For some time we have been blogging about non-traded REITS (and the real risks associated with investing in these complex investment vehicles.  Many investors are familiar with exchange traded Real Estate Investment Trusts (“REITs”).  Pursuant to federal law, these companies which own and typically operate income-producing real estate, are required to distribute at least 90% of their taxable income to investors in the form of dividends.  Because REITs pay out such a high percentage of their taxable income as dividends, these companies have attracted numerous retail investors (including pensioners and other retirees) seeking to augment their income stream.

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While an appropriate allocation of REITs in a retail investment portfolio may well be suitable and warranted in order to achieve diversification and earn decent income, non-traded REITs are an altogether different and often risky investment vehicle.  The primary risks associated with non-traded REITs include: (1) a lack of liquidity – non-traded REITs do not trade on an exchange, and therefore, any secondary market for resale will be restricted; (2) pricing inefficiency – in lockstep with their lack of liquidity, investors in non-traded REITs may find that the price offered for share redemption is substantially lower than the price at which shares were initially purchased;  (3) high up-front fees – compounding the risk with non-traded REITs are the often steep up-front fees charged investors (as high as 10% for selling compensation) simply to buy in and purchase shares; and (4) confusion over source of income – often, investors in non-traded REITs are unaware that dividend income may actually include return of capital (including possible the proceeds from sale of shares to other, later investors).

THE NEW HAMPSHIRE BUREAU OF SECURITIES REGULATION PROCEEDING AGAINST LPL FINANCIAL

In April 2015, the New Hampshire Bureau of Securities Regulation (the “Bureau”) initiated a regulatory proceeding against LPL Financial (“LPL”) in connection with the Boston-based brokerage firm’s sale of non-traded REITs to numerous investors.  Aware of their complex nature and risks, the Bureau alleged that sales of non-traded REITs to New Hampshire residents were unsuitable under the circumstances and that LPL failed to properly supervise its associated members selling the non-traded REITs.

The case involved an elderly resident of New Hampshire, age 81, who was steered into investing approximately $250,000 in a non-traded REIT by an LPL adviser.  The investor ultimately suffered significant losses in the non-traded REIT.  During the course of its investigation into the matter, the Bureau concluded that LPL sold hundreds of non-traded REITS to New Hampshire residents, often in clear violation of LPL’s own internal policies and guidelines.  LPL allegedly failed to follow its own guidelines concerning gathering accurate financial information from clients, ensuring appropriate concentration in any alternative investments such as non-traded REITs, and conducting a suitability analysis in connection with sales to investors.

As a result of the Bureau’s investigation into LPL, the Boston-based brokerage firm agreed to pay a fine of $750,000 for its alleged misconduct.  Furthermore, LPL agreed to allow for a third-party review of its non-traded REIT sales in order to determine whether and in what amount restitution was warranted.

As of April 2017, based on this third-party review, LPL is responsible for refunding roughly 200 New Hampshire residents who had invested in non-traded REITs in the aggregate amount of $8 million (approx. $40,000 per client).

DO YOU HAVE A CASE INVOLVING A NON-TRADED REIT?

If you have invested in a non-traded REIT that you believe was unsuitably recommended, and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.  To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

 

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With increasing frequency, given the current low interest rate environment, retail investors are steered into investing in products appearing to offer more advantageous yields than are available in traditional interest-bearing investments such as money market funds and CDs.  One example is the publicly registered non-exchange traded real estate investment trust (“REIT”) or “non-traded REIT.”  While non-traded REITS share certain similarities with their exchange-traded brethren, they differ in a number of key respects.

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CHARACTERISTICS AND SOME DISADVANTAGES OF NON-TRADED REITS

To begin, a non-traded REIT is not listed for trading on a securities exchange.  Consequently, the secondary market for non-traded REITs is typically very limited in nature.  Furthermore, while some of an investor’s shares may be eligible for redemption after a certain passage of time (e.g., one year), and, even then, on a limited basis subject to certain restrictions, such redemption offers may well be priced below the purchase price or current price of the non-traded REIT.  Thus, lack of liquidity and pricing inefficiency are two disadvantages to non-traded REITs, as opposed to REITs that trade on an exchange (e.g., NYSE: BXP – Boston Properties).

Beyond such liquidity and pricing concerns, non-traded REITs often are sold with very high front-end fees.  These fees may include selling compensation and expenses (not to exceed 10%), as well as additional offering and organizational costs which are essentially passed along to the investor from the outset.  Conversely, purchasing a REIT which trades on a major exchange will only entail the associated brokerage commission.  Because of the fees associated with non-traded REITs, they are rarely suitable for an investor with a short-term time horizon; even long-term investors must remain mindful of the liquidity issues.

