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https://i0.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2018/05/15.10.14-apartment-buildings.jpg?resize=300%2C210&ssl=1NorthStar Healthcare Income, Inc. (“NorthStar Healthcare”) is a public, non-traded REIT formed in October 2010 as a Maryland corporation.  NorthStar Healthcare is in the business of acquiring a geographically diverse portfolio of various healthcare real estate assets, including equity and debt investments (including various joint ventures with other non-traded REITs) in the mid-acuity senior housing sector, as well as in memory care, skilled nursing, and independent living facilities.  Pursuant to its initial offering, which closed on February 2, 2015, the non-traded REIT raised gross proceeds of $1.1 billion (subsequently, NorthStar Healthcare conducted a Follow-on Primary offering, raising total gross proceeds of $1.9 billion through March 22, 2017).

As a publicly registered, non-traded REIT, numerous retail investors were solicited by a financial advisor to invest in NorthStar Healthcare.  Unfortunately, customers who purchased shares through the IPO upon the recommendation of a broker may, in some instances, have been uninformed of the complex nature of the investment, including its high upfront commissions and fees (as set forth in its prospectus, NorthStar Healthcare charged investors a selling commission of up to 7% of gross offering proceeds, a dealer-manager fee of up to 3%, and an acquisition fee of 2.25% for properties acquired by the REIT).

Furthermore, as a non-traded REIT, NorthStar Healthcare is illiquid in nature.  Investors seeking liquidity have limited options at their disposal in the event that they wish to exit their investment position in the near term.  Briefly, investors seeking liquidity may: (i) seek to redeem their shares directly with the sponsor (it is worth noting that NorthStar is “not obligated to repurchase shares” under its Share Repurchase Program), or (ii) be presented with limited, market-driven opportunities to tender their shares to a third party professional investment firm (typically at a disadvantageous price), or finally, (iii) seek to sell their shares on a limited secondary market specializing in creating a market for illiquid securities.

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BuildingHeadquartered in Newport Beach, CA, KBS Real Estate Investment Trust II, Inc. (“KBS II”) was formed as a Maryland REIT in July 2007.  Pursuant to its public offering, KBS II offered 280 million shares of common stock, of which 200 million shares were registered in its primary offering, and an additional 80 million common shares were registered under the non-traded REIT’s dividend reinvestment plan.  KBS II’s initial offering closed on December 31, 2010, with 182,681,633 shares sold, thus raising gross offering proceeds of $1.8 billion.

Many KBS II investors may have been steered into this complex investment by a financial advisor or stockbroker.  Unfortunately, KBS II investors may have been uninformed as to the illiquid nature of their investment (as a non-traded REIT, KBS II shares do not trade on a national securities exchange), and now have limited options if they seek liquidity on their investment.

In January 2016, KBS II’s board of directors formed a Special Committee for the purpose of exploring “the availability of strategic alternatives.”  Subsequently, the Special Committee determined that it was in the best interest of KBS II stockholders to market some of the non-traded REIT’s assets, and depending on the scope of the asset sales, “thereafter adopt a plan of liquidation that would involve the sale” of remaining KBS II assets.

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Oil Drilling RigsInvestors in FS Energy and Power Fund (“FSEP” or the “Company”) will likely encounter difficulty in selling out of all or a substantial portion of their FSEP position, in the event they seek to redeem their shares directly with FSEP’s sponsor, Franklin Square.  Headquartered in Philadelphia, PA, FSEP was formed as a Delaware Statutory Trust in September 2010, and subsequently commenced its investment operations on July 18, 2011.  Structured as a regulated investment company, or RIC, for federal tax purposes, FSEP qualifies as a business development company (“BDC”) under the Investment Company Act of 1940.

Upon information and belief, as a publicly registered, non-traded BDC, FSEP was marketed and recommended to numerous retail investors nationwide.  As set forth in its most recent quarterly 10-Q as filed with the SEC, “The Company’s investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry.”

As we have highlighted in recent blog posts, BDCs have been around since the early 1980’s, when Congress first enacted legislation amending federal securities laws allowing for BDCs — which are simply types of closed-end funds — to make investments in developing companies and firms that would otherwise have difficulty accessing financing.  Because they provide financing solutions for smaller, private companies, BDCs have been likened to private equity investment vehicles for retail investors in various marketing pitches by BDC sponsors and the financial advisors who recommend these financial products.

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Wastebasket Filled with Crumpled Dollar BillsInvestors in Carter Validus Mission Critical REIT, Inc. (“Carter Validus”) may have arbitration claims to be pursued before FINRA, in the event the investment recommendation was unsuitable, or if the financial advisor’s recommendation was predicated on a misleading sales presentation.  Headquartered in Tampa, FL, Carter Validus is structured as a Maryland real estate investment trust (“REIT”).  As a publicly registered, non-traded REIT, Carter Validus was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or financial advisor.

