Monthly Archives: July 2013

For the second time in less than a week, another broker/dealer announced plans to suspend sales of American Realty Capital Trust V, or ARC V. As reported July 19 by Investment News, the broker/dealer, National Planning Corp., cited continuing due diligence as the reason for the halt in sales.

Last Friday, Securities America told its registered reps it was no longer offering ARC V because of a risk of overconcentration.

National Planning Corp. said that its concerns over ARC V stem to another American Realty Capital REIT, American Realty Capital Trust IV. In June, that REIT announced plans to purchase 986 properties from an affiliate of General Electric Capital Corp. for $1.45 billion. The majority of those properties are fast-food and casual-dining establishments.

“Due to concerns with style drift, deviations from the prospectus and growing pains, which all have implications for [ARC V], NPC decided to suspend sales” of the REIT, said an e-mail to NPC reps from the firm’s products group. The same e-mail noted that NPC was adding to its selling list another American Realty Capital REIT, the Phillips Edison – ARC Shopping Center REIT II Inc.

“Based upon the GE transaction, the portfolio for [ARC IV] does not match the [REIT’s] stated strategy in terms of the average credit rating of the portfolio,” according to the e-mail. “Additionally, [ARC IV] appears to deviate from the marketed strategy in terms of the types of tenants and adding value through aggregation.”

Citing a risk of over-concentration, a  top broker/dealer, Securities America, has announced that it will no longer sell the non-traded real estate investment trust American Reality Capital Trust V.

Also known as ARC V, the REIT is a big seller. Brokers sold $406.6 million of ARC V between its launch in April through June 30.

As reported by Investment News, an important risk management tactic being implemented by many broker/dealers, including Securities America, is maintaining certain thresholds that limit a firm’s total  investment in any one alternative product or sponsor.

In the past, Securities America has been burned by too many sales of certain illiquid, alternative investment deals. From 2003 to 2007, Securities America was the biggest seller of private placement notes issued by Medical Capital Holdings Inc., which was later revealed to be a $2 billion Ponzi scheme. Securities America brokers sold close to $700 million of the notes. The legal fallout from those sales ultimately resulted in Ameriprise Financial Inc. selling Securities America to Ladenburg Thalmann Financial Services in 2011.

In June, Securities America was one of five broker/dealers to announce settlements with Massachusetts Secretary of the Commonwealth William Galvin over improper sales of non-traded real estate investment trusts and agreed to pay at least $7 million in fines and restitution.

Earlier this week, Advisor Group, which is owned by American International Group, announced it was cutting its selling agreement with Cole Holdings Corp., another leading sponsor of net-lease non-traded REITs.

Advertising for private-placement securities offerings has been given the green light to move forward following approval by the Securities and Exchange Commission (SEC) last week.

In a 4-1 vote, the SEC’s action opens the door for private-equity funds, hedge funds and brokers selling unregistered securities to market the investments to the general public.

Sales will be limited to accredited investors, who are defined as individuals with a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually. Nearly 9 million U.S. households meet the net-wealth criteria to be accredited investors.

As reported July 14 by Investment News, as the general public is introduced to private-securities offerings through advertising, investment advisers are likely to see more demand from clients who want to take advantage of such opportunities. That then puts the onus on advisers to evaluate these often-risky and complex investments and decide whether their clients have the sophistication to thoroughly understand the risks they are taking on.

“It does put more onus on an adviser to make sure someone is an appropriate investor,” said Jennifer Openshaw, president of Finect, a compliant social-media network for the financial industry, in the Investment News story.

“Today, it’s easy to meet the $1 million threshold as an accredited investor,” she added. “But that doesn’t mean they’re sophisticated.”

The SEC’s ruling implements a provision of a law that was enacted in April 2012 – the Jumpstart Our Business Startups Act. The measure eases securities regulations for small companies.

Supporters of the law say it will help entrepreneurs raise capital. Critics, however, contend that the SEC is lifting the advertising ban without including sufficient measures to protect investors. In response to those concerns, SEC Chairman Mary Jo White recently offered a separate regulatory proposal designed to tighten the rules surrounding private-placement solicitation.

The one dissenter of the SEC who voted against dropping the 80-year-old ban on advertising is skeptical about the potential investor safeguards.

“Any protections from today’s proposal will come too late – if they ever come at all – for investors,” said SEC member Luis A. Aguilar. Aguilar added that the SEC is moving “recklessly” and is “allowing fraudsters to cast a wider net” through private-placement advertising.

A. Heath Abshure, Arkansas’ securities commissioner and president of the North American Securities Administrators Association, echoes those sentiments.

“The decision to lift the ban without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection,” Abshure said in a statement.

The culprits behind a massive multimillion-dollar private-placement fraud will soon be heading to jail. On July 3, U.S. District Judge Marcia A. Crone handed down sentences for four former executives of Provident Royalties – a $500 million oil and gas Ponzi scheme that was sold through a network of independent broker/dealers. Unable to pay the litigation costs by investors who later sued over the phony investments, many of those broker/dealers involved with the Provident offerings ultimately were forced to shutter their business.

