Monthly Archives: April 2012

Sales of private placements have caused the undoing of another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with the Financial Industry Regulatory Authority (FINRA). Several days later, the B-D proceeded to seek bankruptcy protection.

As reported April 24 by Investment News, a three-member FINRA arbitration panel had previously awarded investor Marvin Blum $445,000 in compensatory damages, $900,000 in punitive damages, $150,000 in attorneys’ fees and $12,000 in costs, as well as interest.

Blum, who was more than 70 years of age at the time he purchased the investments, was sold nine different private placements over 13 months totaling $500,000, according to the Investment News story.

Cambridge Legacy Securities is owned by The Cambridge Legacy Group. According to FINRA’s Broker Check Web site, the company’s chief executive, O. Ben Carroll, is the subject of an investigation by FINRA for failing “to have reasonable grounds to believe that the private placements offered by Cambridge Petroleum Group and Cambridge Legacy Group pursuant to [Regulation D] were suitable for any customer.”

In 2010, FINRA fined Carroll $25,000, as well as suspended his privilege to act as a principal for three months. He no longer is registered with FINRA.

Cambridge Legacy Securities also is no longer in business. However, an affiliated RIA, Cambridge Legacy Advisors, is, according to the Investment News story.

Failed private-placements deals have forced a number of broker/dealers to shutter their businesses over the past year. Much of the demise stems from sales involving private placements issued by Medical Capital Holdings; preferred stock investments sponsored by Provident Royalties LLC; and tenant-in-common exchanges that were manufactured by DBSI, Inc.

In July 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud. On Nov. 8, 2010, DBSI filed for bankruptcy. Since then, many investors have filed arbitration claims with FINRA against the various broker/dealers that sold them the failed products.

Investors who bought a non-traded real investment trust (REIT) called Inland Western at $10 a share are less than pleased these days. That’s because the REIT went public earlier this month at $8 a share. Now called Retail Properties of America (RPAI), the split-adjusted value of the stock is worth less than $3 per share for investors who originally purchased it at $10. By any measure, that’s a huge loss.

By many accounts, it was expected that the pre-IPO target price would be in the $12 range. Even at $11, however, investors in the non-traded REIT were expected to be holding public stock valued at well below their original investment, according to an April 8 article by REIT Wrecks, a Website that tracks the REIT industry.

Most analysts estimated a split-adjusted value of between $4 and $4.80 per share if the company went public at $11.

Even after including the total dividend distributions of nearly $4 per share, accumulated over the full length of the investment period, investors were “only getting 80 cents back on every dollar they invested,” said Michael Stubben, president of MTS Research Advisors, in the REIT Wrecks story.

Problems with the Inland Western/Retail Properties REIT have been in the making for some time now, starting back in 2005 when the fund stopped taking in capital. When the market crashed in 2008, prices of the properties held in the REIT’s portfolio were extremely overvalued. As a result, dividend yields were cut from 6.4% to 1% by 2010.

Meanwhile, investors in the Inland REIT had little recourse. Unlike publicly traded REITs, non-traded REITs are not traded daily on a stock exchange. Non-traded REITs also have limited liquidity, unreliable market valuations, hefty upfront fees and commissions of up to 15%, dividend cuts and suspension of buyback programs. Moreover, an investor’s money in a non-traded REIT is tied up a long, long time, usually up to seven years.

Market valuation and lack of transparency are key sticking points for critics of non-traded REITs. As reported in the REIT Wrecks story, this issue is made all the more apparent in Inland Western’s September 2011 filing with the Securities and Exchange Commission.

Earlier this month, Inland Western Retail REIT, now known as Retail Properties of America, went public, giving investors a first-time look at the value of their investment at a publicly set price. And the news wasn’t what they expected. The Oak Brook, Illinois-based real estate investment trust priced its offering of 31.8 million Class A shares at $8. It had been hoping to sell the shares at between $10 and $12.

Investors in Inland Western have now lost significant amounts of money, about 65% by some reports. Unfortunately, it’s a reality that many non-traded REIT investors know only too well. Several high-profile non-traded REITs also have seen their valuations plummet over the past 12 months, including Cornerstone Core Properties and Behringer Harvard REIT.

