Since the end of April, when the stock market began to fall, investors have withdrawn about $75 billion from U.S. equity funds. At the same time, they’ve put about $42 billion into bond funds.  Why? Because they perceive them to be safer than the stock market.

But beware. Some of these bond funds contain huge investments in junk bonds that, in turn, can blow up under certain circumstances. Moreover, all of these funds will drop once interest rates rise. It may take a few years, but make no mistake – they eventually will drop. And as we’ve witnessed in the past, the junk will rise to the top.

Their names include Behringer Harvard REIT I. Inland Western. Cole Credit Property Trust I.  Wells Real Estate Investment Trust II. Desert Capital. These and other non-traded REITs have become a bone of financial contention for countless investors.

The Financial Industry Regulatory Authority (FINRA) issued an investor alert on non-traded REITs in September in which it outlined potential risks of the products. Among the downsides cited: illiquidity, lack of transparency, and high commissions and other upfront fees.

Another risk associated with non-traded REITs concerns dividends, which are a key component to attracting investors. Known as “distributions” in the industry, these dividends “are not guaranteed and may exceed operating cash flow,” according to FINRA.

As a result, distributions can be suspended for a period of time or halted altogether.

That’s exactly what happened to some of the biggest non-traded REITs, including Apple REIT 10, Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

A posting on REIT Wrecks, a Web site that follows the non-traded REIT industry, describes what many investors are feeling these days about their non-traded REIT investments.

“I’ve been burned by Behringer Harvard. I sent my request for distribution in on February 10th of 2009. They denied me (and others) without any notice at their next board meeting (after making me resend the damn thing because I needed a special medallion signature stamp from my bank!). I wasn’t getting my money for any reason other than I’d been unemployed since June of 2008 and needed money to live! To find out I could only get my money out if I died was so morose and in bad taste that I wrote appeal after appeal to the board…only to be told to die or become disabled…and then ‘get in line with everyone else’.!

No one ever told me that this thing wasn’t liquid or would ever have these kinds of issues. No one ever told me that the valuation was completely a fiction. They just raised another few hundred million and then closed the doors on everyone!”

Elder financial abuse is a growing crime, with one in four seniors in the United States becoming a victim. In most cases, elderly victims are taken advantage of by someone them know – a family member, caregiver, neighbor, or financial advisor or broker.

A June 2011 study from MetLife Mature Market Institute shows that elderly financial abuse costs its victims nearly $3 billion a year. Women are twice as likely as men to become victims of elder financial abuse, according to the MetLife study, with most individuals between the ages of 80 and 89, living alone, and requiring some level of help with either health care or home maintenance.

Some of the warning signs of potential elder financial fraud and abuse include:

• Unexplained bank withdrawals.
• Unauthorized use of a credit or ATM card.
• Stolen or misplaced credit cards or a checkbook.
• Unexplained withdrawals from brokerage accounts.
• Checks written as “cash,” “loan” or “gift.”
• Abrupt changes in a will or other documents.
• Unexplained transfer of assets to a family member or someone outside the family.
• Disappearance of valuables.
• Sudden appearance of a previously uninvolved relative claiming a right to an elder’s affairs or possessions.
• New signers on accounts.

The bottom line: If you, a loved one or an elderly neighbor or friend has become a victim of financial abuse, it’s important to contact the authorities. Financial abusers count on silence of their victims to continue their crime.

High fees and a lack of liquidity are just two reasons that non-traded REITs are in the hot seat with the Financial Industry Regulatory Authority (FINRA). Yesterday, the regulator issued an alert to investors, outlining the potential drawbacks and risks that non-traded REITs contain.

Non-traded REITs do not trade on a national exchange, are generally illiquid and sold exclusively through independent broker/dealers. In addition, early redemption of shares in a non-traded REIT is extremely limited, and commissions for non-traded REITs can be as high as 15%.  By comparison, front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds for exchange-traded REITs.

Despite these drawbacks, non-traded REITs have become increasingly popular in recent year, as investors search for alternative investment vehicles that can offer high yields. As reported Oct. 4 by Investment News, investors bought close to $4.6 billion in non-traded REITs through June 30.

In September, FINRA issued a rule proposal aimed at changing how the value of non-traded REITs appear on client account statements, as well as brokers’ commissions and other upfront costs.

FINRA’s recent investor alert on non-traded REITs outlined several issues with the products, including the fact that the periodic distributions that help make non-traded REITs so appealing can, in some instances, be heavily subsidized by borrowed funds and include a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges, which are typically derived solely from earnings.

Lack of a public trading market creates illiquidity and valuation complexities. As their name implies, non-traded REITs have no public trading market. However, most non-traded REITS are structured as a “finite life investment,” meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate, says FINRA.

