Behringer Harvard REIT I, which raised $2.9 billion from its 2003 launch to the end of its final offering in December 2008, has reduced its share value as of May 17 to $4.25, plus cut its annualized dividend rate to 1%, according to a regulatory filing. For countless investors, this revaluation has been a crushing blow financially.

Nontraded real estate investment trusts (REITs) are now capturing the attention of regulators, who want to know exactly what brokers did and did not disclose to investors about the products. In March 2009, the Financial Industry Regulatory Authority (FINRA) officially opened an investigation into nontraded REITs with an examination of documentation and data from various brokers who sell the investments.

Among other things, FINRA’s focus is on whether the sales were suitable and whether the firms made misleading statements to investors regarding fees, dividends and liquidity.

As reported June 1 by Bloomberg, nontraded REITs often appeal to unsophisticated investors who may not understand the extent of risks that the products present. Those risks can include huge broker fees and commissions, unexpected share devaluation, dividend cuts and suspension of buyback programs.

Many investors with nontraded REITs have experienced significant financial losses because of the fraudulent representations made by their broker. Specifically, investors who’ve filed arbitration claims allege that the products were presented as low risk and that critical information was never disclosed.

Behringer Harvard REIT I and Inland Western Retail Real Estate Trust are among a number of nontraded REITs that have reduced dividends to shareholders in the past year. Other firms such as Cole Credit Property Trust II, Hines Real Estate Investment Trust Inc. and Wells Real Estate Investment Trust II suspended or limited redemptions this year and in 2009.

Maddox Hargett & Caruso currently is investigating sales of nontraded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning a nontraded REIT, please Contact Us.

Highly leveraged REITs like Behringer Harvard REIT I, Inland Western Retail Real Estate Trust and others have produced hundreds of thousands of dollars in losses for investors in the past year. As non-traded REITs, the products are not listed on an exchange; they also come with high commissions and fees. Many investors bought into non-traded REITs based on their broker’s sales pitches, which touted steady dividends and a stock price that wouldn’t fluctuate with the market.

That didn’t happen, however. Instead, investors like Robert and Davida Wendorf lost big. As reported June 1 by Bloomberg, the Wendorfs invested $100,000 in 2004 in Inland Western Retail Real Estate Trust. In 2009, Inland cut its payout by 70%. Prior to that, the company had suspended a program under which the Wendorfs could have sold back their shares at the same $10 apiece they initially paid. By the end of 2009, however, the company had reset the stock price to $6.85.

“You can say I was stupid,” said Robert Wendorf, 69, a retired psychotherapist in San Juan Capistrano, California, in the Bloomberg article. “In all honesty you don’t think people sit down and really read all of those papers? Most people do what I did. They trust the guy as he points where to sign.”

The Wendorfs eventually sold their shares in Inland Western at a $45,000 loss.

Regulators are now taking a closer look at the brokers who sell unlisted REITs – which have raised nearly $60 billion since 2000. Specifically, regulators want to know if investors are being properly informed about the products at the time they buy into them.

Maddox Hargett & Caruso is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning non-traded REITs, please Contact Us.

The Security and Exchange Commission’s investigation into the collapse of Lehman Brothers Holdings is gaining momentum and, specifically, into the accounting practices that the company allegedly used to give the appearance of a robust financial picture.

As reported Sept. 10 by the Wall Street Journal, Lehman’s method of accounting was denounced in March as “misleading” by a court-appointed examiner. The practice, known as Repo 105, allowed Lehman to shift as much as $50 billion in assets off of its balance sheets. In using Repo 105, Lehman was able to give the appearance, albeit a false one, that it had reduced its debt levels.

Meanwhile, Lehman allegedly never told its board, regulators or even investors about Repo 105.

According to the Wall Street Journal article, questionable accounting isn’t Lehman’s only problem. The SEC also is reportedly looking into whether former Lehman executives failed to adequately mark down the value of a real-estate portfolio acquired during the firm’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors.

Retained asset accounts (RAA) are in the regulatory hot seat, with critics of the vehicles calling on life insurance companies to improve disclosure policies and beef up transparency of the products to clients.

RAAs are interest-bearing accounts used by life insurers to hold death benefits of beneficiaries. Instead of providing a lump-sum payment, beneficiaries are paid via a “checkbook” supplied by the insurer. The checks themselves are draft-account checks, however, and cannot be used as easily as standard bank-account checks.

