An elderly couple has been awarded $1.4 million by an arbitration panel of the Financial Industry Regulatory Authority (FINRA) in a claim involving sales of two tenant-in-common exchanges (TICs). The TICs were sold by former LPL broker David Glenn. The investors, Heinrich and Araceli Hardt, have gone on to file a separate lawsuit against the sponsor of the two TICs, Direct Invest LLC.
The award contained several allegations by the Hardts, including federal securities fraud and elder abuse.
A TIC is an investment in real estate whereby two or more parties own a fractional interest in a particular property. In 2002, TICs discovered new-found popularity after a change in an Internal Revenue Service ruling gave investors the ability to defer capital gains on real estate transactions involving an exchange of properties.
Turmoil in the economy has caused financial issues for several TICs and their sponsors in recent years. One leading TIC sponsor, DBSI Inc., filed bankruptcy protection in 2008. Since then, a number of broker/dealers involved in DBSI deals have found themselves at the center of arbitration complaints filed by investors.
In the Hardts’ case, the broker behind the TICs left LPL in 2010; he is now affiliated with United Planners’ Financial Services of America, according to a Feb. 14 article by Investment News.
“When these deals were structured, they used tricks,” stated the attorney representing the Hardts in the Investment News article. “A euphemism known as a “yield enhancement” for the TICs relied on “borrowed money” and “returning investors’ money back to them.”
The two TICs in question apparently produced distributions for only a couple of years. By the end of 2009, the Hardts say they stopped receiving payments on both of their TIC investments.
According to the lawsuit, documents for the private-placement offerings by the sponsor, Direct Invest, “contain multiple false and misleading statements regarding the strength and experience of the manager and property manager, the stability of the cash flows, the potential for appreciation, the superiority of the location, the nature and strength of current projected conditions for the greater Boston office market, the strength of the leases and their corresponding projections, the building fundamentals, the use of proceeds, and the purchase price in relation to the replacement cost.”