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Articles Tagged with Suitability

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stock market chartInvestors in speculative microcap and nanocap securities may have arbitration claims to be pursued before FINRA, in the event that the recommendation to invest lacked a reasonable basis, or if the nature of the investment, including its risk components, was misrepresented to the investor.  Both FINRA and the SEC have issued ample guidance with regard to the numerous risks associated with investing in speculative microcap (or “penny”) stocks, including the potential for fraudulent schemes and market manipulation due to the lack of public information concerning the companies’ underlying business and management, as well as verifiable financials.

In certain instances, broker-dealers who transact business in the penny stock arena may expose themselves to regulatory scrutiny and related liability.  For example, Aegis Capital Corp. (“Aegis”) (CRD# 15007) has come under considerable regulatory scrutiny by both the SEC and FINRA with respect to its activities concerning low-priced securities transactions.  Formed in 1984 and headquartered in New York, New York, Aegis is a mid-sized, full service retail and institutional broker-dealer.  As of March 2017, Aegis employed approximately 415 brokers in its sixteen branches, with the bulk of its workforce centered in New York City and Melville, NY.

According to FINRA BrokerCheck, Aegis’ regulatory history includes a total of thirty (30) disclosure events, a number of which involve penny stocks.  For instance, in August 2015, Aegis entered into a settlement with FINRA, pursuant to which the broker-dealer agreed to pay $950,000 in sanctions over allegations of improper sales of unregistered shares of penny stocks, as well as certain AML violations.  In connection with that regulatory event, two of Aegis’ compliance officers were suspended for 30 and 60 days, and ordered to pay fines of $5,000 and $10,000, respectively.  On March 28, 2018, the SEC imposed a cease-and-desist order (“Order”) against Aegis for its alleged supervisory failures concerning penny stocks.  Further, the SEC penalized Aegis $750,000 after the brokerage firm admitted that it failed to file required suspicious activity reports (“SAR’s”) on numerous penny stock transactions from “at least late 2012 through early 2014.”

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Money in WastebasketAs recently reported, the Board of Directors of The Parking REIT, Inc. have unanimously authorized a suspension of the company’s cash distributions and stock dividends, effective immediately.  In conjunction with filing a Form 8-K with the SEC on March 23, 2018, the company issued a press release indicating, inter alia, that “The Board is focused on preserving capital in order to maintain sufficient liquidity to continue to operate the business and maintain compliance with debt covenants, including minimum liquidity covenants…”

Headquartered in Las Vegas, NV, The Parking REIT (f/k/a MVP REIT II, Inc.) holds a real estate investment portfolio consisting of 44 parking facilities across 15 states, with an estimated aggregate asset value of $280 million.  As a publicly registered non-traded REIT, The Parking REIT is a particularly complex and risky investment vehicle.  Among the risks associated with non-traded REITs are their characteristically high up-front fees and commissions (as high as 15% in some instances), as well their illiquid nature.

Unlike exchange traded REITs, non-traded REITs do not trade on a national securities exchange, and therefore cannot be readily sold and resold on a liquid exchange.  Further, as is the case with The Parking REIT, investors may unfortunately encounter a scenario where the Board elects to reduce or altogether suspend distributions and/or dividends.  For many investors in non-traded REITs, one of their primary reasons for investing in the first instance has to do with the enhanced yield often associated with non-traded REITs.  However, when the prospect of steady income through distributions disappears, the investor is left with an illiquid investment position that cannot be easily or readily exited.

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Building DemolishedInvestors in American Realty Capital New York City REIT (“ARC NYC REIT”), may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their ARC NYC REIT investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the broker or financial advisor.  According to its website, ARC NYC REIT is structured to provide its investors with a combination of current income and capital appreciation through strategic investments in high-quality commercial real estate located throughout the five boroughs of New York City.

A publicly registered non-traded real estate investment trust (“REIT”), ARC NYC REIT was incorporated in December 2013 as a Maryland REIT and is registered with the SEC.  Accordingly, ARC NYC REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

In early 2018 — a Tel Aviv, Israel based private real estate investment fund, Comrit Investments 1 LP (“Comrit”) — launched an unsolicited tender offer to purchase up to 1.6 million shares of ARC NYC REIT for $14.68 per share.  In response, ARC NYC REIT’s Board countered with a defensive tender offer, to purchase up to 1.9 million shares at a price of $15.50 per share.  Both of these tender offers were set to expire on March 6, 2018.

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Money MazeInvestors in Roundstone Healthcare Capital V, L.P. (“Roundstone V” or the “Limited Partnership”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution if the recommendation to purchase Roundstone V was unsuitable or if a broker or investment advisor who sold Roundstone V made a misleading sales presentation.

Roundstone V is structured as a Delaware limited partnership and is based in Acton, MA.  The Limited Partnership was formed in 2009 as a capital investment entity, to invest in discounted portfolios of medical receivables.  On March 27, 2009, Roundstone V first sold securities through its private placement offering pursuant to Regulation D (“Reg D”) of the federal securities laws.

