bad broker

FINRA Arbitration Process Under Fire

The securities industry watchdog, FINRA (Financial Industry Regulatory Authority), has come under fire again recently, this time for failing to review its roster of potential arbitrators. According to an article in Bloomberg Businessweek, in a 2013 case set in Wichita, KS, two of the arbitrators offered by FINRA to adjudicate the proceedings and make a ruling happened to be...dead. One of the arbitrators had been deceased for 18 months. This news arrived just a few weeks after FINRA dismissed an arbitrator who had allegedly lied about his legal background. Unfortunately, before his dismissal, this individual actually arbitrated around 30 FINRA cases.

Many investors remain unaware that the vast majority of brokerage firms in the United States require them to sign binding arbitration agreements when initially opening their brokerage accounts. These agreements often pass without notice among the stack of other opening documents that financial advisors may ask customers to sign and/or initial. Not only that, but optimistic customers who do pick up on the arbitration agreement generally will not expect the worse. But when the worst does happen, what are customers really up against...?

For one thing, investors should know that unlike the judges and juries in our judicial system, FINRA’s arbitrators are drawn a pool of around 7,000 retired stock brokers, bankers, branch managers, and attorneys. For the most part, these arbitrators come from the plaintiff or “respondent” side of litigation. Accordingly, FINRA has not been immune to accusations of a strong industry bias in its arbitrators and their rulings. In fact, iit would be surprising if there weren’t a bias: the process was created by the industry and is run by the industry. Perhaps more troubling however is the suggestion, due to the recent developments mentioned above, that the arbitrators, who ultimately decide the outcome of securities litigation, including monetary awards, are not being reviewed and evaluated to ensure they are capable of doing their well-paid job.

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately at 1-866-462-3330 or via email by clicking here.

Bad Brokers Target Pro Athletes

Bad brokers are everywhere. But they tend to really grab headlines--and swindle truly staggering amounts of money--when they defraud professional athletes. We’ve featured more than one post here about individual and groups of pro ballplayers from every major sport who’ve been taken advantage of by close friends or crooked brokers. Unfortunately, so many athletes we know to be unstoppable on the field make for easy targets when it comes to their personal finances.

Photo by Jeramey Jannene

Photo by Jeramey Jannene

Just this week, news arrived that broker, Jinesh “Hodge” Brahmbhatt formerly of Success Trade Securities, Inc., who was apparently at one time “approved” by the NFL to provide investment advice to players, allegedly sold more than $18 million in bogus promissory notes to 58 different investors. Many of these investors were current or former NBA and NFL players. If you’re wondering why pro players are so susceptible to fraudulent investment schemes, think about it: usually from humble backgrounds, pro players suddenly become very rich, spend quickly, invest poorly, and lack the experience and expertise to evaluate complex financial products.

According to the report on Yahoo sports, athletes who bought the dubious Success Trade notes include Jared Odrick of the Miami Dolphins, Brandon Knight of the Detroit Pistons, Adewale Ogunleye of the Chicago Bears, former Washington Redskin Clinton Portis, the 49ers’ Vernon Davis, and Browns cornerback Joe Haden. Those close to the case expect this list to grow as other players who held the Success Trade notes lawyer up and file complaints with the Financial Regulatory Industry (FINRA). Meanwhile, Mr. Brahmbhatt, who most recently worked for investment adviser firm, Jade Private Wealth Management LLC, has been banned by FINRA.

While the life and means of pro ballplayers may seem distant and out of all proportion to ordinary investors, the lesson here is the same. Bad brokers, as Mr. Brahmbhatt certainly appears to be, are everywhere, and they can and will get over on anyone. The best way to protect yourself against broker misconduct and investment fraud is to practice a form of financial self-defense. For tips and techniques on how to do this, please download our free guide.

If you or someone you know has been the victim of broker misconduct, please contact us immediately toll-free at 1-855-462-3330 for a free consultation.