Finally, with non-traded REITs, investors may not always be aware of the anticipated source of returns on the underlying investments.  Often, with a non-traded REIT, income is passed along to the investors from distributions over several years – and it may also be the case that the income distributions include return of capital from other investors.  And upon liquidation, investors in a non-traded REIT may receive less than their initial investment depending on the value of the underlying assets. On the other hand, investors who purchase exchange traded REITS are typically seeking capital appreciation on the share price, in addition to income via dividends or distributions to shareholders.

RESOURCE OFFICE INNOVATION REIT

Recently, one such non-traded REIT – Resource Office Innovation REIT (“Resource Office”) – elected to suspend its public offering, effective April 21, 2017.  Resource Office’s suspension of its offering was approved by its Board in connection with a plan to restructure its $1.1 billion IPO into a NAV REIT, as well as a perpetual life entity that will give the company the ability to conduct offerings for indefinite duration.  In addition to suspending its offering, Resource Office’s Board voted to suspend the company’s distribution reinvestment plan effective May 1, 2017, as well as its share repurchase program effective May 21, 2017.

If you have invested in a non-traded REIT that you believe was an unsuitable recommendation, and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.  To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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State of Illinois Charges Thrivent Over Variable Annuity Switching

May 22, 2017

The State of Illinois Securities Department (“Department”) recently initiated enforcement proceedings against Thrivent Investment Management, Inc. (“Thrivent”) (CRD #18387) for allegedly violating the Illinois Securities Law of 1953 in connection with sales of unsuitable variable annuity (“VA”) products to certain of its clients who already held Thrivent VA’s. Specifically, the Department alleges that Thrivent violated […]

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Former NEXT Financial Broker Douglas P. Simanski Barred for Alleged Theft

October 13, 2016

  Financial Industry Regulatory Authority (FINRA) records indicate that Douglas P. Simanski (Simanski), a former stockbroker who was associated with NEXT Financial Group, has been permanently barred from the brokerage industry.  Simanski’s record also shows 4 currently pending customer disputes, 1 prior final customer dispute and a recent employment separation after allegations. FINRA is the agency that licenses and regulates […]

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Platinum Partners Hedge Funds Under Scrutiny

October 13, 2016

Platinum Partners LP Funds are under scrutiny after federal agents reportedly raided the funds’ New York offices in July 2016.  Hedge fund entities sponsored by Platinum Partners include the Platinum Partners Value Arbitrage Funds, the Platinum Partners Credit Opportunities Fund, Platinum Credit Holdings LLC, Platinum Credit Management LP, Platinum Partners Value Corp., and Platinum Management […]

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FINRA Fines Investors Capital Over Unit Investment Trust Sales

October 13, 2016

The Financial Industry Regulatory Authority (FINRA) recently fined Investors Capital Corporation $250,000 over the sale of unit investment trusts (UITs).  Investors Capital did not admit or deny the allegations leading to the fine, but also agreed to pay $841,500 in restitution to customers, bringing its total payment to over $1 million. FINRA alleged that certain […]

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FINRA Fines Merrill Lynch Over Sales of Strategic Return Notes

October 6, 2016

The Financial Industry Regulatory Authority (FINRA) fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for alleged negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch allegedly failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they […]

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SEC Fines UBS Over Sales of Reverse Convertible Notes

October 6, 2016

  The U.S. Securities and Exchange Comission (SEC) has reached an agreement with UBS under which UBS will pay more than $15 million to settle claims arising out of its sale of hundreds of millions of dollars of reverse converible notes to customers. According to the SEC, UBS sold about $548 million dollars of “reverse […]

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FINRA Fines Investors Capital for Alleged Unsuitable UIT Sales

October 6, 2016

  Investors Capital will pay $1.1 million in fines and restitution over the sale of unit investment trusts (UITs) to resolve an investigation by the Financial Industry Regulatory Authority Inc. (FINRA).  FINRA alleges that certain Investors Capital brokers recommended unsuitable short-term trading of UITs and other complex financial products known as steepener notes in accounts […]

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36 Oil and Gas Companies Filed For Bankruptcy In 2015

February 19, 2016

Law Office of Christopher J. Gray wishes to alert investors to the possibility that recommendations of oil and gas investments by broker-dealers may be unsuitable, depending on the individual characteristics of investors and whether the broker had a reasonable basis for the recommendation. According to a Wall Street Journal article, there have been a total […]

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