Brendan Coughlin, 46, and Henry Harrison, 47, were sentenced to 21 months in federal prison. They founded and controlled Provident along with Joseph Blimline, 35, who already had been sentenced to 12 years in prison. Paul Melbye received a sentence of 18 months in prison.

W. Mark Miller, 59, Provident’s chief financial officer and later president, was sentenced to six months in federal prison and six months in home confinement.

In addition, the four executives were ordered to pay $2.3 million in restitution. Each had earlier pleaded guilty to conspiracy to commit mail fraud.

According to the Justice Department, the Provident executives entered into what was essentially a cover-up. Investors lost money due to Blimline’s “manipulation of investor capital prior to his departure in late 2008,” reads a statement from the Justice Department.

“From Jan. 1, 2009, to Feb. 3, 2009, even after discovering what [Mr.] Blimline had done, [Mr.] Coughlin, [Mr.] Harrison, and [Mr.] Melbye failed to disclose the dire state of the company to investors in order to take in an additional $2.3 million, while [Mr.] Miller, who knew that the crime had occurred, authorized lulling payments to investors to conceal the crime from discovery.”

The sentencing of the four men follows a recent announcement by the Securities and Exchange Commission (SEC) approving a rule to allow advertising for private-placement offerings such as the one associated with Provident Royalties. The SEC’s ruling lifts an 80-year prohibition on the practice.

That decision has many concerned. As reported July 11 by Investment News, following the vote, Commissioner Luis A. Aguilar warned that the SEC was moving “recklessly.” He further warned that the regulator’s backing of private-placement advertising would allow fraudsters “to cast a wider net.”

Sales involving alternative investment products sold to elderly investors has an unleashed an investigation by Massachusetts securities regulators into 15 brokerage firms. The firms include LPL Financial LLC, Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services LLC, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade Inc., ING Financial Partners Inc.,  Commonwealth Financial Network, MML Investor Services LLC, Investors Capital Corp., Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc.

As reported yesterday, the Massachusetts securities division has sent subpoenas to the firms being targeted, asking for information on sales of the products to state residents who are 65 or over.  Among the non-traditional investments included on the list:  Oil and gas partnerships, private placements, structured products, hedge funds and tenant-in-common offerings.

Massachusetts is demanding information on any such products that have been sold over the past year, the investors who purchased them, the commissions generated, how the sales were reviewed, and all relevant compliance, training and marketing materials used for marketing and sales purposes.

The firms have until July 24 to respond.

This isn’t the first time that Massachusetts has come down hard on broker/dealers for alleged improper sales of certain alternative investments. In May, the state settled cases involving non-traded REITs with Ameriprise Financial Services; Commonwealth Financial Network; Lincoln Financial Advisors Corp., Royal Alliance Associates; and Securities America. The five firms agreed to pay a total of $6.1 million in restitution to investors, as well as fines totaling $975,000.

In February, Massachusetts reached a similar settlement with LPL Financial, which agreed to pay at least $2 million in restitution and $500,000 in fines related to sales of non-traded REIT investments.

The REIT investigations “heightened my concern that the senior marketplace is being targeted for the sales of these high-risk, esoteric products,” said Massachusetts Secretary of the Commonwealth William F. Galvin in a statement yesterday.

“While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score … large commissions.”

Last week, the Ohio Division of Securities State regulators issued a cease-and-desist order involving the non-traded real estate investment trust (REIT), Steadfast Income REIT Inc., for announcing price changes two months before they took effect.

As reported earlier by Investment News, Steadfast Income REIT disclosed its estimated value of $10.24 per share on July 12, 2012, but continued to sell the shares at a lower value of $10 per share until Sept. 10.

“Steadfast’s decision to publicly announce an offering price increase 59 days prior to implementation of the price increase created a sale period that may have artificially increased investor demand for its securities,” said the cease-and-desist order, which does not prohibit sales of the REIT in Ohio but calls a halt to the valuation practice.

The Steadfast Income REIT focuses on multifamily real estate and apartment houses, and has more than $690 million in total assets. The REIT was launched in 2009.

Announcing future valuation changes of a REIT can hurt shareholders because it undercuts the REIT’s current value, industry observers say.

“It creates a window for a discounted sales price,” according to Mark Heuerman, registration chief counsel for the Ohio Division of Securities. “It’s in the best interest of prior shareholders that the REIT sells shares for what it’s worth.”

Ohio does not have the authority to issue fines in such cases, and no restitution to investors was ordered.

Steadfast isn’t the first non-traded REIT to issue a new share valuation and then wait a period of time to change it. Earlier this year, real estate investor Tony Thompson attempted to ramp up sales for his TNP Strategic Retail Trust by highlighting the REIT’s rising valuation and lower per-share price.

In a note to broker/dealers at the beginning of January, Thompson stated the REIT’s current net asset value as 6% higher than its share price. “As of Nov. 9, 2012, estimated NAV increased to $10.60. Shares continue to be offered at $10,” the note said.

In March, the REIT halted paying dividends to investors. Today, Thompson is under investigation by the Financial Industry Regulatory Authority (FINRA) for allegedly failing to turn over documents to the regulator.