FINRA Investor Alert: Beware Private Placements

Investor Alert: Beware Private Placements

Yesterday, the US securities industry watchdog, the Financial Industry Regulatory Authority (FINRA), issued its latest investor alert. The alert addressed new issues related to investing in private placement deals. If you’re not familiar with FINRA and its investor alerts, you should know that the agency is responsible not just for regulating the securities industry, but also for identifying problems surrounding new financial products and trends in broker misconduct and investment fraud.

The fact that private placement deals have earned their place on FINRA’s watchlist can be taken as a clear indication that these deals should be approached with caution and that they are almost certainly not appropriate for the casual and/or unsophisticated investor. In other words, buyer beware.

What Is a Private Placement?

Creative Commons

Creative Commons

A private placement is a limited offering of a company’s securities that is not SEC-registered and not public. Most importantly, perhaps, as stipulated by Regulation D of the Securities Act of 1933, private placements are only suitable for “accredited investors.”

Put simply, accredited investors are high net-worth individuals with assets of $1 million or more (not counting primary residence), with strong verifiable incomes over the past two years. If you do not meet these requirements, you should absolutely not be invested in a private placement, nor should your broker invest your money into one. Such investments would be deemed unsuitable according to FINRA rules and regulations.

If You’re An Accredited Investor…

If, on the other hand, you do qualify as an accredited investor and you are interested in purchasing securities as part of a private placement deal, proceed with all due caution. As FINRA warns, companies that issue private placements are not required to file the same financial reports as publicly-traded companies, and these securities often include risks and liquidity considerations that more simple and transparent securities do not. When considering a private placement, investors and brokers should carefully read all documents supplied by the issuing company, including especially the offering memorandum or prospectus. Then, make sure that the risk and liquidity issues associated with this securities fit well into your overall investment portfolio.

Private Placements Afflict Many Retail Investors

We greatly appreciate FINRA's calling attention to the pitfalls of private placement deals, since over the years we’ve seen far too many cases of novice investors purchasing these securities when they were not accredited investors and/or when they did not understand the product itself. And of course, they lost a lot of hard-earned money doing so.

As always, if you or anyone you know has been the victim of broker misconduct or investment fraud related to private placements or any other financial security, please contact us for a free consultation.

Who's Calling, Please? Brokerage Impostor Cold Calls

Since many people who invest money through FINRA-registered brokers do not know what FINRA (Financial Regulatory Agency) is, let alone keep up with the agency's latest warnings, we like to raise awareness out there among everyone who is kind enough to read our blog  whenever FINRA issues a new alert or warning. Usually these warnings come as a result of an uptick in cases seen in FINRA's arbitration process. And so, by our reasoning, if FINRA has been seeing more cases of a certain type of investment fraud or broker misconduct, then maybe you out there have too. Or maybe we can help prevent others from falling prey to it. At any rate, this week saw FINRA issue a new alert titled, "Cold Calls from Brokerage Firm Impostors--Beware of Old-Fashioned Phishing."


As the warning describes, scam artists have recently been cold-calling citizens while impersonating at least one well-known brokerage firm and engaging them in conversation in the hope of getting people to reveal personal financial information, including of course their social security numbers. As FINRA notes, this scheme is a throwback twist on what's known as Internet "phishing," or spattering people with spam messages with the intention of culling financial information for nefarious purposes. We say "throwback" because this more recent version of the scam uses not email but the somewhat old-fashioned telephone cold-call, which as the fraudsters must know adds a much more personal element to the phishing. After all, over the past decade or so we've learned to be very suspicious of emails find their way into our inbox from Nigeria and so on, but we may be a little less wary of an actual person talking to us on the phone, especially if they say they work for such-and-such major brokerage firm. 

The mechanics of the scam work like this. Once the caller gets you on the line, he or she will tell you about a special offer on Certificates of Deposit (CDs) or some other financial product. They'll insist that, if you invest, you can get yields well above the norm. If you seem even remotely interested, they don't go in for the kill right away. They say they'll have their supervisor get back to you with more information, or else they may send you applications forms to fill out. At some point in these interactions, however, they will try to obtain your personal financial information. Once they have it, they'll use it to steal your money or your identity.  And that's very bad news indeed.

