Tenants-in-Common

Cabot Investment Properties Principals Carlton Cabot and Timothy Kroll Arrested in $17 Million Fraud

July 20, 2015 | by Staff Attorney

According to the United States Attorney for the Southern District of New York and several other government agencies, Carlton Cabot (Cabot) and Timothy Kroll (Kroll) the former Chief Executive Officer and Chief Operating Officer of Cabot Investment Properties LLC (Cabot Investment), were arrested on charges of defrauding investors in numerous Cabot Investment-sponsored real estate investments by misappropriating over $17 million to pay for personal and business expenses and thereafter covering up their fraud with manipulated financial statements. Regulators stated that the two’s greed overcome honest business practices. In the end, the regulators say that the defendants stole from their investors to fund their lavish lifestyle.

According to the release, from 2003 through 2012, Cabot Investment – which was controlled by Cabot and Kroll – sponsored approximately 18 tenants-in-common (TIC) securities offerings to investors. Those investments included:

20 North Orange

Broker Investigation: Kenneth McDonald’s Sale of Tenants-in-Common (TIC) Real Estate Investments

June 29, 2015 | by Staff Attorney

According to the BrokerCheck records kept by Financial Industry Regulatory Authority (FINRA) broker Kenneth McDonald (McDonald) has been the subject of at least three customer complaints and one regulatory action. Customers have filed complaints against McDonald alleging a number of securities law violations including that the broker made unsuitable investments, misrepresentations and false statements in connection with recommendations to invest in private placements such as tenants-in-common (TICs) interests.

McDonald was a registered representative with Crown Capital Securities, L.P. from June 2003 through February 2013. Thereafter, McDonald has been registered with Newport Coast Securities, Inc.

TIC investments have come under fire by many investors. Indeed, due to the failure of the TIC investment strategy as a whole across the securities industry, TIC investments have virtually disappeared as offered investments. According to InvestmentNews “At the height of the TIC market in 2006, 71 sponsors raised $3.65 billion in equity from TICs and DSTs…TICs now are all but extinct because of the fallout from the credit crisis.” In fact, TICs recommendations have been a major contributor to bankrupting brokerage firms. For example, 43 of the 92 broker-dealers that sold TICs sponsored by DBSI Inc., a company whose executives were later charged with running a Ponzi scheme, a staggering 47% of firms that sold DBSI are no longer in business.

Customers Complain Broker William Sheehan Sold Unsuitable TIC Investments

January 9, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP is investigating a series of complaints against broker William Sheehan (Sheehan). According to Sheehan’s BrokerCheck records the broker has been the subject of 7 investor complaints since 2010. That many claims against one broker is rare. According to InvestmentNews, only about 12% of financial advisors have any type of disclosure event on their records. Thus the number of brokers receiving eight complaints is exceedingly small.

The complaints concerning Sheehan’s activities at several brokerage firms. From July 2004, through October 2007, Sheehan was associated with Investors Capital Corp. (ICC) Next, from October 2007 until January 2010, Sheehan was a registered representative of Omni Brokerage, Inc. Thereafter, Sheehan went back to ICC until October 2012. Finally, Sheehan is currently registered with DFPG Investments, Inc.

Many of the complaints against Sheehan involve allegations investment recommendations into real estate securities and limited partnership interests in tenants-in-common (TICs). TIC investments have come under fire by the customers and even within the securities industry. Indeed, due to the failure of the TIC investment strategy as a whole across the securities industry, TIC investments have virtually disappeared as offered investments. According to InvestmentNews “At the height of the TIC market in 2006, 71 sponsors raised $3.65 billion in equity from TICs and DSTs…TICs now are all but extinct because of the fallout from the credit crisis.” In fact, TIC recommendations have been a major contributor to bankrupting several brokerage firms. For example, InvestmentNews found that 43 of the 92 broker-dealers that sold TICs sponsored by DBSI Inc., a company whose executives were later charged with running a Ponzi scheme, a staggering 47% of firms that sold DBSI are no longer in business.

Broker Spotlight – Mark Johanson’s Sale of Tenants-in-Common (TIC)

November 13, 2014 | by Staff Attorney

According to the Financial Industry Regulatory Authority’s BrokerCheck system, there have been four customer complaints filed against former Sigma Financial Corporation (Sigma) and current Charles Schwab broker, Mark Johanson (Johanson) stemming from unsuitable Tenants-in-Common (TIC) investments.

