Articles Tagged with unsuitable recommendations

Published on:

by

investing in real estate through a limited partnershipRecent pricing on shares of Cole Credit Property Trust V, Inc. (“CCPT V” or, the “Company”) – at reported prices of $17.25-$17.75 – suggests that investors who chose to sell their shares on a limited secondary market may have sustained considerable losses of up to 30% (excluding any distributions received to date).  Formed in December 2012, CCPT V is structured as a Maryland corporation.  As a publicly registered, non-traded real estate investment trust (“REIT”), CCPT V is focused on the business of acquiring and operating “a diversified portfolio of retail and other income-producing commercial properties.”  As of October 31, 2018, the Company’s real estate portfolio consisted of 141 properties across 33 states, with portfolio tenants spanning some 26 industry sectors.

The shares of CCPT V, a publicly registered, non-traded REIT, were offered to retail investors in connection with CCPT V’s initial offering, which was priced at $25 per share.  The Company launched its initial offer in March 2014, and as of the second quarter of 2018, had raised $434 million in investor equity through the issuance of common stock.

Some retail investors may have been steered into an investment in CCPT V by a financial advisor, without first being fully informed of the risks associated with investing in non-traded REITs.  For example, one initial risk that is often overlooked concerns a non-traded REIT’s characteristic structure as a blind pool.  In the case of CCPT V, its blind pool offering means that not only were shares issued to public investors for a REIT lacking any previous operating history, but moreover, CCPT V did not immediately identify any of the properties that it intended to purchase.

Published on:

by

Money in WastebasketOn July 18, 2018, the SEC filed a lawsuit in the District of Connecticut naming Temenos Advisory, Inc. (“Temenos”) and George L. Taylor (“Taylor”) as Defendants and essentially alleging that Defendants made improper recommendations of certain private placement investments to their investment advisory clients.  A copy of the SEC Complaint is accessible here: SEC v Temenos & Taylor 

Temenos, founded by Taylor, is a Connecticut corporation headquartered in Litchfield, CT, with additional offices located in St. Simons Island, GA and Scottsdale, AZ.  Temenos has been registered with the SEC as a registered investment advisor (RIA) since 1999, and is owned by Mr. Taylor and a trust that was purportedly established for purposes of benefiting Taylor’s former business partner.

As alleged by the SEC, prior to 2014, Temenos’ business was largely focused on the sale of traditional financial products to its clientele, including “[m]utual funds, exchange traded funds, variable annuities, and publicly traded stocks.”  Like many RIAs, Temenos charged an advisory fee to its customers based upon a percentage of assets under management.  However, as alleged in the Complaint, beginning in 2014 Temenos began recommending private placement investments to its clients: “Between 2014 and 2017, Defendants placed more than $19 million in investments by their clients and others in [the securities of] four private issuers … And they did so without ever sufficiently examining the marketing claims, financial statements, or business activities of those companies.”

Published on:

by

Money MazeBased upon recent secondary market pricing, investors in certain publicly registered, non-traded business development companies (“BDCs”), may have suffered losses on their illiquid investments.  In the wake of the 2008 financial crisis, many retail investors have been steered into so-called non-conventional investments (“NCIs”), including non-traded REITs and BDCs, often premised upon a sales pitch or marketing presentation from a financial advisor touting the investment’s lack of correlation to stock market volatility and enhanced income via hefty distributions.  Unfortunately, in some instances, investors were solicited to invest in such NCIs without first being fully informed of the risk components embedded in these products.

In January 2017, FINRA issued the following guidance with respect to investments in non-traded NCIs:

“While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.”

Published on:

by

financial charts and stockbrokerOn January 8, 2018, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“2018 Letter”).  The purpose of this letter is to highlight certain issues of importance to FINRA in the upcoming year, and serves as a useful guidepost for industry professionals and investors, alike.  Included among the areas of concern addressed in the 2018 Letter is the increased prevalence of so-called securities backed lines of credit, or SBLOCs.

Given the current bull market that is currently approaching nine (9) years in age, it should come as no surprise that many brokerage firms and their registered representatives have heavily marketed SBLOCs to their clientele.  The sales pitch in a rising market such as this is relatively simple: you may tap into the value of your investment portfolio in order to readily access cash in the form of an SBLOC, without the need to sell out of any investment holdings, thereby ensuring continued upside appreciation in the value of your investment portfolio.  Such a marketing pitch, while logical, often downplays the risks associated with a SBLOC and its use of leverage against collateral that can rapidly deteriorate in value.