FINRA provides a few useful tips for how to avoid getting fleeced by this particular scam. We would add that like most scams, the fraudsters rely on two key dynamics: false promises and lack of due diligence. You can beat this scam and many others like it simply by always sticking to the rule of thumb that "if it sounds too good to be true, it probably is;" and by insisting that, rather you giving them more information, they give you more information. That way, you can look more deeply into the background they claim to have, whether it's with a large brokerage company or as an independent. You can call the brokerage itself, the compliance office, FINRA's general intake phone line, or use FINRA's BrokerCheck to see if your shady cold-caller is who they say they are.  

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation. 


Deadbeat Brokerages Leave Investors in the Lurch

As if investors needed another reason to very carefully select and vet their financial advisors, a recent article indicates a significant uptick in the number of investors who have won FINRA (Financial Industry Regulatory Authority) arbitration cases against negligent broker dealers that have not recovered any of the money they are entitled to.

According to statistics provided to the Chicago Tribune, in 2011 nearly 11% of claims that investors had been awarded by FINRA went unpaid. That's up from around 4% in the two previous years. Historically, around 15-33% of the total awards granted by FINRA have never made it into the hands of investors. We're talking tens of millions of dollars! 

One big reason this is happening is that FINRA does not require that broker dealers carry insurance in the event of an unfavorable outcome in securities arbitration. And so, rather than pay out hundreds of thousands of dollars in damages, many small brokerages will simply bankrupt themselves and the brokers will move elsewhere. That leaves the investor whose claim has been successful holding the proverbial bag.  And since FINRA is not actually part of the criminal justice system, investors who find themselves in this lamentable position are truly stuck: they can't take brokers to court.

Besides the lack of what would essentially be a form of malpractice insurance, another major contributing factor to this depressing situation is that most brokerages compel clients to sign binding arbitration clauses when they engage the services of the broker dealer. These clauses, which many investors are not aware of when they sign up with a brokerage firm, mandate that in the case of a dispute, clients will be forced to take their case through the FINRA arbitration process rather than the US Criminal Justice System. And that's all well-and-good, as long as FINRA is able to enforce its judgments and awards. But obviously it's having a harder time doing that now than it has in the past.

FINRA needs to take a closer look at broker dealer binding arbitration clauses and their standing within the larger justice system. If brokerage firms are not going to honor the awards that FINRA grants to damaged investors, should the clauses that protect firms from criminal action continue to be honored? And why not require or somehow strongly recommend malpractice insurance? Doctors and lawyers almost universally carry it.

These systemic changes may never come. In the meantime, however, investors can take action. They can protect themselves from deadbeat brokerage firms by doing as much background research on firms and brokers as possible, before ever signing a contract. As you might imagine, most of the broker dealers who fold rather than pay up are small-time operators, many with a history of misconduct or shady dealings. Any investor doing their own due diligence could probably see them coming a mile away. Rather than small, unreliable operators, investors should be looking for firms with a long track record of financial stability and probity. Name recognition isn't such a bad indicator of reliability in the financial securities industry, either. After all, there's probably a reason big name firms have stuck around so long and are recognizable: they generally do the right thing. If as an investor you're interested in a smaller firm, call them up and question them about their compliance policies, corporate structure, history, and so on.

In other words, be proactive and be diligent. While the regulatory system may take many years to change (if it ever does), going that extra step to make sure your life-savings are in safe hands can be done any time. We encourage you to do it now!



As always, if you or anyone you know has been the victim of broker misconduct or financial advisor fraud, please contact us immediately for a free consultation.

