A number of non-traded real estate investment trusts (REITs) continue to be a losing investment for investors. Most recently, it’s been Inland Western Real Estate Trust to cause many investors to lose sleep.

In early April 2012, Inland Western went public at $8 a share. For investors who bought Inland Western at its original share price of $10 a decade ago, their investment is now worth approximately $2.90.

The dismal public debut of Inland Western (now renamed Retail Properties of America) doesn’t bode well for future IPOs of non-traded REITs.  As a retail investment, non-traded REITs have taken a beating in the financial media over the past year, with regulators – including the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) – launching repeated inquiries into the broker/dealers who sold the investments to investors.

In addition, FINRA has issued several investor notices on non-traded REITs. In those notices, FINRA highlights a number of concerns: the products’ limited valuation transparency, illiquidity, potential conflicts of interest, risks to an investor’s principal, and the high fees and commission they command.

If you’ve suffered significant losses in non-traded REITs, including Inland Western/Retail Properties of America, Inland American or Behringer Harvard REIT I, contact us to tell your story.

Investors who put their money into Inland Western REIT are just realizing the extent of losses they’ve actually suffered. That’s because the non-traded real estate investment trust (REIT) just went public, giving investors a first-time look at its true worth.

In April, the initial public offering price was set at $8 a share for the Inland Western REIT, now known as Retail Properties of America. The price was well below the expected $10 to $12 pre-offering price. Moreover, some highly complicated reverse-stock-split engineering was required to even reach the $8 mark.

For investors who initially purchased the investment at $10 share a decade ago, the split-adjusted value of their investment following the IPO is less than $3. In other words, those investors lost some 65% of their original investment.

In another unexplained move, Retail Properties decided to offer only a quarter of the shares during Inland Western’s initial public offering. Three follow-up stock sales are planned over the next 18 months.

After the IPO, company president and chief executive Steven Grimes stressed in a letter to shareholders the impact of the economic recession on the real estate industry.

“It is uncertain if and when we will see a full recovery,” he states in the letter.

If you’ve suffered losses in Inland Western/Retail Properties of America, tell us your story. Maddox Hargett & Caruso currently is investigating unsuitable sales of non-traded REITs, including Inland Western, Inland American and Behringer Harvard REIT I.

 

Inverse and leveraged exchange-traded funds (ETFs), which have faced ongoing scrutiny by regulators in recent months, are now garnering the attention of lawmakers on Capitol Hill.

As reported May 3 by Investment News, Sen. Jack Reed, D-R.I., chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, announced that he is continuing to monitor the complex financial products and plans to follow up on a hearing he held last year with another one in the near future.

Earlier this week, leveraged and inverse ETFs took center stage when the Financial Industry Regulatory Authority (FINRA) levied $9.1 million in penalties on four major banks – Citigroup Global Markets, Morgan Stanley & Co., UBS Financial Services and Wells Fargo Advisors – for their role in selling the risky investments to retail clients who, because of their conservative risk profiles, should never have purchased them.

According to FINRA, the brokerages failed to adequately educate their own representatives about the complexities – and inherent risks – of leveraged and inverse ETFs. The same representatives then marketed and sold the products to investors who were uneducated about the potential dangers that inverse and leveraged ETFs hold.

Exchange-traded funds are essentially baskets of investments – stocks, bonds, commodities, currencies and options – that track market indexes. In recent years, however, traditional ETFs have grown increasingly complex, delving into esoteric and risky areas that involve swaps, futures contracts and other derivative instruments.

Leveraged and inverse ETFs are two of the most risky ETFs. Leveraged ETFs are designed to deliver “multiples” on the performance of the index or benchmark they track. Its cousin, the inverse ETF, works in the reverse way by trying to deliver returns that are opposite of an index’s returns.

The problem that many investors make with leveraged and inverse ETFs is that they hold these investments for longer than one single trading day. Leveraged and inverse ETFs are not designed for long-term returns. Rather, their goal is to try and achieve their stated performance objectives on a daily basis. Holding a leveraged or inverse ETF for a longer period of time may result in a financial nightmare.

 

Several of the nation’s leading banks – including Citigroup, Morgan Stanley, UBS and Wells Fargo – were recently sanctioned by the Financial Industry Regulatory Authority (FINRA) for more than $9.1 million over their failure to supervise retail sales of leveraged and inverse exchange-traded funds (ETFs). In addition to supervisory failures, FINRA said the banks failed to have “a reasonable basis” for recommending the products to investors in the first place.

“The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers,” said J. Bradley Bennett, FINRA enforcement chief, in a statement.

“Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products,” he added.

 The break-down of the fines is as follows: 

• Wells Fargo – $2.1 million fine and $641,489 in restitution;
• Citigroup – $2 million fine and $146,431 in restitution;
• Morgan Stanley – $1.75 million fine and $604,584 in restitution; and
• UBS – $1.5 million fine and $431,488 in restitution.

Both the Securities and Exchange Commission (SEC), the North American Securities Administrators Association and FINRA have issued separate and joint warnings to investors about leveraged and inverse exchange-traded funds in recent months. Specifically, regulators are concerned about the increasing complexity of the products, their lack of transparency and their potential to cause significant financial losses to investors who do not thoroughly understand how inverse and leveraged funds actually work.

Leveraged ETFs seek to deliver “multiples” of the performance of the index or benchmark they track. Inverse ETFs do the reverse. They try to deliver the opposite of the performance of the index or benchmark being tracked.

The past year has been a rocky roller coaster ride for many broker/dealers, as the fallout from soured private-placement deals in Medical Capital Holdings, Provident Royalties and DBSI Inc. caused more than 50 broker/dealers that sold those products to close up shop.

According to findings in a new report by the Compliance Department consulting group, 93 broker/dealers closed their doors during the first three months of 2012, while 137 B-Ds shut down in the first quarter of 2011. Meanwhile, fewer new B-Ds are opening.  Forty-four new broker/dealers opened in the first quarter of 2012, compared to 57 for the same time period in 2011.

As reported May 1 by Investment News, the Financial Industry Regulatory Authority (FINRA) shows 4,428 broker/dealers were open in March, compared to 5,005 in 2007. That’s an 11% decline over five years.

Many of the problems facing broker/dealers are the result of legal and regulatory issues over private-placement investments involving Medical Capital Holdings and Provident Royalties, as well as tenant-in-common exchanges manufactured by DBSI.

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 broker/dealers that sold them the failed products.

More recently, sales of private placements were responsible for the shuttering of broker/dealer Cambridge Legacy Securities LLC. On April 13, after losing a $1.5 million arbitration claim in March, Cambridge Legacy Securities filed its withdrawal request with FINRA.  A few days later, the firm sought bankruptcy protection.

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.