In connection with its IPO, Carter Validus offered up to 150,000,000 shares of common stock at $10 per share.  As set forth in its Registration Statement as filed with the SEC, Carter Validus seeks to acquire “income-producing commercial real estate with a focus on medical facilities, data centers and educational facilities.”  As more fully described below, recent secondary market pricing for Carter Validus shares, at a bid-ask spread of between $3.15 – $3.30 per share, suggests investors who opted to sell their shares through a limited secondary market have sustained a principal loss of approximately 67%, excluding distributions.

Non-traded REITs like Carter Validus pose many risks to investors that are often not readily apparent, or in some instances adequately explained by the financial advisors recommending these complex and esoteric investments.  To begin, one significant risk associated with non-traded REITs has to do with their high up-front fees and commissions, which act as an immediate drag on investment performance.  In connection with its IPO, Carter Validus charged investors a “selling commission” of 7%, in additional to a “dealer manager fee” of 2.75%, and certain “organization and offering expenses” of 1.25%.  Thus, in aggregate, investors who participated in the IPO were charged 11% in commissions and fees from the outset.

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Money WhirlpoolOn November 6, 2018, Sierra Income Corporation (“Sierra”) filed a Registration Statement (on Form N-14) with the SEC, notifying Sierra investors and the public at large of a proposed merger transaction.  Specifically, Sierra’s board of directors is seeking shareholder approval on a series of related transactions designed to effectuate a merger between and among Sierra, a publicly registered non-traded business development company (BDC), as well as Medley Capital Corporation (“MCC”), a publicly traded BDC, and Medley Management Inc. (“MDLY”), a publicly traded asset management firm.

MDLY is the parent company of both MCC’s and Sierra’s investment adviser, and the same portfolio management team and officers are responsible for both MCC’s and Sierra’s operations.  While a date for a special shareholder meeting has yet to be set, Sierra’s board of directors is seeking shareholder approval on the contemplated merger, a transaction which will reportedly create the second largest internally managed and seventh largest publicly traded BDC.

Sierra is currently externally managed by SIC Advisors LLC, which in turn, is affiliated with MDLY.  MDLY operates a national direct origination franchise through which it seeks to market its financial products, including Sierra.  As of December 31, 2016, Sierra reported that it had raised in excess of $900 million in connection with its equity capital raise.  As of July 31, 2018, Sierra had closed its public offering.  Most recently, shares of Sierra have been assigned a NAV of $7.27 per share by management, and has reported approximately $1.1 billion in total assets.

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Money Maze
Investors in Black Creek Diversified Property Fund, Inc. (“Black Creek” or the “Company”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to purchase Black Creek was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation.   Black Creek changed its name as of September 1, 2017- it was formerly known as Dividend Capital Diversified Property Fund.  As of June 2017, Black Creek owned 51 properties worth an estimated $2.3 billion in 19 geographic markets in the United States.

Black Creek was formed in 2005 and is a NAV-based perpetual life REIT primarily focused on investing in and operating a diverse portfolio of real property. As a NAV-based perpetual life REIT, Black Creek states that it intends to conduct ongoing public primary offerings of its common stock on a perpetual basis. The Company states that it also intends to conduct an ongoing distribution reinvestment plan offering for Black Creek stockholders to reinvest distributions in the REIT’s shares.

Because Black Creek is registered with the SEC, the REIT was permitted to sell securities to the investing public at large, initially offering shares at $10.00 a share.  However, Central Trade & Transfer, a secondary market web site, lists a trading range for Black Greek shares of between $6.95 and $7.05 a share, even though Black Creek lists its estimated net asset value (NAV) per share as $7.49 a share.  Based on either figure, it appears that investors at the initial $10.00 a share offering price have incurred significant principal losses.

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Robert Shapiro, the former chief executive officer of Woodbridge Group of Companies, has reportedly agreed to pay $120 million to the Securities and Exchange Commission to settle allegations he defrauded investors in an alleged $1.2 billion Ponzi scheme.  Shapiro and his subordinates reportedly promised investors returns of as high as 10% from  purported “hard money” loans to third parties.  In reality, most of the “loans” were in fact extended to shell companies controlled by Shapiro that had no cash flows to repay the loans, and investors’ funds were instead commingled and used for other purposes.

Woodbridge, which is the subject on ongoing proceedings in Delaware bankruptcy court, received approval on October 29, 2018 for its plan of liquidation.  Investors in Woodbridge securities reportedly will receive a refund of between 40-70% of their sums invested, depending on the type of investment and other factors.