Investors who participated in the offering were required to invest a minimum of $10,000.  Shortly after commencing its initial offering of up to $25,000,000 in investor capital, the Limited Partnership sold $4,459,000 of securities through private placement by May 18, 2009.

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Money MazeOn September 25, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued a fine of $3.25 million against Morgan Stanley Smith Barney LLC (“Morgan Stanley”) in connection with the brokerage firm’s alleged failure to supervise its brokers’ short-term trades of unit investment trusts.  Unit investment trusts (“UITs”) are a specific type of Investment Company, as defined by the Investment Company Act of 1940 (the ’40 Act), and subject to regulation by the SEC.  Unlike mutual funds, closed-end funds, or ETFs, UITs are unique in that they are created for a specific, limited time period (e.g., 24 months).  Furthermore, UITs consist of a static investment portfolio as part of a pre-selected pooled investment vehicle.

Typically, UITs impose a number of charges.  Some of these charges include a deferred sales charge, a creation and development fee, as well as annual operating expenses charged as an annual fee to account for portfolio administration and bookkeeping.  In aggregates, these various fees might total approximately 4% for a typical 24-month UIT.  Thus, any investor in a UIT will experience a “drag” on the performance of their UIT portfolio in the form of various fees.

Because UITs carry a substantial fee structure and are subject to termination after a given time period, there exists the potential for some financial advisors to recommend to their clients that they roll-over, or switch, from one UIT to another.  In its worst form, this sales practice amounts to a stock broker seeking enhanced income through switching clients out of one product to another on a short-term basis in order to earn commissions and fees, at the expense of the client.

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Non-traded real estate investment trusts (“REITs”), such as KBS REIT I (“KBS I”), unlike exchange traded REITs, are complex and risky investment vehicles that do not trade on a national securities exchange such as the NYSE or NASDAQ.  Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs, meaning that investors who wish to sell their shares can only do so through a direct redemption with the issuer or through a fragmented and illiquid secondary market.

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Apartment Building

KBS I launched through its initial public offering (“IPO”) in early 2006 for issuance of up to 200 million shares.  Through its IPO at $10 per share, KBS I raised $1.7 billion prior to closing in May 2008.  The company’s portfolio includes nearly 200 properties, in addition to participation in various real estate loan receivables.

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A FINRA arbitration panel awarded $1 million to an investor whose portfolio was over-concentrated in UBS Puerto Rico closed-end bond funds. The 66 year-old conservative investor reportedly “lost $737,000 of his nearly $1 million portfolio when the value of UBS’ Puerto Rico municipal bond funds collapsed in the fall of 2013.”

15.6.11 puerto rico flag mapWhen the client expressed his concern about his declining account, he was told “even a skinny cow could give milk.” The arbitration panel wrote that the investor’s portfolio was “clearly unsuitable” and provided a lengthy explanation for their award, which pointed the finger at UBS’s sales practices and alleged that brokers were under pressure to sell the closed-end funds and keep clients in them. The arbitration panel wrote that “Claimant’s lifetime pattern has been one of frugality, saving and employment of resulting capital and his own labor in business opportunities that he understands can earn a good return.”

UBS was ordered to pay $400,000 to buy back the investor’s portfolio and pay $600,000 in compensatory damages. The investor’s request for $1 million in punitive damages was reportedly denied by the arbitration panel. The FINRA award is accessible here ubs puerto rico.

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Inland American REIT has changed its name to Inventrust Properties Corp. In addition, the Company’s SEC fillings report a recent tender offer of $2.00 per unit from Mackenzie Realty. The $2.00 a share tender offer represents a sharp dropoff from Inland American’s initial offering price of $10.00 a share.

15.6.11 building explodesInland American is an enormous company- the largest of the giant non-traded REITS. The Company had raised a total of approximately $8.0 billion of gross offering proceeds as of December 31, 2008.

Inland American is a non-traded REIT, meaning that its shares are not listed on a national securities exchange. However, sales of shares in non-traded REITs, which file periodic reports with the Securities Exchange Commission as do listed companies, are not limited to accredited investors and shares are sold to the general public through brokers.

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Raymond J. Lucia Sr., an investment advisor who hosts a nationally syndicated radio talk show, has been accused of misleading investors with claims that his “Buckets of Money” strategy helps retirees “generate inflation-adjusted income for life.” The Securities and Exchange Commission (“SEC”) accused the San Diego radio personality of misleading investors by misleadingly exaggerating the historic returns and claiming that his “Buckets of Money” strategy helps retirees “generate inflation-adjusted income for life.”

Lucia, whose radio program is broadcast daily in most of the nation’s top markets, promotes his investment program at seminars held at upscale resorts throughout the country. Some of those seminars are reportedly co-hosted by financial columnist and actor Ben Stein, who has called Lucia “the best wealth manager I know.”

The SEC proceeding (Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company act of 1940 (Exchange Act Release No. 67781, Administrative Proceeding File No. 3-15006 (“Order”)) alleges that Raymond J. Lucia Companies, Inc. (“RJL”) and Lucia presented materially misleading information at a series of investment seminars RJL and Lucia hosted for potential clients.

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