Monday, September 22, 2014

Monogram Residential Trust’s Proposed Listing is Further Evidence That Even the Non-Traded REITs Winners Are Losers

The non-traded REIT, Monogram Residential Trust, rebranded from the Behringer Harvard Multifamily REIT I this April, is “exploring a potential listing on a national securities exchange”, Monogram’s CEO Mark Alfieri wrote in a letter to investors last month. Monogram’s managers and senior advisors are optimistic that such a liquidity event will “maximize shareholder value”. They claim that the REIT’s main problem has been a lack of monetization. We disagree. 

We have analyzed all of Monogram’s SEC filings and applied the gross proceeds, distributions, and other cash flows to a liquid, low cost benchmark using the same methodology we have used previously. Including all $162 million in distributions, we found that investors would have been $629.5 million better off had they invested these funds in the benchmark. Once again, liquid, low cost traded REIT funds are a superior investment when compared to illiquid, fee-laden non-traded REITs.

Using Vanguard’s liquid, diversified mutual fund of traded REITs (ticker: VGSIX) as a benchmark, we plotted the values of the accumulating net investments in both Monogram and Vanguard. The figure below shows our estimate of the value that investors in Monogram would have had if they had instead been invested in Vanguard. The orange dots represent stated Monogram valuations.
As of August 12 (Monogram’s most recent SEC filing) the REIT was valued at $1.76 billion. On the same date, the accumulated money invested by Monogram’s investors would have been worth close to $2.4 billion if they had been made in Vanguard’s traded REIT index.
We have written extensively on the dangers of non-traded REITs in the past, and we do not believe that Monogram’s performance sets it apart. Investors would be well-advised to stay away from non-traded REITs, including Monogram Residential Trust.


Friday, September 19, 2014

Enforcement Actions: Week in Review

SEC Charges Eight for Roles in Widespread Pump-And-Dump Scheme Involving California-Based Microcap Company, September 18, 2014 (Litigation Release No. 23087)
Charges were filed against eight individuals cooperating in what the SEC alleges is a “pump-and-dump scheme involving a penny stock company…that has repeatedly changed its name and purported line of business over the past several years.” The SEC named Izak Zirk de Maison and Angelique de Maison as the key organizers of the scheme, and obtained an emergency court order to freeze the de Maison's assets, as well as the assets of the other six individuals that the de Maisons brought into the enterprise. The SEC’s investigation is slated to continue in conjunction with investigations by the US Attorney’s Office for the Northern District of Ohio, the FBI’s Cleveland Division and FINRA. The US Attorney and the FBI announced criminal charges against Zirk de Maison on September 18 as well.
SEC Charges It Employee At Law Firm with Insider Trading Ahead of Merger Announcements, September 18, 2014 (Litigation Release No. 23086)
Insider trading charges were filed against Dimitry Braverman, a senior IT worker at Wilson Sonsini Goodrich & Rosati. According to the SEC, Braverman “had access to nonpublic information in the firm's client-related databases and garnered more than $300,000 in illicit profits by trading in advance of merger announcements.” The US Attorney’s Office for the Southern District of New York announced parallel criminal charges against Braverman. The SEC investigation will continue in conjunction with the US Attorney, the FBI, FINRA and Options Regulatory Surveillance Authority.
SEC Obtains Asset Freeze Against Company in Turks and Caicos Islands Behind South Florida-Based Ponzi Scheme, September 16, 2014 (Litigation Release No. 23085)
The SEC obtained an emergency asset freeze against Abatement Corp. Holding Company Limited, a company based in Turks and Caicos Islands. The SEC alleges that Abatement Corp. and its late principal Joseph Laurer “falsely promised investors safe, guaranteed returns while engaging in an offering fraud and Ponzi scheme from November 2004 until Laurer's death on May 15, 2014.” The SEC also named Laurer’s widow Brenda Davis and International Balanced Fund, another company run by Laurer, as relief defendants, due to their receipt of investor funds. Allegations include the complaint that Abatement Corp. defrauded about 50 investors in South Florida of more than $4.6 million. The SEC is in the process of litigation, and is working with FINRA as well as the Turks and Caicos Islands Financial Services Commission.
Court Orders Joseph D. Stilwell to Testify in Response to SEC Investigative Subpoena, September 16, 2014 (Litigation Release No. 23084)
After filing an application to enforce its investigative subpoena on August 13, the SEC announced that the US District Court for the Southern District of New York had entered an order requiring Joseph D. Stilwell to testify. The SEC is investigating whether Stilwell’s company, Stilwell Value, LLC, violated anti-fraud securities laws. The Commission is still in the process of conducting a fact-finding inquiry and has not made any allegations of misconduct thus far.
SEC Charges Ddbo Consulting, Inc., Calpacific Equity Group, LLC, and Principals with Fraud and Registration Violations, September 18, 2014 (Litigation Release No. 23083)
Civil actions were filed in the US District Court “against individuals and companies behind a boiler room scheme that hyped a company whose new technology was purportedly to be used in the Super Bowl.” This action followed a previous SEC charge against the operators of the scheme, which revolved around pressuring investors to purchase stock in Thought Development Inc. (TDI). The four executives in question, who operate DDBO Consulting, Inc., DBBG Consulting, Inc. and CalPacific Equity Group, LLC, promised investors that TDI’s initial public offering was imminent, although this did not turn out to be the case. More than 110 investors purchased about $1.7 million in TDI shares. In addition to charging the companies, the SEC charged Dean R. Baker, Daniel R. Baker, Bret A. Grove and Demosthenes Dristas, all of whom agreed to settle. The US Attorney’s Office for the Central District of California has announced criminal charges against Daniel Baker and Demosthenes Dristas.