Put simply, SBLOCs are non-purpose in nature, meaning that such loans are not used to purchase more securities, and are thus distinguishable from traditional margin loans.  Despite the fact that SBLOCs are non-purpose — and may be utilized for any number of ends, including for example creating liquidity for the purchase of a home, paying tuition, or financing the purchase of a car — FINRA has recently expressed concern over the risks associated with SBLOCs.

Published on:

by

financial charts and stockbrokerInvestors in Business Development Corporation of America (“BDCA”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if a broker or financial advisor made the recommendation to invest in BDCA without a reasonable basis, or misled the investor as to the nature of the investment.  BDCA is a non-traded business development company headquartered in New York, New York.  As a business development company (“BDC”), BDCA focuses on providing flexible financing solutions to various middle market companies, including first and second lien secured loans and debt issued by mid-sized companies.

As an investment vehicle, BDCs first emerged in the early 1980’s following legislation passed by Congress making certain amendments to federal securities laws.  These legislative changes allowed for BDC’s — types of closed end funds — to make investments in developing companies and firms.  Many brokers and financial advisors have recommended BDCs as investment vehicles to their clientele, touting the opportunity for retail investors to earn enhanced dividend income while participating in private-equity-type investing previously unavailable to the average retail investor.

While BDCs may arguably offer an attractive investment opportunity, non-traded BDCs, such as BDCA, are very complex and risky investment products.  Non-traded BDCs, as their name implies, do not trade on a national securities exchange, and are therefore illiquid products that are hard to sell (investors can typically only sell their shares through redemption with the issuer, or through a fragmented and illiquid secondary market).  Further, non-traded BDCs such as BDCA have high up-front commissions and fees (typically as high as 10%), which are apportioned to the broker, his or her broker-dealer, and the wholesale broker or manager.

Published on:

by

Building DemolishedAs we discussed in a recent blog post, investors in American Realty Capital Healthcare Trust III Inc. (“ARC HT III”) may be able to recover losses on their investment in FINRA arbitration.  Sponsored by AR Global, ARC HT III is a publicly registered non-traded real estate investment trust (“REIT”) based in New York, NY.  As its name implies, this non-traded REIT is primarily focused on investing in healthcare-related assets including medical office buildings, seniors housing and other healthcare-related facilities.

ARC HT III raised approximately $168 million in investor equity prior to cancellation of its offering, due in large part to a series of scandals concerning AR Global.  As recently as July 2017, ARC HT III announced an estimated net asset value (“NAV”) per share of $17.64.  Investors who participated in the offering bought in at $25 per share.  Additionally, on July 18, 2017, the ARC HT III Board determined that it would cease paying distributions beginning in August 2017.

One of the risks associated with investing in non-traded REITs concerns the viability of the distribution payment.  At its discretion, the board of a non-traded REIT may well decide to substantially reduce, or altogether suspend, payments of distributions to investors.  This is troubling, particularly because many investors are advised to purchase non-traded REITs as a means of earning enhanced income.  Another risk associated with investing in non-traded REITs has to do with their high up-front commissions, typically between 7-10%.  In addition, non-traded REITs like ARC HT III generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.  These fees act as an immediate ‘drag’ on any investment and can serve to compound losses.

Published on:

by

Apartment BuildingAmerican Finance Trust (“AFIN”), formerly known as American Realty Capital Trust V, Inc., is a publicly registered non-traded real estate investment trust (“REIT”) that is based in New York, NY.  Incorporated on January 22, 2013 as a Maryland REIT, AFIN is a diversified REIT with a focus on retail properties.  As of September 30, 2017, AFIN owned a total of 517 properties.  Because AFIN is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

AFIN commenced its initial public offering in April 2013, which closed approximately six months later, raising $1.6 billion in investor equity.  Investors who participated in the IPO paid $25 per share.  In February 2017, AFIN completed a merger with another affiliated non-traded REIT: American Realty Capital – Retail Centers of America.