Bloomberg first reported on the issue of retained asset accounts earlier this summer, bringing to light the fact that RAAs allow insurers to earn high returns – 4.8% – on the proceeds of a life insurance policy. Meanwhile, beneficiaries get peanuts with interest rates as low as 0.5%.

On top of that, retained asset accounts are not insured by the Federal Deposit Insurance Corp. (FDIC).

Advocates of retained asset accounts say the products give beneficiaries additional time to decide what to do with their money.

Recently, retained asset accounts were the focus of subpoenas issued by New York Attorney General Andrew Cuomo to Prudential Financial and MetLife. Now, Cuomo’s office reportedly has expanded the investigation to include other insurers. According to an Aug. 31 article by the Indianapolis Star, one of those insurers is Carmel-based CNO Financial Group, formerly known as Conseco.

Currently, only six states have regulations pertaining to retained asset accounts. However, the regulations don’t mandate that insurers reveal how much interest income they make on the money held for the beneficiary.

In August, the National Association of Insurance Commissioners issued a consumer alert about retained asset accounts.

Retained asset accounts are facing growing scrutiny, with regulators calling into question the disclosure policies of insurance companies that market and sell the products to clients. In July, New York Attorney General Andrew Cuomo opened a fraud investigation into retained asset accounts, with subsequent probes announced by Georgia and New York insurance departments.

Earlier this month, the U.S. Department of Veterans Affairs also announced plans to review its own insurance program, followed by the U.S. House Oversight and Reform Committee saying it would investigate insurance benefits for 6 million U.S. soldiers.

Insurers like MetLife and Prudential Financial use retained asset accounts as a way to keep cash when beneficiaries of the policies do not elect a lump-sum payout of death benefits. Beneficiaries are instead issued a “checkbook” to access their funds. Meanwhile, the insurance companies earn interest from the money in the accounts.

Retained asset accounts are not backed by the Federal Deposit Insurance Corporation, however – a crucial fact that creates uncertainty and added risks. Take the case of Jasmine Williams.

After her mother passed away in 2002, Williams was assured by MetLife that her $101,819 in life insurance benefits were safe. She was then sent a guaranteed money market “checkbook.”

The next year, Williams, who was 19 at the time, told MetLife that a cousin had taken nearly $50,000 by forging her name on 12 checks. Williams sought reimbursement. The insurance company and Pittsburgh-based PNC Bank NA, which processed the MetLife checks, refused to make good on Williams’s losses, however. Each company denied responsibility, according to the Bloomberg, which first reported the story.

If Williams’s money had been in a bank, instead of an account managed by an insurer, federal and state laws would have required the bank to verify signatures on checks and cover losses.

“It’s high risk for the beneficiary to have money in these insurance accounts,” said Robert Hunter, director of insurance for the Consumer Federation of America in Washington, in the Bloomberg article. “I’ve been telling people to get their money out. You have what I consider a little black hole.”

Securities America has once again caught the attention of securities regulators over risky sales in Medical Capital Holdings. This time, Montana’s State Securities Commission is suing Securities America.

In January, Massachusetts Secretary of State William Galvin filed the first lawsuit against Securities America, accusing the broker/dealer of failing to reveal key information about failed private placements in Medical Capital.

According to the Montana lawsuit, Securities America and several of its top executives, including new chief executive James Nagengast, allegedly “withheld material information regarding heightened risks” from its representatives and their clients regarding notes issued by Medical Capital Holdings.

Securities America brokers sold $698 million worth of the notes from 2003 to 2008 and “concealed these risks” from its brokers and their clients, the Montana lawsuit contends.

In total, Medical Capital sold $2.2 billion of notes through dozens of independent broker-dealers, a number of which have failed or shut down. Securities America is the broker/dealer that sold the largest amount of Medical Capital notes.

Securities America is facing a number of lawsuits and arbitration claims from disgruntled investors who lost hundreds of thousands of dollars in their Medical Capital investments.

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

When Citigroup eked a $75 million settlement deal in July with the Securities and Exchange Commission (SEC) over claims it misled investors by failing to disclose $40 billion in risky mortgage-related holdings, many people thought Citigroup got off far too easy. Now, it appears a federal judge feels the same way.

