.

Bill Tatro and Mary Helen Caprice Mallett Accused of Selling Unsuitable Private Placements Securities Part I

March 25, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently barred broker William (Bill) Tatro, formerly registered with First Allied Securities, Inc. (First Allied), concerning allegations that he failed to respond to two requests for information by FINRA staff in connection with an investigation into whether he violated federal securities laws or FINRA conduct rules. According to FINRA, Tatro admitted that he received both information requests but did not provide any of the requested information and documents because he claimed that he believed the bankruptcy court had stayed all requests pending the bankruptcy’s resolution. FINRA rejected Tatro’s bankruptcy defense and that Tatro violated FINRA Rules by failing to provide the information and documents FINRA staff requested and determined that Tatro should be permanently barred from associating with any FINRA member firm in any capacity.

FINRA initiated the investigation against Tatro after it received customer complaints and a series of Uniform Termination Notices (Forms U5) filed by Tatro’s former broker-dealer, First Allied. According to FINRA, the amended termination notices disclosed numerous customer complaints alleging fraud and other sales practice violations of more than 80 individuals who might be victims of Tatro’s alleged misconduct. Tatro total career related losses have been estimated to be anywhere from $10 million to $100 million and may potentially involve as many as 1,000 clients. On July 30, 2012, Tatro filed a petition for bankruptcy with the United States Bankruptcy Court for the Western District of New York.

Tatro began his securities career in 1975 and worked at six different broker-dealers before becoming associated with First Allied in November 2003. After Tatro left First Allied he operated Biltmore Wealth Advisors, LLC, an investment advisory firm in Phoenix, Arizona. Tatro also operated Eagle Steward Wealth Management, an investment advisory firm. Tatro’s wife, colleague, and business partner, Mary Helen Caprice Mallett (Mallett) has also advised Tatro clients and has been accused of recommending the same or similar speculative investments that characterizes Tatro’s practice.

FINRA Proposes Rule Addressing Valuation Issues of REITs and DPPs

February 26, 2014 | by Staff Attorney

FINRA has recently proposed a rule change that would amend the procedures for valuing Direct Participation Programs (DPPs) and Real Estate Investment Trusts (REITs). The rule change is intended to provide greater clarity to investors concerning the value of these investments, an extremely contentious issue.

A REIT is a security that invests in different types of real estate such as commercial properties, home mortgages, or other specialty niche real estate markets (e.g., golf courses, malls, hotels). REITs can be publicly traded or privately held. Publicly traded REITs can be sold on an exchange and have the liquidity traditional associated with other liquid stocks and bonds. Non-traded REITs are sold only through broker-dealers and are illiquid.

Increased volatility in the stock market in recent years led some investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, claims of stable REITs have been shown to be false. The stability of non-traded REITs only exists because brokerage firms and issuers have control over the value of the security listed on an investor’s account statements and not because the security will actually sell at that value or is stable over time.

FINRA Bars LPL Financial Broker for Falsifying Documents

January 7, 2014 | by Staff Attorney

On December 13, 2013, Financial Industry Regulatory Authority Inc. (FINRA) barred Gary Chackman after he allegedly falsified company documents to evade procedures and protocol, which caused an overconcentration of customer’s investments in alternative assets. Chackman evaded the firm’s supervision and inaccurately completed investor documents. LPL Financial Inc., Chackman’s employer at the time of the incident, denies any involvement in Chackman’s illegal activity.

Although Chackman neither admitted nor denied FINRA’s findings, he consented to the described sanction; therefore FINRA barred him as a member of the association. Although there are numerous complaints and investigations pending before FINRA, the association rarely bars brokers. Only one other broker was barred this year due to misrepresentations in the sale of an investment product.

Not only did Chackman allegedly misrepresent the financial transaction to the firm, but also failed to disclose the high-risk nature of alternative investment to his clients. The investor’s liquid net worth was misidentified on purchase forms when acquiring Real Estate Investment Trusts (REITs) and alternative investments. By misrepresenting client information on the purchase forms, the client’s purported liquid net worth remained below the firm’s limitation. Therefore, the REITs became highly concentrated in illiquid alterative investments.