REITs

National Planning Holding Temporarily Stops Selling American Reality Capital Properties’ Nontraded REIT sales After Disclosure of $23M Accounting Error

Published on: October 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

National Planning Holding, a broker-dealer network, says that it has temporarily stopped offering American Realty Capital Properties Inc.’s (ARCP) non-traded real estate investment trusts for sale. The move comes after the real estate investment trust, run by Nicholas Schorsch, disclosed a $23 million accounting mistake. American Realty Capital is the top sponsor of nontraded REITs. Schorsch is its chairman.

The National Planning Holding suspension impacts just one Schorsch product, the Phillips Edison – ARC Grocery Center REIT II. This is a new REIT with about $207 million in total assets.

The four brokerage firms who are temporarily suspending sponsorship and distribution of the nontraded REITs by American Realty Capital Properties and its affiliates are SII Investments Inc., National Planning Corp, Investment Centers of America Inc., and INVEST Financial Corp. They are asking for Realty Capital Securities, the wholesaling broker-dealer for ARC products, to return unprocessed sales orders from INVEST advisers. They don’t want the brokerage firm to process related new business.

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm

Published on: October 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

James “Jeb” Bashaw, the former star financial adviser at LPL Financial (LPLA) from Texas is now registered with International Assets Advisory, a small brokerage firm. LPL Financial fired Bashaw last month over allegations involving selling away. Then, for a while this month, he was with Wunderlich Securities Inc.

Selling away typically involves engaging in private securities transactions sans the required written disclosure or brokerage firm approval. It can also include borrowing from a client, as well as engaging in a transaction that is a potential conflict interest, again without the required disclosure in writing or firm approval.

Responding to the selling away allegations, Bashaw noted that he was “home supervised” and underwent more than a dozen perfect audits while affiliated with LPL. After his firing, Wunderlich took steps to hire Bashaw but there was a delay in transferring his license to the firm. In the end, the broker-dealer and Bashaw reportedly decided not to pursue a working relationship.

SEC Approves Regulations Involving REIT Prices and Arbitration Fraud Intervention

Published on: October 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has approved a Financial Industry Regulatory Authority-proposed rule that would create greater transparency of Nontraded real estate investment trusts. Under the new rule, investors will have to be provided with more information about the costs involved in buying shares of nontraded REITs.

With the existing practice, brokerage firms can list nontraded REITS as having $10/share price. The new rule would obligate broker broker-dealers to include a per share estimated value for an REIT or unlisted direct participation program on customer statements and make other disclosures.

Firms would calculate an REIT or DPP per share estimated value by either using the appraised value methodology or the net investment methodology. The appraised value method involves using the liabilities and assets of the REIT or DPP to determine the valuation upon which the share value would be based. The valuations would have to be conducted at least once a year by a third-party valuation expert. The net investment method involves brokerage firms articulating in customer statements that a portion of return of capital is included in a distribution and that this return lowers the estimated per share value listed on the statement.

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny

Published on: July 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to state regulators, non-traded real estate investment trusts, structure products, and private placements, are some of the financial instruments that the states and insurance regulators are watching closely. First Deputy Commissioner of the Iowa Insurance Division Jim Mumford and Alabama Securities Commission director Joseph P. Borg recently spoke at a panel at the Insured Retirement Institute’s Government, Legal and Regulatory Conference.

Borg noted that a growing number of agents are now selling unlicensed financial products, with insurance agents selling private placements and getting clients away from insurance products and into Regulation 506 of Regulation D. The rule establishes a safe harbor for securities’ private offerings. Such instruments are only supposed to be made available to accredited investors and non-accredited investors that have enough sophistication to be able to assess this type of investment. Agents, however, have tried to circumvent securities laws by claiming that a (nonexistent) attorney gave them a letter stating that the private offering actually wasn’t a security.

Also up for sale lately are self-directed IRAs and promissory notes. Structured products have also been quite popular, although unfortunately, Borg noted, many agents and brokers don’t even understand what they are selling.

Boston Investment Firm Accused of $5 Million Real Estate Investment Fraud Targeting Senior Investors

Published on: June 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The state of Massachusetts has filed a complaint against Cabot Investment Properties and its principals Timothy J. Kroll and Carlton P. Cabot. Secretary of the Commonwealth William F. Galvin is charging the firm with defrauding mostly elderly investors through fraudulent real estate investment sales.

The administrative complaints contends that Massachusetts residents wanting retirement income invested over $5 million in eight tenancy-in-common investments and misappropriated more than $9 million of the investment proceeds. Cabot Investment Properties had bought 18 business centers, malls, and other real estate properties in the US and structured them as securities.