U.S. Judge Ellen Huvelle said earlier this week that she wouldn’t approve the $75 million settlement and wants more information from the bank.

Citigroup first stated in 2007 that it had significantly reduced its exposure to mortgage securities by 45%, to $13 billion. That wasn’t the case, of course. In reality, Citigroup made a $40 billion understatement of its mortgage-related exposure.

The SEC then accused Citigroup of committing negligent – not intentional – fraud. No fraud allegations were filed against any executives at Citigroup, however. Instead, the SEC cited two men, former Citigroup Chief Financial Officer Gary Crittenden and former investor-relations head Arthur Tildesley, of engaging in “disclosure violations.”

Crittenden paid a $100,000 fine and Tildesley $80,000.

Like many people, Judge Huvelle has some questions for Citigroup, not the least of which is how the SEC settled upon the $75 million fine in the first place. Why didn’t federal regulators accuse Citigroup of intentional fraud? And, more important, why were only two individuals cited by the SEC? Surely there were others behind the obvious misdeeds.

Citigroup has until the end of September to get back to the judge with its answers.

Meanwhile, Citigroup shareholders are paying the price for Citigroup’s actions. Citigroup stock is down more than 90%.

Former ING Financial broker Rhonda Breard is trading her swanky professional suits for prison garb. After pilfering clients out of $12 million, a federal judge has sentenced Breard to six years and eight months in prison.

The former chief executive officer of Breard and Associates Wealth Management in Kirkland was initially charged on March 10 to one count of mail fraud in connection to an investment scheme that defrauded clients out of millions. Breard later admitted she concealed the scheme by giving her clients fake account statements that showed investments in a variety of phony financial and insurance products.

The Financial Industry Regulatory Authority (FINRA) barred Breard from the securities industry in March.

After stealing from her clients, Breard allegedly used the money to purchase extravagant homes, jewelry and more than two dozen vehicles. In February, Breard tried to commit suicide, presumably because authorities were onto her fraud following a surprise audit by ING.

During Breard’s sentencing, several of the victims she defrauded were present. One of the victims was Shelly Heath, who had invested with Breard for 25 years. Gone from her account were her retirement savings and money for her children’s college education fund.

Another of Breard’s victims was an autistic man who lost his entire savings while working as a janitor and other small jobs.

As for Breard, she blamed her actions on greed and the need to appear wealthy.

In its first securities fraud case against a state, the Securities and Exchange Commission (SEC) has accused the state of New Jersey of misleading investors by hiding the underfunding of its two biggest pension plans. The situation in New Jersey is far from isolated, and many legal analysts believe similar lawsuits against other states will soon be forthcoming.

New Jersey settled the SEC’s claims without admitting or denying any wrongdoing.

As reported Aug. 18 by Bloomberg, New Jersey is the third-most-indebted state in the country, behind California and New York, with $37.7 billion in gross tax-supported debt outstanding. Its $66.9 billion pension system includes seven funds, which were underfunded by $46 billion as of June 30, 2009.

Nationwide, state pension systems were underfunded by at least $500 billion in 2008, according to a report by the Pew Center on the States. The report, The Trillion Dollar Gap, says that in 2000, slightly more than half of the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four—Florida, New York, Washington and Wisconsin—could make that claim.

The consequences of severely underfunded public sector retirement benefit systems translate into lower bond ratings, higher taxes and less money available for essential public services.

The one upside to the underfunding issue is the attention being generated for new reforms. Many states are now taking action to change how retirement benefits are set, how they are funded and how costs are managed.

Retained-asset accounts – a product that allows insurers to profit from beneficiary death benefits by placing the funds in interest-bearing accounts – have become the new tainted investment of the day.

Just days after the Federal Deposit Insurance Corporation announced that life insurers should disclose more information about retained-asset accounts to their customers, the National Association of Insurance Commissioners issued a consumer alert on the products.

Last month, New York Attorney General Andrew Cuomo subpoenaed Prudential Financial, MetLife and several other insurers as part of an investigation into possible fraud in the life insurance industry.

The focus of Cuomo’s investigation concerns whether consumers thoroughly understand the payout options associated with retained-asset accounts.

A retained-asset is considered a temporary repository of funds. Instead of paying out a lump-sum upon the death of a policyholder, insurers keep the money in their own general fund. By keeping the money, insurers are able to earn a higher return on the funds than they pay out in interest.