SEC Launches Informative Site for Investors

Ramping up their effort to become a kind of consumer protection agency for novice investors, the SEC recently launched a very helpful site featuring tons of great investment advice at  

A lot of the suggestions featured here are also included in our 10 Tips for Financial Self-Defense, so download that if you haven't already. In order to supplement your arsenal of weapons in the fight against financial misconduct and bad brokers, check out the SEC site. It touches on everything from how markets work to investment basics to retirement planning. Of course, this body of knowledge is exactly why, as a novice investor, you might engaged the services of a broker. But as with everything from buying a car to picking the right doctor, the more research you can do on your own, the less likely you will be to get fleeced. Information, after all, is power. And there's a wealth of information on the SEC site. Click here to go to the introductory video that gives you a tour.

For the social media savvy, better hop on the SEC Investor Ed twitter feed. We have! Here, you'll get updates and investor alerts that will help you get out in front of problems with your investments that you may not have anticipated or simply do not understand. For example, Ponzi schemes. We've got a page on our site explaining the history of the Ponzi scheme and how it works. If you thought these scams faded with the incarceration of Bernie Madoff, think again. According to the latest SEC investor alert, they are alive and well among virtual currencies like Bitcoin. Other alerts on scary yet fascinating topics include Investment Options Implying SEC Endorsement, Pump-and-Dump Stock Email schemes, and Binary Options and Fraud. With our own blog here at The Green Firm, we'll do our best to keep abreast of the latest trends in investor scams and try to develop the legal angle for you. So stay tuned to the SEC and to us!

As always, if you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately for a free consultation. 






SEC May Pack More Heat Soon

A bipartisan effort in Congress is underway to give the SEC more sting when it comes to securities law violators. All we can say is: it's about time! Lawmakers are pushing hard to increase the limits of the fines the SEC is allowed to slap broker dealers and brokerages with to up to $1 million per violation for individual brokers and up to $10 million per offense for firms. Basically, the bill's backers in Congress want the SEC to be able to inflict enough financial pain on brokerages to change the culture. Right now, most firms tend to view the SEC fines as a nuisance--the cost of doing business. If, however, the bill that was written by Senator Jack Reed, a Democrat from Rhode Island and Chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment; and Senator Charles Grassley, a Republican from Iowa and ranking member of the Senate Judiciary Committee gets passed in Congress, the SEC will be getting some serious new regulatory firepower.

Ultimately, what lawmakers hope is that steeper penalties and more pain will result in fewer repeat offenders along with heightened self-regulation on the part of brokerages, who will be forced to beef up or wake up their compliance departments and come down much harder on rogue brokers. Under the new law, not only would broker dealers be more likely to increase vigilance around compliance issues, they would also be much less tolerant of individual broker misconduct. Since heftier fines means broker dealers are more exposed by any bad brokers they sponsor, they'd be foolish not to crack down on rule breakers and/or terminate those who cannot toe the regulatory line. 

Some critics of the bill say that rather than raising its punitive powers lawmakers should be looking to strengthen the SEC's enforcement abilities by granting the commission more funding for personnel and financial expertise. But just last year, the SEC set a record for enforcement actions and fines. Still others say the SEC is most effective on moral terms: they insist that suffering an SEC action is usually a career-ending event. Still, the larger fines written into the bill seem directed more at the brokerages than the individual brokers. By setting their sights on crooked firms, lawmakers have made it clear they want not just to punish offenders and inflict pain, but instigate real change.

It's hard to predict how far the bill will get in Congress before the current session ends in December. But we at The Green Firm hope change comes sooner rather than later.

As always, if you or anyone you know has been the victim of broker misconduct, please contact us for a free consultation.



Stockbrokers Who Cheat

Some brokers start cheating early. A recent Reuters piece reminded us of how important it is for retail investors to remain ever-vigilant when dealing with representative of a financial industry so rife with rule-benders and rule-breakers. As you may know, the industry watchdog, FINRA (Financial Industry Regulatory Authority) requires would-be brokers to pass a series of licensing exams before they can handle other people's money. The most common exam is known as the "Series 7," or general stockbroker exam, and it's a 250 multiple-choice question test that ensures candidates have a strong grasp of industry rules and regulations as well as how to invest appropriately according to client risk tolerances and investment objectives. In 2012, according to FINRA, around 32% of Series 7 test-takers failed the exam. Another handful cheated and got caught. Who knows how many cheated and didn't get caught. 

