illiquid investments

FINRA Panel Awards $900K in Non-traded REITs Case

This week, a FINRA arbitration panel in Florida turned some heads with a $900,000 award to investors who had lost money in two non-traded REITs offered by Inland American Real Estate Trust, Inc. One of the nation’s largest real estate trusts, Inland American controls more than $11 billion in real estate assets. The REITs at issue in the case were Inland Western Real Estate Investment Trust and Inland American Real Estate Investment Trust.

photo by Kevin Dooley (Creative Commons)

photo by Kevin Dooley (Creative Commons)

Maybe you’ve heard of REITs already. They’re real estate trusts that pool investor money in order to control large assets such as shopping malls, apartment complexes, even timber land. There are two basic kinds of REITs that are publicly registered (as well as something called a “private REIT” or “private placement REITs” which we we’ll talk about another time): exchanged-traded REITs and non-exchanged-traded REITs. In the case of traded REITs, they are similar to more familiar securities like stock in that their shares are listed on a national securities exchange and they can be sold rather easily on the secondary market.

Non-traded REITs are different. Their shares are not traded on a national securities exchange, they demand high fees, and they are highly illiquid. Often, investors will not be able to get their money out of a non-traded REIT for 8 years or more. Finally, distributions thrown off by a REIT are subject to reductions or stoppages by the issuer of the REIT if they deem it necessary--and there’s nothing you can do about it. These factors make REITs, and especially non-traded REITs, rather risky investments, especially for novice investors who do not fully understand the liquidity issues involved.

In summer 2012, FINRA dedicated one of its “Investor Alerts” to the subject of non-traded REITs. For more information, please click here. Below you’ll find a helpful chart provided by FINRA that helps describe and distinguish between traded and non-traded REITs:


We’ve litigated numerous cases in which brokers seeking higher fees placed unwitting investors in non-traded REITs without informing them of the risks involved, especially the risks related to liquidity. Years later, when the REITs stop issuing distributions or the investors want out, they find themselves stuck in a product they don’t understand and that is not appropriate for them. Because there is no secondary market for such securities, investors simply have nowhere to go.

If you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately at 1-855-462-3330 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.