Non-traded REITs pose many risks that may not be readily apparent to investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments.  One significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%.  In addition to high commissions, non-traded REITs like AFIN generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.  Such high fees (perhaps as high as 13-15%) act as an immediate ‘drag’ on any investment and can serve to compound losses.

Published on:

by

stock market chart As part of its ongoing regulatory focus on variable annuity (“VA”) sales misconduct, the Financial Industry Regulatory Authority (“FINRA”) has recently barred a former Next Financial Group (“Next Financial”) (CRD# 46214) broker.  Registered representative JoeAnn Walker (CRD# 2210194) was previously affiliated with Commonwealth Financial Network (1998-2006), LPL Financial LLC (2006-2015), and most recently, NEXT Financial – until her termination by her former employer in October.  According to FINRA, it was conducting an inquiry into whether Ms. Walker was engaging in possible unsuitable VA sales practices.

As we have discussed in several recent blog posts, FINRA has ramped up its efforts in recent months to target VA sales practice misconduct.  Since handing down a $20 million fine against MetLife Securities, Inc. (“MSI”) in May, 2016 (in addition, FINRA ordered MSI to pay $5 million to customers in connection with allegations of making negligent material misrepresentations and omissions on VA replacement applications), FINRA enforcement has continued to fine numerous member firms and investigate certain financial advisors concerning variable annuity sales practice issues.

In particular, FINRA has targeted brokers recommending unsuitable VAs, in the first instance, as well as recommending the sale of one VA for another in order to generate commissions (a practice akin to churning, and commonly referred to as “switching”).  According to publicly available information through FINRA, Ms. Walker has three prior customer complaints, each of which resulted in a settlement.  Most recently, in March 2016, a customer initiated a dispute against Ms. Walker, alleging “… unauthorized sales of various stocks, unauthorized and unsuitable purchases of variable annuities and unauthorized mutual fund switches between June 2014 and June 2015.”  That FINRA proceeding alleged damages of $208,764 and ultimately settled for $175,000.

Published on:

by

https://i1.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2017/08/15.11.17-flying-money-1.jpg?resize=300%2C270&ssl=1
If you have invested in HMS Income Fund (“HMS”) upon the recommendation of your financial advisor, you may be able to recover your losses through arbitration before the Financial Industry Regulatory Authority (“FINRA”).  A Maryland corporation formed in 2011, HMS is sponsored by Hines Interests Limited Partnership (“Hines”).  HMS is structured as a closed-end management investment company, and pursuant to the Investment Company Act of 1940 operates as a public, non-traded business development company (“BDC”).  HMS’s business focuses on providing mezzanine debt and equity financing to various private middle market companies.  As of June 30, 2017, HMS has provided debt financing to 119 companies across a spectrum of industries.

 
As an investment vehicle, BDCs have been available since the early 1980’s (when Congress enacted legislation making certain amendments to federal securities laws allowing for BDC’s to make investments in developing companies and firms).  Frequently, financial advisors have recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing.  Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield.

 
Traded BDCs that are listed (and thus sold and resold) on national securities exchanges may offer an attractive investment opportunity (although with enhanced dividend yield comes additional risk).  However, non-traded BDCs are altogether different, and should be regarded as risky, complex and illiquid investment products.  As their name implies, non-traded BDCs do not trade on a national securities exchange, and are therefore illiquid products that are difficult to sell.  Typically, investors can only sell their shares through redemption with the issuer, or through a fragmented and inefficient secondary market.  Moreover, non-traded BDCs such as HMS usually have high up-front fees (typically as high as 10%), which are paid to the financial advisor selling the product, his or her broker-dealer, and the wholesale broker or manager.

Published on:

by

With increasing frequency retail investors are encountering scenarios in which they are offered an opportunity to invest in a private placement. A private placement – often referred to as a non-public offering – is an offering of a company’s securities that are not registered with the Securities & Exchange Commission (“SEC”). Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration applies.

DISTINGUISHING A PRIVATE PLACEMENT FROM OTHER INVESTMENTS

When an investor decides to purchase shares in a publicly traded company, or for that matter purchase shares in a mutual fund or exchange traded fund (“ETF”), he or she will have the opportunity to first review a comprehensive and detailed prospectus required to be filed with the SEC. When it comes to a private placement, however, no such prospectus need be filed with the SEC – rather, these securities are typically offered through a Private Placement Memorandum (“PPM”).