Normally, a candidate who gets caught cheating on any of the FINRA exams will be banned from the financial industry. In rare cases, he or she will receive a lengthy suspension. Some of the more colorful examples of broker cheating include hiring a better prepared test-taker to ace the exam; stashing review materials in the ceiling tiles of a test center bathroom; and using the old cheat-sheet during the test. Although new technologies such as palm scanning, test randomization (which means each individual gets a unique test generated from scores of possible questions, so peeking at your neighbor's answers is pointless), and in some cases video surveillance have significantly cut back on the amount of broker subterfuge going on each year, the impulse to game the system remains alive and well in some shady quarters. And apparently it's not just aspiring brokers who are guilty of cheating, it's test-prep professionals, too, who try to steal test questions to better prepare their students.

Although it's amusing to hear anecdotes like these, which harken back to high school midterms or the SATs, we must remember that these cheaters could have been our future brokers, the ones handling our life-savings or 401Ks. And again, not every cheater gets caught. And some cheaters, as we've seen in so many of our cases, are late bloomers. They wait till they pass their exams before they really start cheating.

If you or anyone you know has been the victim of broker fraud or misconduct, please contact us immediately for a free consultation. 


Alt Mutual Funds Not Like Traditional Ones

If you've been keeping up with the activities of financial industry watchdog FINRA (Financial Industry Regulatory Agency) like we have, you've probably noticed an important trend: FINRA has issued a number of warnings recently about complex financial products that have made their way into investor portfolios, sometimes without investors realizing just how complex and--more to the point--how risky they actually are.

The latest warning concerned so-called "Alternative Mutual Funds," which contain more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling. According to a recent Reuters article, these Alt Funds, which can resemble hedge funds but remain subject to the regulation by the Investment Company Act of 1940, have become increasingly popular in recent years as investors seek greater yields while trying to avoid getting burned like they did in 2008. Whatever their motivation, investors need to be exercise all due caution when considering purchasing Alt Funds because these funds may conceal risks that the unsophisticated and sophisticated investors alike may not be fully aware of. 

If you or your investment advisor are thinking about buying into an Alternative Mutual Fund, FINRA's Investor Alert on the subject strongly suggests taking a close look at the following points: Investment  Structure,  Strategy Risks, Investment Objectives, Operating Expenses, Fund Manager, and Performance History. Investigating these points will provide you with greater insight into a financial product whose complexity will almost certainly raise suitability issues in the near future. Indeed, if past experience is any indication, FINRA's Investor Alert portends greater scrutiny of not only this product but of brokers and investment advisors who see fit to recommend Alt Funds to clients.




Plain Broker-Dealers Aren't Always so Plain

Brokerages have a primary fiduciary and legal obligation to protect their clients. Period. Unfortunately, greed and other unsavory considerations often get the best of them, and far too many brokerages tend to lose sight of this fundamental tenet of the financial industry. Soon, they’re serving themselves at the expense of their clients. A recent article on the Financial Regulatory Authority’s disciplinary actions against Cedar Brook Financial Partners for allegedly making false statements about high-risk funds sold to wealth management firm Pepper Pike is another sharp reminder that brokerages are often willing to bend or break the rules to turn a profit.

According to the article, FINRA punished Cedar Brook for making “false and misleading statements” about two funds: Medical Capital Holdings Inc, or MedCap, and IMH Fund, a security backed by subprime mortgages. MedCap in particular created massive problems for firms like Cedar Brook, when the Anaheim, CA-based company was revealed to be a Ponzi scheme sold to investors across the country and totalling nearly $2.2 billion in notes. The fraud was exposed by the SEC. The whole works. Oh boy.