Investors who have lost money in Woodbridge Wealth or in any of the Woodbridge Mortgage Funds may be able to pursue recovery of their losses through securities litigation or arbitration.  Although so-called First Position Commercial Mortgages (“FPCMs”) and Woodbridge units are securities according to state and federal regulators, Woodbridge FPCMs were not registered as securities with government regulators as required by law, and in many instances were sold by unregistered, unlicensed persons.

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Investors in Woodbridge, either through a First Position Commercial Mortgage (commonly referred to as a “FPCM” or “note”) or in any Woodbridge “units” upon the recommendation of former broker David Ferdwerda (CRD# 832431) may be able to recover your losses through securities arbitration.  As recently disclosed by FINRA, as of October 30, 2018, FINRA barred registered representative David Carl Ferdwerda (“Ferdwerda”) from the securities industry due to his purported failure to provide requested documents and information to FINRA concerning his sales of Woodbridge securities.

According to publicly available FINRA records, from 2012 through March 2018, Mr. Ferdwerda was affiliated with broker-dealer Signator Investors, Inc. (BD No. 468) (“Signator”) in the firm’s Grand Rapids, MI office.  Further, FINRA BrokerCheck indicates that Mr. Ferdwerda was discharged from his employment with Signator on or about March 20, 2018 due to his alleged “Involvement in the sale of unapproved outside investments in violation of firm policy.”  Through his alleged nonresponsiveness to FINRA Enforcement’s investigation, Mr. Ferdwerda neither admitted nor denied FINRA’s findings.

As has been alleged by the SEC, Woodbridge and its owner and former CEO, Mr. Robert Shapiro, purportedly “used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”  According to Steven Peiken, Co-Director of the SEC’s Enforcement Division, the Woodbridge “[b]usiness model was a sham.  The only way that Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money.”

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U.S. Bankruptcy Judge Kevin J. Carey (D. Delaware Case No. 17-12560-KJC) has overruled the final objection to the Chapter 11 Liquidation Plan (“Plan”) for the Woodbridge Group of Companies, LLC and its affiliated debtors in possession (collectively, “Woodbridge” or the “Debtors”).  As we have discussed in recent blog posts, the Woodbridge bankruptcy cases arise out of a purported massive, multi-year fraudulent scheme perpetrated by Woodbridge’s founder and former CEO, Robert Shapiro (“Shapiro”).  Judge Carey’s ruling paves the way for payment of creditor claims.  Public investors in Woodbridge reportedly will receive around 60-70% of their net investment sums for investments in Notes (or so called First Position Commercial Mortgages or “FPCMs”) and 40-50% of their net investment sums for investments in units in so-called Units.

In connection with the alleged fraud, Mr. Shapiro — through a web of various affiliated entities, including several hundred limited liability companies — raised approximately $1.2 billion from approximately 10,000 investors nationwide.  Upon information and belief, many of these investors were elderly retirees who were solicited to invest in either Woodbridge Notes or Units, as further defined below, by a nationwide network of Woodbridge’s own in-house promoters, as well as certain licensed and unlicensed securities brokers.

Woodbridge investments came in two primary forms: (1) “Units” consisting of subscription agreements for the purchase of an equity interest in one of Woodbridge’s seven Delaware limited liability companies, and (2) “Notes” or what have commonly been referred to as “First Position Commercial Mortgages” or “FPCMs” consisting of lending agreements underlying purported hard money loans on real estate deals.

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As previously reported, American Finance Trust, Inc. (“AFIN” or the “Company”), formerly known as American Realty Capital Trust V, Inc., listed its shares on Nasdaq Global Select Market (“Nasdaq”), under the symbol AFIN effective July 19, 2018.

The former non-traded REIT’s shares are therefore publicly traded, but not all shares are yet saleable. In connection with the listing, the Company’s shares were divided into three classes: Class A, Class B-1 and Class B-2.  American Finance Trust has listed its Class A and former Class B-1 shares on NASDAQ, and the remaining Class B-2 shares are expected to list by January 2019. Shares of the non-traded REIT originally sold for $25.00 each, and the company terminated its share repurchase program at the end of June prior to listing on Nasdaq.

Against this backdrop, a private equity fund known as MacKenzie Realty Capital Inc. has offered to purchase up to 400,000 shares of each class of company common stock. MacKenzie is offering $15.00 per Class A share and $14.01 per Class B-1 share, and will purchase up to 400,000 shares of each class. The offer expires on November 16, 2018.  Of note, these prices are above the current market price of AFIN shares on NASDAQ. Although most investors paid $25.00 a share for AFIN shares in the Company’s offerings, AFIN shares have consistently traded well below that price level since the Nasdaq listing.  AFIN shares have traded as low as $13.15 a share, and closed on October 25, 2018 at $13.85 a share.  The performance of the Company since it started trading on July 19 may have caught some investors by surprise, since AFIN published an “estimated per share” net asset value of $23.56 in June 2018.

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