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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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.

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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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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).

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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" »

The four top selling nontraded real estate investment trusts have either closed or say they intend to close soon. This has left industry participants wondering whether new players will be able to fill the void. “As top nontraded REITs close, doubt over new ones,” InvestmentNews). Industry participants apparently believe the $9 billion nontraded REITs market is still popular with investors. But that may not be the case for long as negative press reports, well-publicized disciplinary actions and investor arbitration claims have increased investors’ awareness of the risks of these alternative investments. In fact, Registered Rep Magazine, a publication geared to brokers, recently published an article reporting that the securities industry is beginning to take notice of these storm warnings in the nontraded REITs arena. (“NonTraded REITs Raising Red Flags in the Industry,” Registered Rep).

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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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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.

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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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Morningstar reportedly will begin covering nontraded real estate investment trusts (REITs) next year, according to InvestmentNews. Morningstar has not decided whether to use its star-ratings system, but said it is a “strong possibility.” The independent research giant for mutual funds is expected to bring some transparency to what it described as an opaque and chaotic industry. The question is whether most nontraded REITs can “withstand the light of day?”

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Unfortunately, many investors are experiencing first hand the truism that hedge fund managers rarely outperform the market on consistent basis.

John Paulson, the hedge fund manager who made a killing when Goldman Sachs let him select bad CDO assets, which he turned around and bet against, is having a tough time in 2011. His hedge fund has declined nearly 50% this year as a result of a massive positions in Bank of America, which had lost half of its value by October, Rupert Murdoch’s scandal-plagued News Corp., which owns Fox News, and Sino-Forest Corp., which imploded after an accounting scandal.

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Many investors in alternative investments are in for unpleasant surprises. Alternative investments are very popular these days, as traditional stock and bond investments are not doing well. Alternative Investments include a wide variety of investments that fall outside the traditional stock and bond categories. Examples include structured products (such as principal protected notes and reverse convertibles); hedge funds; private equity; nontraded REITs; niche, leveraged, inverse leveraged, and synthetic exchange traded funds; and many others.

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Recent evidence indicates that investors were misled about the “income” being generated by non-traded Apple REITs. Brokers at David Lerner Associates regularly represented to investors that the Apple REITs were safe, conservative investments that would protect savings from the volatility of the stock market and had produced steady, annualized returns in the neighborhood of 7% to 8%. A recent expert report, however, concluded that the Apple REITs consistently paid distribution using borrowed fund or funds received from investors – effectively recycling investors’ funds back to them as “distributions.”

Continue reading "Lerner Cases Reveal Some of the Abuses Associated with Non-Traded REITs" »