Now, MedCap was a superlative fraud. But that’s got nothing to do with Cedar Brook. Except that Cedar Brook allegedly went wrong by misrepresenting just how risky the financial products being offered by MedCap and IMH actually were to investors--as well as altering at least three of their own investors’ accounts to create a false presentations of their net worth, concealing unbalanced portfolio distributions and potential unsuitability issues. Bad news. And it turns out Cedar Brook were not the only brokerage guilty of playing dirty over MedCap and IMH fund. According to FINRA’s records, across the country, 18 firms and 66 individual brokers have suffered disciplinary action over MedCap; and 15 firms and 40 brokers have suffered similarly over the IMH fund. And you can bet your bottom dollar there’s more where that came from.

Until this most recent scandal, Cedar Brook was a fairly well-regarded Midwestern brokerage. But beneath that veneer of respectability lurked a significant history of complaints against its principals that any informed investors could have accessed via FINRA’s BrokerCheck, which provides a history of any and all complaints against brokerage firms and individual brokers nationwide. After all, around 95% of registered brokers have NO complaints on their record.

If you or anyone you know has been the victim of broker misconduct or fraud, please contact us immediately for a free consultation.


No Such Thing As a "Free Lunch" (Seminar)

The Financial Industry Regulatory Authority or FINRA reports that 64% of Americans over 40 years old have at one time or another received unsolicited invitations to enjoy a so-called "free lunch seminar" that promises to teach them about money management and investing. Those are some impressive figures. Alas, as we all know, there's no such thing as a free lunch in this world. So if you do choose to accept one of these invitations, be prepared for the usual salesperson full-court press as the sponsoring firms or brokers who are behind the seminar try their darndest to turn you into a new client or sell you something you probably don't want. Typically, these seminars transform into a veritable flea market of sales pitches involving books, financial products, money management tools or software, or investing services. You may get a bellyful of appetizing lunch gratis, but you'll also most certainly be getting an earful of sales palaver as well.

According to a recent article on the subject, "Securities regulators such as FINRA conducted more than 100 examinations of free-meal seminars. In half the cases, invitations and advertisements contained exaggerated or misleading claims, and 12 percent of them appeared to involve fraud."


Wow. With those daunting statistics in mind, if you still want to attend a free lunch seminar, do yourself a big favor and:

Commit to nothing. It's ok to grab a lunch on someone's else tab, especially if it's good eats (!), but knowing in advance you're inevitably going to come under pressure from financial salespeople connected to the seminar means you can steel yourself for no matter what they come at you with. Of course, always be polite, accept whatever literature or information packets they're handing out, but do not agree to or sign anything while you're at the seminar, especially if you haven't done any background research ahead of time. Which brings us to...

Do background research. It's the Age of Information, people! There's absolutely no reason in the world you should be attending a free lunch seminar/sales pitch session without knowing something about who's behind it and who's going to be doing the speaking. General research can be done through Google or social media. If the seminar sponsors are brokerages or individual brokers, use FINRA's wonderful online resource BrokerCheck to look into their professional history. If you're still not sure who you're dealing with by the time you get to the seminar, turn the tables on the pitch masters by putting them on the spot by asking for references. Let them feel some high-pressure.

We at The Green Firm have handled several cases in the past that involved our client being sold a bill-of-goods at one of these shady seminars. Don't be their next victim. If, however, you or anyone you know has already been the victim of broker fraud or fraud related to informational seminars hosted by financial industry professionals, please contact us immediately for a free consultation.


Brokers Are Not Just "Order-Takers"

The financial world has been undergoing several years of reform, to varying degrees of success. But the more circumscribed world of financial advisers has lagged behind--until now. If you’re an investor or even just a casual reader of the Business or Financial pages of the newspaper, get ready to hear a lot more about “fiduciary standard” in the next few years.

According to several recent articles, the SEC is gearing up its campaign to raise the standard for financial advisers who often claim, especially when they’re being sued for misconduct or negligence, that they’re only “order-takers” when it comes to important investment decisions. Yeah, right. Then why all the fees? And why call themselves “advisers” at all?