Issues surrounding non-traded REITs have met with increased scrutiny in recent years, raising red flags and questions among regulators. In March 2009, the Financial Industry Regulatory Authority (FINRA) officially opened an inquiry into non-traded REITs and the broker/dealers responsible for marketing and selling the products to investors. Among other things, FINRA wanted to determine the suitability of non-traded REIT sales to retail investors and the disclosures made regarding fees, dividends and liquidity.

That same year, FINRA issued a regulatory notice requiring REITs to publish their valuations no later than 18 months following the conclusion of an offering. Then, in October 2011, FINRA issued an investor warning on non-traded REITs, citing the products’ lack of transparency, illiquidity, potential conflicts of interest, risks to an investor’s principal, and high fees.

The plunge in shares of an exchange-traded note (ETN) backed by Credit Suisse Group underscores the growing risks that investors may unknowingly take on when they put their money into these complex financial products. The VelocityShares Daily 2x Short-Term ETN (TVIX), which aims to provide twice the daily return of the VIX volatility index, lost more than 60% of its value last month.

The startling free-fall raises serious questions – most notably whether retail investors who own exchange-traded notes like TVIX truly understand how the products actually work. ETNs are intended for short-term trading. When held for longer periods of time, investors leave themselves exposed to potentially huge financial losses. Unlike exchange-traded funds (ETFs) that have set fees and must alert investors when those fees change, an ETN’s can change daily.

Exchange-traded notes are debt securities issued by banks. The products first arrived on the investing scene in 2006, and were intended to be a mechanism for sophisticated traders to make bets on various market sectors.

State securities regulators, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are now looking into the volatility surrounding the VelocityShares, as well as the marketing efforts of firms that market it and other ETNs to investors.

Proponents of the Jump-Start Our Business Start-Ups, or JOBs Act, contend the legislation will create more jobs by increasing the number of initial public offerings. Critics, however, say the Act is a sure-fire path to more investment fraud.

Under the JOBS Act, regulations would be lessened for emerging growth companies. In loosening those regulations, the doors are opened wide for potential abuse by companies to pump up their financials in order to lure new investors.

The Act also allows something called crowd funding, which permits companies to raise up to $1 million via online solicitations. Another provision in the JOBS Act lessens regulatory oversight by the Securities and Exchange Commission (SEC) and removes certain restrictions designed to protect investors from financial abuse and fraud.

“That is tantamount to putting up a sign saying ‘Swindlers Welcome,’ says an April 5 story in the Huffington Post on the JOBS Act.

The bottom line: Everyone is in favor of creating more jobs and jumpstarting the economy. And while the JOBS Act may sound good on surface, when you peel back the layers, many troubling questions remain.

An April 1 article by Investment News offers insight into the potential downside of non-traded real estate investment trusts (REITs).  Shortly after investor Susan Fox, 63, bought a non-traded REIT – Inland American Real Estate Trust – for her IRA from her broker, it began to decline in value. Her broker, however, dismissed the losses and went on to sell her a second non-traded REIT.

The second REIT, Cornerstone Core Properties REIT, also is tanking in value. In March 2012, the Cornerstone REIT had fallen more than 70% in value – to $2.25 per share, from $8.

Adding to Fox’s financial woes is the fact that the REITs are part of her IRA, which in 2008 had $105,000 in it. The REITs accounted for $56,616 of her account, or almost 54%, according to the Investment News article.

In July 2010, she instructed her broker to sell her non-traded REITs but learned she was unable to do so. That’s because non-traded REITs have specific redemption policies; in most cases, money in non-traded REITs is tied up for seven or more years.

Fox’s dilemma strikes a familiar and painful chord with many non-traded REIT investors.  Non-traded REITs can be highly risky. Because they do not trade on a national stock exchange, non-traded REITs are considered illiquid investments – a fact that many investors, including Fox, are often unaware of until it’s too late.

Non-traded REITs also lack transparency, have limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential downside of non-traded REITs concerns dividends, which are not guaranteed to investors and can be halted at any time. In the past year, a growing number of non-traded REITs have either suspended their dividends or stopped them altogether. Among them: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Apple REITs.