Thursday, September 5, 2013

Five Broker-Dealers Ordered to Pay over $10 Million in Restitution for Non-Traded REIT Sales

By Tim Husson, PhD

Back in May, Massachusetts securities regulators ordered five independent broker-dealers to pay over $6 million in fines and restitution for improperly selling non-traded REITs.  It also settled separately with another broker-dealer, LPL Financial, for an additional $2.5 million.  Just yesterday, Secretary of the Commonwealth William Galvin announced an additional settlement with the same five broker-dealers for an additional $10.75 million in additional restitution for improper sales of non-traded REITs.
“These investments are popular, but risky,” Mr. Galvin said in a statement. “Our investigation showed widespread problems with adherence to the firms' own policies as well as the state rule that an investor's purchase of REITs cannot be more than 10% of that person's liquid net worth.”
Interestingly, the distribution of fines and restitution payments is very different between this settlement and the one in May.  In particular, Securities America was leveled with a much higher restitution payment.

Firm May
Ameriprise Financial Services Inc. $2.530 million $400,000 $1.6 million
Commonwealth Financial Network $2.074 million $300,000 $0.534 million
Securities America Inc. $0.778 million $150,000 $7.7 million
Lincoln Financial Advisors Corp. $0.504 million $100,000 $0.841 million
Royal Alliance Associates Inc. $0.059 million $25,000 $0.125 million
$5.945 million $975,000 $10.75 million

Looking at the May signed consent orders, Securities America was found to have sold $6.5 million in shares of four non-traded REITs:  Inland Retail Real Estate Trust, Inland Western Real Estate Trust, Inland Diversified Real Estate Trust, and the largest non-traded REIT by total assets, Inland American Real Estate Trust, which we have discussed specifically.  Securities America was found to have sold these shares in violation of concentration limits and other securities laws.

Non-traded REITs are risky, high cost, illiquid investments that are in many ways inferior to publicly traded REITs and real estate mutual funds -- please see our research paper for more details.  Nonetheless, the non-traded REIT industry is on pace to sell $17 billion in shares this year, potentially its biggest year yet, suggesting that broker-dealers are still aggressively marketing these problematic investments.

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