The truth is, at the moment, financial advisers are held to a somewhat lower standard of fiduciary obligation known as “suitability.” This standard involves a suitable match between a customer’s stated investment objectives and risk-tolerance and the financial products a financial advisor places them in. The SEC’s new standard would raise the bar. Brokers would not simply be asked to ensure that investments comply with suitability, but that brokers uphold the interests of their clients absolutely. As an article on CNBC mentions, “The current regulatory system means that brokers are legally permitted to recommend a higher-priced mutual fund to investors even if they know a low-cost one with better returns exists. Many brokers are compensated partly by commissions from mutual funds.”


With the SEC’s help, the world of investment just may become a little safer and more friendly to the interests of investors whose money is at stake in the first place. After all, shouldn’t financial advisors who are responsible for the life-savings of many of their customers, be held to professional standards that resemble the standards of lawyers, doctors, and CPAs? Of course they should. Right now, brokers are having it both ways. They take significant fees for their expertise, but they deny responsibility when that “expertise” fails them and damages customers.

Is This Investment REIT Or Wrong For You?

xtended periods of uncertainty in the stock market along with low interest rates can drive investors seeking higher returns into the arms of products that they may not fully understand or that may not be appropriate for their financial situation or risk tolerance. Take non-exchange traded real estate investment trusts (REITs), usually referred to as "non-traded REITs." A particularly egregious case we're currently handling reminded us that we needed to get the word out once again about the danger of buying into non-traded REITs if you don't fully grasp how they work. Of course, it's not the customer who would generally consider purchasing such sophisticated financial products; rather, brokers are pitched on such products by REIT representatives; and, seduced by promises of low-risk and high-return, the brokers in turn pitch their clients on them. 

(Very quickly, if you're not familiar with the concept of a "REIT:" a REIT is a trust or company that pools individual investments to purchase large portfolios of income-producing real estate. A very large percentage of the income from these properties is then disbursed annually to shareholders in the form of their distribution or return.)

Before you agree to the purchase of a non-traded REIT at your broker's suggestion (if it's not too late already), bear in mind three very important things:

  1. hares of non-traded REITs by definition do not trade on any national securities exchange
  2. arly redemptions of the shares you own in a non-traded REIT are strictly limited and in any case come with high fees that cut deep into your potential return
  3. Unlike in publicly traded companies, the distributions or returns ou get from non-traded REITs often come from borrowed funds or investor principal

1) The first item means that it can very difficult to determine the value of your investment in the REIT, especially if it starts to go bad. Since the REIT is not part of any actual market or exchange, its valuation is assigned internally and can often be inaccurate or manipulated by those running the fund. Moreover, until the shares are actually sold, the valuation of those shares is pure speculation. It's like a company going public for the first time: the value of its shares can fluctuate wildly in the initial offering and more often than not fails to correspond to projections, even by the experts.

2) Non-traded REITs are an illiquid investment. Be prepared to have your money locked up in a REIT for at least 8 years, possibly longer. In the meantime, if your financial situation changes, and you need to get out of the REIT, you face steep fees and losses. 

3) A unique feature of non-traded REITs is that he distributions or returns you get from them do not come out of earnings or profit, but rather from heavily subsidized debt or initial investor principal. When things go bad, and a non-traded REIT starts losing money, this can look a lot like a Ponzi scheme in that new investors are paid distributions from early investor principal. In some cases, a failing REIT will suspend distributions entirely, n which case not only will an investor be stuck in an illiquid product but it's an illiquid product that provides them with no return whatsoever. 

In investing, as in much else, knowledge is power. Know what you're getting into if you agree to purchase shares in a non-traded REIT. And if you don't know what you're getting into, ask your broker to explain everything to you--along with why he or she thinks this financial product is good for you. For more on non-traded REITS, consult FINRA's tip sheet here.

f you or anyone you know has been the victim of broker misconduct related to the purchase of non-traded REITs or any other financial product, please contact us for a free consultation.