Sales of TICs exploded during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. TICs are private placements that have no secondary trading market and are therefore illiquid investments. These products were promoted as appropriate section 1031 exchanges in which an investor obtains an undivided fractional interest in real property. In a typical TIC, the profits are generated mostly through the efforts of the sponsor and the management company that manages and leases the property. The sponsor typically structures the TIC investment with up-front fees and expenses charged to the TIC and negotiates the sale price and loan for the acquired property.

TIC investments entail significant risks. A TIC investor runs the risk of holding the property for a significant amount of time and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the fees and expenses associated with TICs, including sponsor costs, can outweigh the any potential tax benefits associated with a Section 1031 Exchange. That is, the TIC product itself may be a defective product because its costs outweigh any potential investment value for a customer. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

Ameriprise Slammed With $1.17 Million Decision Concerning Tenants-in-Common (TIC) Investments

June 17, 2014 | by Staff Attorney

A Financial Industry Regulatory Authority (FINRA) arbitration panel recently ordered Ameriprise Financial Services Inc. (Ameriprise) to pay two elderly California investors $1.17 for recommending the investments in Tenants-in-Common (TIC), real estate related investments that eventually failed.

Brokerage firms, such as Ameriprise, having increasingly turned to alternative investment products such as TICs in recent years. The sales of TIC interests grew from approximately $150 million in 2001 to approximately $2 billion by 2004. FINRA has warned brokerage firms to put investors on notice of the risks of these illiquid investment for which no secondary market exists. In addition, subsequent sales of TIC property may occur at a discount to the value of the real property interest causing the investor substantial losses. FINRA has also warned that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with the IRS Section 1031 Exchange. FINRA requires that all member brokerage firms have an obligation to comply with all applicable conduct rules when selling TICs. These rules include the obligation to conduct proper due diligence and to ensure that promotional materials used are fair, accurate, and balanced.

In a recent InvestmentNews article, it was reported that in May, a FINRA arbitration panel in San Francisco ruled that Ameriprise had inappropriately advised two retired schoolteachers to invest a total of $1.03 million into three TICs in office complexes and hotels in early 2008. One of the TICs has subsequently failed and the two others have suffered declines in value. According to the investors, the couple lost most of their life savings. The couple invested in TICs known as ARI-Onyx Office Plaza Tenant In Common; Moody Springhill Suites Pittsburgh Tenant in Common; and Moody Marriott TownePlace Suites Portland Scarborough Tenant in Common.

Mislead into Investing in Tenants-in-Common (TIC) Property?

May 22, 2014 | by Staff Attorney

The sales of Tenants-in-Common (TIC) interests grew significantly during the early 2000s from approximately $150 million in 2001 to approximately $2 billion by 2004. The Financial Industry Regulatory Authority (FINRA) has noted that TICs are illiquid investments for which no secondary market exists and that subsequent sales of the property may occur at a discount to the value of the real property interest. FINRA has also warned that the risk that the fces and expenses charged by the TIC sponsor can outweigh the potential tax benefits associated with a Section 1031 Exchange. FINRA also instructed members that they have an obligation to comply with all applicable conduct rules when selling TICs by ensuring that promotional materials used are fair, accurate, and balanced.

According to FINRA former brokerage firm CapWest Securities, Inc., (CapWest) violated industry content standards in communications with the public. FINRA found that the communications: (1) were not fair and balanced and failed to provide a sound basis for evaluating TIC investments being promoted; (2) used exaggerated and or misleading statements; (3) used prohibited statements by projecting the results of the products being promoted; and (4) used customer testimonials without proper disclosures. FINRA also found that CapWest violated supervisory standards by failing to implement effective supervisory procedures. FINRA found that all of these violations and conduct were inconsistent with just and equitable principles of trade.

FINRA’s investigation involved CapWest’s promotion and sales of Section 1031 Exchanges and TIC investments that started being sold in the early 2000s. CapWest made public communications to promote tax-deferred exchanges of real property under Section 1031 of the Internal Revenue Code (IRC) as well as TIC investments. The IRC permits an investor to defer paying capital gains tax on the sale of real estate held for use for investment by exchanging the investment for “like-kind” property of equal or greater value.

What are Tenants-in-Common Securities?

October 30, 2013 | by Staff Attorney

Tenants-in-common real estate investments (“TIC”) are a more than $1-billion a year industry. However, with all innovative investment products, TIC investments receive their share of complaints from unhappy investors who bought them through a private placement. In FINRA arbitration, these complaints materialize as suitability claims and allegations of negligent misrepresentation. Usually, one or more of the following claims are made:

Investing in a TIC was not appropriate for me because of my needs, experience, or risk tolerance.
My broker did not perform adequate due diligence on the,offering materials of the TIC, appraisals of the underlying properties, persons promoting the TIC.