REITs

Texas Ponzi Scams: Oil Co. Owner Is Indicted by a Federal Grand Jury, CEO of Texas First Financial is Charged in Internet-Related Fraud, and Texas REIT United Development Funding Remains in Trouble

Published on: December 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Texas First Financial CEO is Arrested For Fraud

Authorities have arrested Bobby Eugene Guess, an ex-Texas-based registered representative and the CEO and founder of Texas First Financial, for financial fraud. Guess promoted himself as a financial expert through financial seminars and radio promotions in the Dallas-Fort Worth area.

He is accused of running a Ponzi scam online involving two companies—StaMedia Inc., which is a Dallas company, and TenList Inc. According to the Texas State Securities Board, Guess was indicted for money laundering, securities fraud, theft, and taking part in organized criminal activity involving the multi-million-dollar sales of investments in an internet ad company.

Prosecutors contend that Guess and others sold $6M in investment contracts, stock certificates, and notes in Stamedia Inc. Also, he allegedly raised millions of dollars from Stamedia investors from ’14 to ’16 but did not disclose that the company’s net income and revenue were negligible. Investor funds were allegedly used to pay earlier investors the returns they were promised.

American Capital REIT is Accused of Charging Hundreds of Millions of Dollars in Excessive Fees

Published on: October 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A class action securities case brought by stockholders is accusing American Capital Agency Corp. of charging excessive management fees that were given to directors and executive officers as compensation. The real estate investment trust invests in agency mortgaged backed securities “on a leveraged basis.” Because of this, American Capital must pay 90% of profits to investors as dividends.

However, according to William Wall, the lead plaintiff in the REIT case, a number of the individual defendants “improperly funneled” millions of dollars that should have gone to AGNC stockholders. He said that the REIT’s board allegedly forced the company to pay the AGNC Manager “exorbitant” fees in light of the management agreement between the AGNC Manager and AGNC. The fees went to the defendants.

Noting that the REIT’s dividend is a key metric for its success, the class action securities complaint said that in 2012 the board cut AGNC’s dividend by over 50%. The plaintiff said that the board had the contractural right to either end the unfair management agreement or make the AGNC Manager charge fees that were fairer. Instead, AGNC allegedly kept paying the manager over $100M annually even though results were “abysmal.”

FINRA Warns Investors to Be Careful When Considering Public Non-Traded Real Estate Investment Trusts

Published on: October 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In a recent Investor Alert, the Financial Industry Regulatory Authority said that it wants investors to be aware of the risks involved in investing in non-traded real estate investment trusts that are publicly registered. The regulator is also recommending that investors ask the right questions regarding benefits, fees, and features.

Nontraded REITS invest in real estate, must be registered with the SEC, and are required to make regulatory disclosures. Unlike exchange-traded REITs, nontraded REITs don’t trade on a national securities exchange and they usually are illiquid for at least eight years.

High fees may come along with Nontraded REITS. These fees can eat away at returns. Fees could include front-end fees as high as 15% of the per share price.

Texas REIT Gets SEC Wells Notice as Nasdaq Delists Its Shares

Published on: October 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

United Development Funding IV, a Texas real estate investment trust, said that it has received a Wells Notice from the U.S. Securities and Exchange Commission. This is a sign that the regulator’s staff will likely recommend an enforcement action against the mortgage and development REIT. There are individuals connected to the company and its adviser that also received SEC Wells notices.

The UDF REITs have been in trouble for months now, ever since Harvest Exchange, a hedge fund that had a short position in UDV IV shares, published a report about how it believes the company has been run like a Ponzi scam for years. Harvest Exchange claimed that the REIT utilized new capital to pay current investors their distributions, while providing earlier UDF companies hefty liquidity in order to pay earlier investors. The hedge fund noted the earlier companies do not appear to be able to stand on their own without this liquidity from the latest UDF REITs.