Brokers May Have Been Broken by Financial Crisis

Did post-traumatic stress disorder lead huge numbers of brokers to make bad investment decisions on behalf of customers in the aftermath of the 2008 financial crisis? According to a recently published study from an academic journal called, "The Journal of Financial Therapy" (who knew such a thing existed!), it seems entirely likely they did. The study is based on a survey of financial advisers across the industry, “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress," and according to an article in MarketWatch the survey found that 93% of financial advisers and planners admitted they'd wrestled with PTSD following the crisis. That's not all, though. Shockingly, fully 40% of respondents to the survey said they had suffered severe PTSD symptoms. The respondent pool was responsible for anywhere between $20-$40 million in assets.

In order to qualify for a clinical diagnosis of PTSD, one must exhibit symptoms including sleep disturbance, high stress levels, anxiety, difficulty concentrating, and self-doubt for a period of more than one month. Many of the financial advisers who took part in the survey claimed that their symptoms continued for far longer than that--in some cases, for years afterward. Moreover, the study shows a correlation between the brokers' PTSD symptoms and a widespread shift in investment strategy over a period of a few years.

Although we sympathize with brokers who suffered personally during one of the worst financial crises in history, we tend to sympathize more with the customers whose life-savings simply vanished during that very same crisis, and who, we're quite sure, experienced their own form of PTSD or worse.

One psychologist quoted in the article mentions that PTSD sufferers tend to engage in very risky behavior like "substance-abuse, aggression, and thrill-seeking." Indeed, at The Green Firm it has been our experience that a surprising number of brokers reeling from the financial crisis have demonstrated such erratic behavior in its aftermath, often at the expense of customers who had already suffered losses due to the market's collapse. No matter how much sympathy we accord to brokers suffering from PTSD, they are still professional investors, still responsible for our money, and they still have supervisors who should be monitoring them for symptoms associated with PTSD as with any other condition that causes them to be unable to do their job. 

If you or anyone you know has been the victim of broker misconduct or any other form of investment fraud or negligence, please contact us immediately for a free consultation.





Bad Apple REIT Spoils a Bunch

Sometimes a bad investment is just a bad investment. At least, that's the message that was sent by a recent ruling from a US federal judge in a class-action suit against Richmond-based Apple REIT Co, a real estate investment trust which invests primarily in hotels. The story begins in Washington back in October 2012 when FINRA sanctioned brokerage David Lerner Associates (DLA) of Syosset, NY to the tune of $14 million for restitutions to customers and fines. FINRA's sanction was punishment for what the regulatory agency determined was a whole lot of unfair practices by DLA related to offering Apple REIT Ten, as well as excessive markups on municipal bonds and CMOs. To read the full complaint, click here.


As sole distributor of Apple REITs, DLA was found to be targeting unsophisticated investors and the elderly; selling the illiquid securities without determining if they were suitable for customers; using misleading marketing materials; and touting the REIT's performance as a "fabulous cash cow" and "gold mine." FINRA slapped them up for all of that, and suspended Lerner personally from the securities business for one-year, plus a two-year suspension from being a principal in a brokerage business. But here's where the story gets more interesting than just your average misbehaving brokerage...

he same customers who won restitution from DLA got together in a class-action suit and sued Apple REIT Co. Why not, right? If DLA was messing around, maybe Apple REIT was, too. But, somewhat surprisingly, as the April 3, 2013 ruling on the matter by US District Judge Kiyo Matsumoto of the Eastern District of New York stipulates, "investors had received sufficient disclosure to understand the risks of investing" and that Apple’s investment objectives “did not constitute actionable misrepresentations or omissions.” In other words, Apple REIT did nothing wrong. They had a high-risk product that had a real chance to be an illiquid investment given the nature of the real estate market, and apparently they had disclosed all relevant information in their marketing and promotional material. In this case, the bad Apple wasn't Apple REIT: it was DLA.

The takeaway: if a REIT discloses the nature of their product in all the small print and legalese in their offering material, that does not remove the duty of the financial adviser to make sure that this investment is suitable for an individual customer. It's the financial adviser's responsibility not only to ensure suitability, but to make a full disclosure to the customer about the risks and liquidity issues involved in an investment of this (or any) type.

If you or anyone you know has been the victim of misleading marketing material or any other form of broker misconduct, please contact us for a free consultation.