Galvin claims that the respondents committed fraud when offering and selling the securities and made omissions and misrepresentations about their backgrounds and the consequences involved in securitizing the underlying TIC mortgages into commercial mortgage-backed securities. He contends that they misled investors by providing disclosures that downplayed how much liability was involved.

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading

Published on: May 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is postponing when it will send to the U.S. Securities and Exchange Commission its proposed new rules that would give investors a more accurate overview of the costs involved in buying nontraded real estate investment trust shares. The proposed change to NASD Rule 2340, if approved by the SEC, would no longer allow brokerage firms to list a nontraded REIT’s per-share value at the common price of $10, which is the price that they are sold to clients.

Instead, the different fees and commissions that deal managers and brokers are paid would have to be factored in, which would lower each nontraded REIT’s share price in a customer’s account. Independent brokerage firms and their affiliated reps are the ones that would be most affected since practically all they sell is nontraded REITs. Unlisted private placements would also be impacted.

Although the comment period on the proposed rule changes ended in March, FINRA now says that it is not yet done looking at these comments. One group, the Investment Program Association, wants the proposed rule changes—in particular, the one that modifies to the way REIT valuations show up on client statements—delayed until 2015 so that nontraded REIT sponsors and brokerage firms that sell these investments have enough time to make their modifications so they are in compliance.

California Regulators Probe Inland American Real Estate Trust REIT

Published on: May 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The California Department of Business Oversight is looking into the Inland American Real Estate Trust Inc. This is the largest nontraded real estate investment trust with $9.7 billion in assets. Earlier their year, Inland American announced to shareholders that it would become a self-managed REIT.

Inland American is one of the big REITs that experienced a swift drop in valuation when the real estate market crashed in ’07-’08. While the nontraded REIT is currently not under investigation, state regulators want clarification about the offering price in the recent repurchase of shares of the REIT.

In a letter written last month, the department’s corporation counsel Danielle Stoumbos asked why Inland is selling shares at up to $8.03/share in its distribution reinvestment plan when the share price pursuant to the latest tender offer is just $6.10 to $6.50. The state also wants to know how Inland compensates its manager/internal adviser and whether there might be conflicts of interest.

Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules

Published on: March 19, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The non-traded real estate investment trusts industry wants to delay the implementation of the Financial Industry Regulatory Authority disclosure rule until the end of 2015. The rule would require that investors be given more accurate data about the valuation of direct participation programs and non-traded REITs.

This should provide investors with a more accurate picture of how much it costs to buy non-traded REIT shares. Currently, the self-regulatory authority’s proposal would put the rule change into effect at the end of 2014, which would be about six months after obtaining Securities and Exchange Commission approval.

Almost all non-traded REIT vendors are independent brokerage firms. Generating close to $20 billion in sales last year, which is twice as much as the year prior, broker-dealers and their representatives have gotten commission boosts due to their typical 7% commission.

FINRA Awards Nearly $1M in Florida Non-traded-REIT Cases

Published on: February 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has ordered two Retirement Securities Inc. and Sterling Enterprises Group Inc. to pay an individual and two trusts over $900,000 in a Non-traded real estate investment trust case. The individual is investor Kristopher Brownlow and the two trusts are the Martha H. Mason Trust and the Derek Mason Trust. Both Retirement Securities and Sterling Enterprises are no longer registered with FINRA.

The two trusts and Brownlow brought the case to the SRO, contending that they lost money because of the investments that Sterling Enterprises and Retirement Securities recommended to them. Per FINRA documents, the investments were made in REITS offered by Inland American Real Estate Trust Inc. and they were non-tradable. Inland Real Estate Trust Inc. is one of the biggest non-traded REITs with over $11 billion in assets.

At the dispute resolution hearing, the claimants argued that the investment advisors breached their fiduciary duty, were negligent, took part in common law fraud, violated the Florida Securities and Investor Protection Act, and breached contracts. Except for the allegation involving the Florida act, all allegations were thrown out.

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales

Published on: December 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred ex-LPL Financial (LPLA) representative Gary Chakman over securities industry rule violations related to the sale of non-traded real estate investment trusts. Chackman was registered with the brokerage firm from 2001 until 2012. LPL then ended his registration with the firm for purportedly violating its procedures and policies related to alternative investment sales.

According to the SRO, Chackman “recommended and effected” transactions that were unsuitable in several LPL customer accounts. He did this by overconcentrating clients’ assets in illiquid securities, including REITs. Chackman is also accused of falsifying LPL documents to avoid firm supervision and making the broker-dealer’s records and books inaccurate because he turned in purchase forms misrepresenting clients’ liquid net worth.

FINRA’s settlement letter says that when Chackman submitted falsified documents, this allowed him to increase how much of customers’ accounts could be concentrated in REITs and other investments even though these amounts went over LPL’s allowed allocation limits. The alleged overconcentration took place between January 2009 and February 2012.