Investment Fraud Lawyer Blog

Inland American Real Estate Trust Inc. is being investigation by the Securities and Exchange Commission according to that firm’s quarterly report. The SEC's investigation is reportedly focusing on fees. Inland American is the industry’s largest nontraded real estate investment trust, and has $11.2 billion in real estate assets. Inland American is one of five REITs sponsored by The Inland American Real Estate Group of Companies Inc.

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The Financial Industry Regulatory Authority (FINRA) is investigating and considering legal action against a “captive” broker-dealer of a real estate investment company for the second time in three years. (See InvestmentNews article by Bruce Kelly entitled “Nontraded REITs’ B-D faces another probe”).

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The U.S. Securities and Exchange Commission is “asking” banks that issue structured notes to improve the accuracy of disclosures to investors, including comparing the sale price to the true (lower) value of the notes at the time of sale. “We believe issuers should consider prominently disclosing the difference between the public offering price of the note and the issuer or its affiliate’s estimate of the fair value,” the SEC said. See “SEC Seeking Fair Value Disclosure From Banks on Structured Notes,” by Matt Robinson, Bloomberg.

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Nontraded REITs are both illiquid and unsafe. Investors are encouraged to be extremely wary of these investments. Recent developments have shown that nontraded REITs haven’t performed as represented.

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Green Street Advisors – the “industry leader in REITs research” –recommends against investing in nontraded REITs. Investors who want exposure to the real estate market would be better off investing in publicly traded REITs, according to a report issued by the firm. (“Nontraded REITs should be a nonstarter for clients: Green Street,” InvestmentNews).

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Much to their dismay, investors in KBS Real Estate Investment Trust I (“KBS REIT I”) recently learned that shares which they purchased for $10 per share now have an “estimated” value of only $5.16. In his March 26, 2012 letter to shareholders, chief executive Charles Schreiber, Jr. also told them that they would no longer receive their monthly distribution payments, which had been reduced to less than $.53 per share.

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Investors in the Cornerstone Core Properties REIT Inc. were recently told by the company that the shares, once valued at $8, are now worth $2.25 (see article in InvestmentNews by Bruce Kelly). The article references a letter from the REIT's chairman and chief executive Terry Roussel, as saying “The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011.”

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The prospect of several more years of extremely low interest rates is causing people who depend on interest income to accept Wall Street’s recommendations to purchase relatively illiquid and opaque alternative investments like structured products, non-traded REITs, hedge funds and variable annuities. (“Itchy Investors Ramp Up the Risk,” Wall Street Journal). Regulators worry that the increased risks associated with such investments are not being explained to investors.

Continue reading "Chasing Higher Yields Involves Taking Greater Risk" »

Could Wall Street’s role in creating the recent financial crisis boil down to something as simple as a conditioned reflex? Apparently so, according to William D. Cohan, a former investment banker. Cohen writes: Wall Street “rewards bankers and traders for the revenue they generate by constantly selling whatever comes across their desks, regardless of its quality, is terribly, terribly broken. People are simple: They do what they are rewarded to do, and they will continue to do that over and over again until they are rewarded to do something else.” “Cohan: Wall Street Confesses to Bonus Culture Ills.”

Continue reading "Wall Street Compensation Systems are the Roots of Many Evils" »

There has been a marked uptick in purchases of high-yield or junk bonds by retail investors. Junk bonds pay a higher interest rate to compensate investors for the increased risks of default, among other risks. So far this year, retail investors are have put $11.8 billion into junk bond mutual funds, $9.9 billion into investment grade bond funds, and $4.8 billion into stock funds (See Wall Street Journal, “Buyers Take a Shine to ‘Junk’”). Mutual fund managers are also buying more junk bonds to enhance returns.

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The Financial Industry Regulatory Authority has issued a Regulatory Notice (12-03, Jan. 2012) to “remind” its member firms of their sales practice obligations with regard to complex products, and to provide them “guidance” in exercising heightened scrutiny and supervision over marketing and sales of complex products. Complex products are not defined in the Notice, but are described as including a host of alternative investments, such as derivative-based products, nontraded REITs, structured notes, inverse or leveraged exchange traded funds, hedge funds, and securitized products like mortgage-backed securities and asset-backed securities.

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The Financial Industry Regulatory Authority (FINRA) recently issued a report outlining is its regulatory and examination priorities for 2012. The securities industry regulator is focusing on conduct and products meant to beat the market that are unsuitable investments for many investors.

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Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).

Continue reading " Most Financial Advisers Don't Understand Alternative Investments According To John Hancock Survey" »

Brokerage firms that sell nontraded REITs reportedly “cringe” at Investor Alerts posted by the Financial Industry Regulatory Authority (FINRA) warning of the dangers of those products. They know that such alerts cause investors “anxiety and concern,” as they learn about the risks that were not disclosed to them by their brokers. Brokerage firms routinely fail to disclose material risks about the nontraded REITs they sell for two reasons: (i) they failed to inform themselves of the risks by conducting appropriate due diligence, and (ii) they don’t want to cause potential investors any “anxiety and concern,” because that would be bad for sales, which pay hefty commissions to the sellers. (“Non-traded REITs face tough scrutiny,” InvestmentNews).

Continue reading "The News Regarding Nontraded REITs Keeps Getting Worse" »

MONEY Magazine identifies nontraded REITs as very risky investments that should be avoided. In the last 10 years, the number of nontraded REITs has exploded into a $9 billion dollar market, as yield hunters piled in. Unfortunately, many investors including, most recently, investors in Behringer Harvard Opportunity REIT I have learned about the problems with these investments the hard way.

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Registered Rep Magazine, a publication geared to brokers, reports that the securities industry is beginning to shun non-traded real estate investments trusts (REITs). Well-publicized disciplinary actions and investor arbitration claims, as well as the hundreds of independent brokerage firm that were forced to close their doors as a result of improper sales of non-traded REITs, have brought an increased awareness of the risks of these alternative investments on the part of investors and the securities industry. (“Non-Traded REITs Raising Red Flags in the Industry,” Registered Rep).

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Broker-dealers that sold billions of dollars in fraudulent private placements, such as Medical Capital and Provident Royalties notes, “failed massively in their due diligence responsibilities to investors” according to Gordon Yale, a CPA and expert witness in securities fraud cases. (See “Private-placement due diligence ‘sloppy,’” Investment News). They grossly misrepresented investigations into the investments and issuers they claimed to have performed, and, in fact, merely relied on self-serving representations made by management that were false and fraudulent.

Continue reading "Expert Contends that Brokerage Firms are Failing to Satisfy their Due Diligence Obligations." »

The Financial Industry Regulatory Authority (FINRA) has fined Wells Investment Securities, Inc. $300,000 for misleading investors about Wells Timberland REIT, Inc., a non-traded Real Estate Investment Trust (REIT). FINRA found that Wells Investment Securities used misleading marketing materials to effect sales of the Wells Timberland REIT.

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When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.

Continue reading "High Correlations Among Asset Classes Means There's No Place To Hide" »

Wells Real Estate Funds, a major nontraded REIT seller, has announced that shares of its Wells REIT II, which investors purchased at a share price of $10, are actually worth an estimated $7.47 per share (“Share value of popular Wells REIT sinks,” InvestmentNews). Clients will see the reduction in the estimated account value on their statements next month. In addition, after raising $5.9 billion from investors, the Wells REIT II only invested $4.7 of the proceeds in real estate, the rest going to commissions, fees and other expenses. In other words, right off the bat, the Wells REIT II was worth about $7.97 per share, rather than $10.

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