Moreover, even if a liquidity event takes place, there is no guarantee that the value of your investment will have gone up-and it may go down or lose all its value. Indeed, valuation of non-traded REITS is complex. Many factors affect the pricing, including the portfolio of real estate assets owned, strength of the trust’s balance sheet (assets versus liabilities), overhead expenses, cost of capital and more. The boards and managers of non-traded REITs might even rely on third-party sources to estimate a per-share value.

Finally, properties may not be specified in a non-traded REIT. Most non-traded REITS start out as blind pools, which have not yet specified the properties to be purchased. Others may specify a portion of the properties the REIT plans to acquire, or they may be in various stages of acquisition.

Concerns about potential risks, lack of transparency, liquidity and possible fraud of self-directed individual retirement accounts will likely lead to tougher restrictions by regulators on broker/dealers that market and sell the products. On Sept. 23, both the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association issued an investor alert warning about investing through self-directed IRAs.

As reported Oct. 2 by Investment News, self-directed IRAs are different from traditional IRAs because they allow owners of the products to invest their retirement savings in a variety of unusual investment vehicles. Those vehicles can include real estate, promissory notes, tax lien certificates, and private-placement securities. Investors in traditional IRAs are generally limited to stocks, bonds and mutual funds.

Private placements in particular have become a cause of concern for investors recently. In 2009, the SEC filed fraud charges against two issuers of failed private placements: Medical Capital Holdings and Provident Royalties LLC. Investors who held private placements in the two entities lost hundreds of millions of dollars. Meanwhile, the placements were allowed to be recommended into IRAs.

According to NASAA, there has been a noted recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature. State securities regulators also are investigating numerous cases where a self-directed IRA was used in an attempt to lend credibility to a fraudulent scheme.

Similarly, the SEC has brought numerous cases in which promoters of fraudulent schemes steered investors to self-directed IRAs.

While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes when considering a self-directed IRA. The SEC says fraudsters often exploit self-directed IRAs because owners are allowed to hold unregistered securities in them, and custodians often fail to performed adequate due diligence on the offerings.

Moreover, because there is a penalty for making early withdrawals from an IRA, investors caught in a scheme might actually be encouraged to keep the money in the account even longer.

Many big broker/dealers have already imposed restrictions or increased their due diligence on investments made through self-directed IRAs. A number of smaller and midsize firms have yet to follow suit, according to the Investment News article.

The reason is because of the higher profit margins that typically come with riskier product offerings.

Insider trading, in which trades are made based on certain “inside” knowledge or information about a major corporate happening, is a crime – and one that cheats everyone. A Sept. 25 article in Investment News describes what happens when insider trading occurs and why the perpetrators involved should be punished to the fullest extent of the law.

“Every owner of shares manipulated by insider trading is a victim,” the article says. “In addition to direct investors, the victims of insider trading are the thousands, if not millions, of 401(k) plan participants, mutual fund shareholders and bank trust customers who received lower prices for their shares because a few cheaters had inside information.”

Several individuals accused of insider trading are gearing up to face their sentences. One of them is hedge-fund titan Raj Rajaratnam. Rajaratnam, co-founder of Galleon Group LLC, was convicted on May 14 of conducting the world’s biggest insider-trading scheme. His sentencing is set for Oct. 13. The government, hoping to send an loud and clear message that illegal insider trading will not be tolerated, is asking the judge in the case to sentence Rajaratnam to 20 to 24 years in jail.

Last week, the Securities and Exchange Commission (SEC) issued subpoenas to hedge funds and other financial firms as it investigates possible insider trading prior to the downgrading of the U.S. government’s credit rating by Standard & Poor’s.

Insider trading allows people like Rajaratnam to profit from non-public information. In making their profits, insider traders are slowly but surely undermining the faith and trust that investors place in the financial markets. And that harms all of us.

Elder abuse is on the rise – something Donna LeBoeuf, a Pittsburg resident in the early stages of dementia, knows only too well. Playing a “game” with her caregiver, LeBoeuf unknowingly signed her name several times on pieces of paper, unaware that the innocent act would put her financial future in jeopardy.

As reported Sept. 25 by the Contra Costa Times, LeBoeuf initially was grateful that her caregiver, Mary Genai, helped her with life’s daily tasks. That included watching over LeBoeuf’s finances. LeBoeuf never suspected that her gratefulness might come back to haunt her.

LeBoeuf’s son later discovered that his mother had signed away control of her money and medical decisions, and that Genai, the caregiver, had got away with stealing “thousands of dollars” from LeBoeuf.

Specifically, Genai gained LeBoeuf’s power of attorney, deposited her Social Security checks into her own checking account, named herself the beneficiary of a $100,000 life insurance policy and got control of LeBoeuf’s medical decisions in the event she became incapacitated, according to the Contra Costa article.

