REITs

Securities Fraud: Ex-American Reality Capital Properties CFO is On Trial, Abu Dhabi Investor’s Lawsuit Against Citibank is Revived, and Drivers File Class Action Case Against Juno

Published on: June 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Former REIT CFO’s Criminal Trial is Under Way
Brian Block, the ex-American Realty Capital Properties CFO, is on trial over his alleged involvement in accounting errors that led to the former Nicholas Schorsch-controlled real estate investment trust’s release of inaccurate financial statements during the first two quarters of 2014. As a result of the inaccuracies, ARCP overstated its adjusted funds from operations (AFFO) by about $12M for the end of that first quarter and by about $10.9M for the second quarter while understating its net losses.

This week, Lisa McAlister, a key witness and ARCP’s ex-chief accounting officer gave testimony. She suggested that Schorsch, the REIT’s CEO and chairman at the time, instructed Block on how to distort the number in the books. Block was McAlister’s boss at ARCP.

McAlister said that she was in the room when Schorsch advised Block on how to hide the fraudulent accounting. McAlister said that Schorsch, who has not been charged with wrongdoing in the accounting mistakes, was instructing Block on how to compensate for a 3-cent shortfall in ARCP’s targeted AFFO/share by fudging a certain line item.

McAlister has already pleaded guilty to fraud charges over ARCP’s accounting irregularities.

Securities Cases: David Lerner Associates Settles Nontraded REIT Sales for $700K, RBS Resolves Investor Lawsuit, and HSBC Holdings Settles More Libor Rigging Claims

Published on: May 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

David Lerner Associates to Pay NJ Over Nontraded REIT Sales

David Lerner Associates has agreed to pay a $700K penalty to resolve allegations accusing it of illegally selling nontraded real estate investment trusts in the state of New Jersey. In the consent order from the New Jersey Bureau of Securities, the firm also agreed to pay $50K to a fund for investor education, as well as $100K for costs.

At issue are the nontraded REITs Apple 9, Apple 8, and Apple 7. In early 2014, the three REITs merged together and became Apple Hospitality REIT Inc (APLE). Investors complained to the state regulator about the sale of the three REITs, which raised money to purchase hotels. After the NJ regulator contacted the firm about possible failures in its compliance system related to the sale of the non-traded real estate investment trusts, David Lerner Associates said it would assess its sale of the REITs there.

Investors File Nontraded REIT Fraud Lawsuit Accusing Nicholas Schorsch And Others of Stealing from RCAP

Published on: March 10, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In Delaware Chancery Court, investors have brought a nontraded real estate investment fraud lawsuit against former RCS Capital (RCAP) CEO Nicholas Schorsch accusing him and his partners of enriching themselves by taking revenue from the publicly traded brokerage holding company. The plaintiffs are part of the RCS Creditor Trust. They are unsecured creditors who say they lost all of their investments with RCAP.

It was just last year that RCAP filed for bankruptcy after falling into millions of dollars in debt. It emerged as Aretec, the holding company that controls Cetera Financial Group.

The plaintiffs contend that Schorsch and partners Peter Budko, William Kahane, Brian Block, and Edward “Michael” Well took advantage of their authority at RCAP to enrich AR Capital, which was the nontraded REIT business that they wholly owned.

Purshe Kaplan Sterling Investments Must Pay Native American Tribe $3.4M Over Excessive Sales Charges Involving Nontraded REITs and BDCs

Published on: February 22, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering Purshe Kaplan Sterling Investments (PKS) to pay almost $3.4M in restitution to a Native American tribe. The tribe had paid excessive sales fees for the purchase of Business Development Companies (BDCs) and non-traded Real Estate Investment Trusts (REITs).

Gopi Vungarala was the Purshe Kaplan Sterling registered representative for the tribe from 7/2011 through at least 1/15/15. He was also the tribe’s Treasury Investment Manager at the same time. It was his job was to oversee the group’s investment portfolio.

FINRA’s case against Vungarala in this matter has yet to be resolved. However, Purshe Kaplan Sterling must also pay $750K for its purportedly inadequate supervision of nontraded REIT and BDC sales.

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.