Monday, June 16, 2014

United Development Funding IV Left Investors $34.8 Million Worse Off

By Craig McCann, PhD, CFA

On Wednesday last week, another non-traded REIT listed on a public exchange. United Development Funding IV (ticker: UDF), which sold as a non-traded REIT for $20 per share, closed its first day of trading on the NASDAQ at $19.60. As we have argued extensively in the past, we think that non-traded REITs are a very bad deal for investors, and UDF IV was no exception.

We have gone through all of UDF IV’s SEC filings and applied the gross proceeds, distributions, and other cash flows to a liquid, low cost benchmark using the same procedure we have used previously. UDF IV raised approximately $647 million from November 2009 to its listing last Wednesday. We find that, including all $54 million in distributions, investors would have been $34.8 million better off had they invested these proceeds in the benchmark. Once again, we find that liquid, low cost traded REIT funds to be superior to illiquid, fee-laden non-traded REITs.

However, UDF IV is unique in one respect. Unlike most other non-traded REITs, UDF IV’s assets consist almost entirely of loans to real estate developers rather than properties. This type of REIT is typically called a mortgage REIT (though the holdings may not consist only of mortgages), which are not uncommon amongst traded REITs. Mortgage REITs differ from property-holding REITs because they are sensitive to different risk factors: while property-owning REITs are sensitive to the market value of their properties, mortgage REITs are much more sensitive to interest rates and credit risk.

For this reason, the benchmark we have chosen for UDF IV is not the broadly diversified Vanguard Real Estate Index Fund we chose for most other non-traded REITs. Instead, we chose the iShares Real Estate Mortgage Capped Fund (ticker: REM), an exchange-traded fund that invests in mortgage REITs. This benchmark better reflects the risks and returns of real estate loans, rather than properties. Had we used the Vanguard fund, the shortfall would have been $98.8 million rather than $34.8 million.

UDF IV Shortfall to Traded REIT Benchmarks

While REM has had lower returns than the Vanguard fund over this period, UDF IV has done even worse. We will say it again: if investors want real estate exposure in their portfolio, there is no reason to choose illiquid, high-cost non-traded REITs. The alternatives are almost always superior.

Friday, June 6, 2014

Enforcement Actions: Week in Review


SEC Obtains Final Judgment Against Charles J. Dushek, Charles S. Dushek, and Capital Management Associates, Inc.
, June 5, 2014, (Litigation Release No. 23015)

Final judgments have been entered against Charles J. Dushek, Charles S. Dushek, and their investment advisory firm, Capital Management Associates, Inc., for their involvement in a "cherry-picking" scheme that "garnered the Dusheks nearly $2 million in illicit profits." The final judgment permanently enjoins the defendants from future violations of the securities laws, orders them to pay over $2.6 million in disgorgement, prejudgment interest, and civil penalties combined. Additionally, the judgment bars the Dusheks from association "with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization" and names Margaret Dushek as a relief defendant, requiring her to disgorge over $1.8 million.

Court Enters Default Judgment Against SEC Defendant Malcolm Stockdale, June 4, 2014, (Litigation Release No. 23014)

A final judgment has been entered against Malcom Stockdale for his alleged involvement with Guiseppe Pino Baldassarre and Robert Mouallem in "a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Dolphin Digital Media, Inc." The judgment orders him to pay over $72,000 in penalties, disgorgement, and prejudgment interest, imposes a penny stock bar against him, and enjoins him from future violations of the securities laws. $22,978.55 of the amount Stockdale was ordered to pay has been "deemed satisfied by the forfeiture orders entered against Stockdale and his co-defendants in a parallel criminal action."

SEC Obtains Judgment Against Georgia Man Charged with Insider Trading, June 4, 2014, (Litigation Release No. 23013)

A judgment has been entered by consent against Earl C. Arrowood, who allegedly "traded on the basis of material, non-public information regarding a potential merger of Matria Healthcare, Inc." The order permanently enjoins Arrowood from future violations of the securities laws and orders him to pay over $22,000 in disgorgement, prejudgment interest, and a civil penalty. Charges have voluntarily been dismissed against Arrowood's co-defendant, Parker H. Petit.

SEC Charges Albany, N.Y.-Based Investment Adviser with Defrauding Clients, June 4, 2014, (Litigation Release No. 23012)

An emergency enforcement action was filed to halt ongoing fraud by an investment adviser, Scott Valente, who allegedly lied "to clients about the success of their investments" raised through his firm, The ELIV Group LLC, "while stealing their money for his personal use." Additionally, Valente failed to tell his clients that he was expelled from the broker-dealer industry in 2009 by FINRA and he has filed for bankruptcy twice. The complaint (PDF) charges the defendants with violating the Exchange Act and Investment Advisers Act and seeks a temporary restraining order to freeze assets, as well as a final judgment that would order the defendants to pay disgorgement, prejudgment interest, and financial penalties.

Jury Finds T. Bradley Strickland, Peter Black, and Nelson Obus Not Liable for Insider Trading, June 2, 2014, (Litigation Release No. 23011)

Last week, "after a two week trial, a ten person federal jury in New York found T. Bradley Strickland, Peter Black, and Nelson Obus not liable for violating the insider trading provisions of the federal securities laws."