UDF IV not only denied the hedge fund’s claims, but also it filed a complaint with the SEC claiming it had been the victim of a securities trading scam in which an investor was building a short stock position to illegally manipulate its shares.

Former ARCP CFO Pleads Not Guilty to Criminal Securities Fraud Charges

Published on: September 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brian S. Block, the ex-CFO of American Realty Capital Properties Inc., now called Vereit, has pleaded not guilty to criminal charges that accuse him making false filings with the SEC, making false certifications, securities fraud, and conspiracy to commit securities fraud. His criminal trial is scheduled for May 2017.

The U.S. Department of Justice had filed the charges against Block earlier this month. He was arrested at his home in September.

According to a statement issued by Manhattan U.S. Attorney Preet Bharara, Block is accused of knowingly misleading the public and doing so through material misrepresentations about a key metric for evaluating the real estate investment trust’s 2014 financial performance. The government claims that Block overstated, by approximately $13M, the “adjusted funds from operations” for that year. As a result, the public thought that ARCP was performing better than how it was actually doing.

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Securities Violations: Raymond James and Robert W. Baird to Pay Fines For Alleged Wrap Fee Compliance Failures, RBC Agrees to Pay $2.5M Over Proxy Statement Disclosures, and Ex- ARCP Accounting Executives Are Accused of Overstating REIT’s Performance

Published on: September 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James and Robert W. Baird Are Charged With Compliance Failures

The Securities and Exchange Commission said that Robert W. Baird and Co. and Raymond James & Associates (RJF) will pay $250K and $600K, respectively, to settle charges accusing them of compliance failures in their own wrap free programs. Both firms resolved the charges without admitting or denying to them. They did, however, consent to the regulator’s orders, which found that they violated the Investment Advisers Act of 1940 and Rule 206(4)-7.

According to the SEC’s investigation, Raymond James and Robert W. Baird did not put into place the necessary policies and procedures that would have allowed them to figure out how much in commissions their clients were charged when sub-advisers “traded away” with a brokerage firm that was not part of the wrap fee programs. As a result, said the regulator, the advisers could not let clients know the “magnitude of the costs” nor did the firm consider these commissions when trying to figure out whether the wrap fee program or sub-advisers were appropriate for clients. Because of this, claims the SEC, some clients did not know that they were paying for more than the single wrap fee for investments that were bundled.

Two ARCP Ex-Accounting Executives Face SEC and Criminal Charges For Allegedly Inflating the REIT’s Performance

Brian S. Block and Lisa P. McAlister are facing criminal and civil charges for allegedly overstating the performance of the American Reality Capital Properties (ARCP), now called VEREIT Inc. The two former ARCP accounting executives are accused of inflating a key metric that investors and analysts used to evaluate the publicly-traded real estate investment trust.

SEC Fines Texas-Based Investment Advisory Firm for Overcharging REIT Clients

Published on: July 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is ordering WFG Advisors to pay a $100K penalty for charging clients too much on their investments business development companies and real estate investment trusts. The Dallas-based firm is the registered investment advisory arm of Williams Finance Group.

According to the regulator, the purported overcharges took place from 1/11 through 8/13. The SEC claims that WFG Advisors had policies and procedures that were inadequate, which kept it from identifying and stopping incidents of overcharging. Because of these inadequacies, including what the regulator considered a lack of technological capabilities, 35 accounts were collectively overcharged $34,640.63 in advisory fees.

The Commission said client’s in the firm’s wrap account program were told that they would be charged a commission to buy alternative investment product interests, including interests in BDCs and REITs. However, there wasn’t supposed to be an advisory fee. Instead, said the Commission, WFG Advisors charged both a commission and an advisory fee. (Forms submitted to the regulator included false statements saying that wrap program participants would not have to pay commissions for transactions that took place in their accounts.)