Today, Genai faces six felony counts of financial elder abuse. She has pleaded not guilty and is free on $402,000 bail pending an Oct. 4 court date.

The “fine print” of many an investment product has come back to haunt investors over the years. The latest name on the watch list? Stable-value funds.

Despite their name, stable-value funds are far from risk free. Most contain restrictions on transfers and withdrawals – something many investors are unaware of until after the fact.

“Some of those restrictions may not be clearly communicated until a participant tries to make a transaction, and then they’re prevented from making it,” said Jeff Elvander, chief investment officer of a California company that consults with employers who offer defined-contribution retirement plans, in a Sept. 21 article by Bloomberg.

Stable-value funds – and the holdings they contain – also have a reputation for being opaque and complex. Unable to determine the quality of the underlying assets, investors oftentimes have no way of knowing the level of risk they are really taking on.

Stable-value funds refer to funds that pool one or more retirement plan’s assets, to insurance contracts and annuities that are offered within defined-contribution retirement plans like a 401K. In general, stable-value funds invest in short- to intermediate-term bonds and buy insurance on their portfolios. The contracts themselves are issued directly to a retirement plan sponsor or to its participants, and provide an interest rate that resets periodically.

In August 2011, stable-value funds returned 0.22 percent, compared with a 5.68 percent decline in the Standard & Poor’s 500 Index, according to the Bloomberg article. The returns are achieved, in part, by purchasing insurance contracts.

Once the darling investment product of broker/dealers, some B-Ds are cutting back on the number of REIT products they intend to sell to investors. Their concerns have to do with several issues, including the risk levels of certain REITs, various expenses and how the REITs actually pay for their dividend.

Non-traded REITs have been in the news for some time now, with names like Behringer Harvard REIT, Apple REITs, Inland American Real Estate Trust and Desert Capital garnering top space in the headlines for the financial problems they’ve caused investors.

Non-traded REITs are considered public companies, whose shares are registered with the U.S. Securities & Exchange Commission, but they don’t trade publicly. In recent months, this lack of transparency has been thrust into the spotlight, along with problems tied to inaccurate valuation estimates, excessive broker fees, complex redemption policies, illiquidity and distribution issues.

In late May, the Financial Industry Regulatory Authority (FINRA) filed a complaint against David Lerner Associates related to distribution and valuation issues. In the complaint, FINRA questioned the value of various Apple properties, noting that investors were consistently told that their shares were worth $11 each when that was no longer the case. Some of the Apple REITs had to return investor capital – maintaining the perceived payout, but “eating the seed corn that normally grows those dividends,” according to a July 21 article by MarketWatch. That money, at the very least, should have been deducted from the share price, the MarketWatch article says.

In response, more broker/dealers are taking a new look at non-traded REITs. As reported Sept. 18 by Investment News, National Planning Holdings, a network of four broker/dealers with 3,663 affiliated reps and advisers, has reduced the number of non-traded REITs on its platform to 10 from 15 so far this year.

Other B-Ds like Next Financial Group are following a similar path. Next Financial, which maintains 923 affiliated reps and advisers, cut its number of non-traded REIT products to five from seven. Two years ago, the firm offered twice as many non-traded REITs for its reps to sell.

A number of non-traded real estate investment trusts (REITs) have turned sour for investors in the past year. Among them: Behringer Harvard REIT, Desert Capital, Inland American, Cornerstone Growth & Income, Cole Credit Property, as well as others.

These and other non-traded REITs are considered public companies, but their shares are not listed on a stock exchange. This lack of transparency, along with inaccurate valuation estimates, excessive broker fees, complex redemption policies and illiquidity has come back to haunt many non-traded REIT investors. Cases in point: Behringer Harvard REIT, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust and Desert Capital.

In May 2011, facing creditor claims of more $43 million, Desert Capital was forced into involuntary Chapter 11 bankruptcy. Similar cash-flow issues have plagued Inland Western. In 2009, Inland Western defaulted on several property loans, as well as pushed back maturity dates of others. As of May 2009, Inland Western subsidiaries defaulted on six mortgage loans – totaling $54.9 million – according to a quarterly report filed with the Securities and Exchange Commission (SEC).

As a result, Inland Western slashed its dividend by 70% in 2009. It also suspended its share-repurchase program, putting shareholders who wanted to sell their investment in limbo.

Investors in Behringer Harvard REIT I are in similar financial turmoil. This particular non-traded REIT has never generated profit for investors and is now completely illiquid.

Many investors in non-traded REITs thought they were buying a conservative, relatively low-risk investment. Their assumption was based on the recommendations and information they received from their brokers. Instead, many of these investors are facing suspended redemption policies and an illiquid investment.

If you’ve suffered investment losses in non-traded REITs, contact us to tell us your story.