Massachusetts Fines Seven Broker-Dealers Over Proxy Voting Fraud Involving Realty Capital Securities

Published on: June 23, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Secretary of the Commonwealth of Massachusetts William Galvin is ordering seven brokerage firms to pay $238K in fines for their involvement in the proxy fraud committed by Realty Capital Securities. The broker-dealers are:

· Voya Financial Advisors Inc. (VOYA)
· Invest Financial Corp.
· FMN Capital Corp.
· Platinum Wealth Partners Inc.
· Newbridge Securities Corp.
· TKG Financial
· Pariter Securities

Galvin claims that brokers at the firms worked with RCS to cast the bogus proxy votes involving American Realty Capital Healthcare Trust II and American Realty Capital Trust V—both nontraded real estate investment trusts—and Business Development Corp. of America, which is a nontraded business development company. The state’s securities division claimed that RCS employees pretended to be shareholders so they could cast proxy votes to the benefit of management. The votes were key in the merger between American Realty Corp., which is a Real Capital Securities affiliate, and Apollo Global Management. The deal was linked to a larger deal of $378M between AR Capital and Apollo.

Independent Brokerage Firms that Sold UDF REITs May Be Subject to Arbitration Claims Over Alleged Ponzi Scam

Published on: February 25, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, a number of independent broker-dealers could find themselves in legal hot waters, should investors decide to pursue them through arbitration for selling UDF real estate investment trusts. United Development Funding is under investigation over allegations that the UDF IV was run for years like a Ponzi scam. UDF IV was initially a nontraded real estate investment trust that later became listed as a publicly traded REIT.

The article goes on to name four firms that sold the UDF REITs or private deals to investors: Financial Services Inc., Berthel Fisher & Co., VSR Financial Services Inc., and Centaurus Financial Inc. Other firms also have sold UDF REITs to investors.

The allegations against UDF first surfaced in December in an anonymous post published on Harvest Exchange, an investor website. Among the accusations: that the UDF umbrella demonstrated traits “emblematic” of a Ponzi scam; new capital was used pay existing investors; and newer UDF companies were giving liquidity to earlier UDF companies to pay earlier investors. Noting that a hedge fund had created a short position in UDF IV shares, the company accused the fund of trying to illegally profit by depressing and manipulating UDV IV’s share price.

Recently, J. Kyle Bass of Hayman Capital also published a website about the allegations. On the site, Bass acknowledged that Hayman maintains a short position in UDV IV common stock.
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FINRA Accuses Brokerage Firm of Lack of Supervision in Nontraded REIT Sales

Published on: February 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is accusing VFG Securities of failing to supervise brokers to make sure that clients’ portfolios did not become overly concentrated in illiquid investments. In its complaint against the brokerage firm, the regulator said that from 11/10 to 6/12, VFG made nearly 95% of revenue from the sale of nontraded real estate investment trusts and direct participation programs. An audited financial statement with the SEC said that by 6/30/12, the broker-dealer had nearly $4M in revenues for that past year.

The self-regulatory organization said that VFG Securities owner Jason Vanclef wrote a “The Wealth Code,” which he used as sales literature to market investments in direct participation programs and nontraded REITs, in order to bring potential investors. He purportedly claimed in the book that nontraded REITs and nontraded direct participation programs provide capital preservation and high returns—a claim that is misleading, inaccurate, and not in line with information in the prospectuses for the instruments sold by VFG Securities. Such investments are typically high risk to the extent that an investor may end up losing a substantial part of if not all of his/her investment.

Vanclef also wrote in the book that by investing in the instruments that he recommended, investors stood to earn 8-12% results and consistent returns. FINRA said that he and the firm did not give readers a “sound basis” upon which to assess such claims.

In an interview with Vanclef, InvestmentNews said that FINRA has been “persecuting” him, ever since VFG underwent an exam in 2012. That is the year when the self-regulatory organization started concentrating more of its attention on illiquid alternative investment sales. Vanclef is accusing the regulator of “character assassination.”