July 14, 2010 Comments (0) Blog, Securities Fraud

Common Securities Fraud Involving REITs (real estate investment trusts).

(Last Updated On: July 17, 2015)

A real estate investment trust or REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable, into the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. The problem with REITs is that they are often not regulated like mutual funds and can offer some of the higher commissions to unscrupulous financial advisors seeking to earn money at the expense of their clients.

As such, anyone contemplating an investment in a REIT (particularly a private or unlisted Real Estate Investment Trust), should consider the motivations of the broker and brokerage firm selling it.

Unlisted REITs are particularly problematic investments because they are not traded on the New York Stock Exchange or Nasdaq market. Accordingly, they can be difficult for investors to sell and difficult for investors (or brokerage firms) to accurately value.

To overcome marketplace concerns, the managers and operators of private REITs typically offer brokers and brokerage firms higher commissions to sell their products to retail investors.

This strong commission-based motivation to sell unlisted and listed REITs has not gone unnoticed by regulators. In March 2009, the Financial Industry Regulatory Authority (FINRA), began questioning multiple brokerage firms about their sales and promotion practices related to private or non-traded REITs.

In 2009, the Securities and Exchange Commission charged Ameriprise Financial Services, Inc. with fraud and accused the Minneapolis, Minnesota-based broker-dealer of receiving millions of dollars in secret payments as a condition of offering and selling certain REITs to its brokerage clients.

Ameriprise agreed to settle the charges without admitting wrongdoing and pay $17.3 million, the SEC said.

According to the SEC order: “Ameriprise received approximately $30.8 million in undisclosed compensation in connection with Ameriprise’s offer and sale to its brokerage customers of certain real estate investment trusts (‘REITs’) between 2000 and May 2004 … Ameriprise demanded this undisclosed compensation, which it referred to as ‘revenue sharing,’ in exchange for including the REITs on Ameriprise’s brokerage platform.”

FINRA also issued a regulatory notice (09-09) in February 2009 regarding additional concerns about post-sale representations surrounding private and unlisted REITs. In the regulatory notice, FINRA reminded brokers and brokerage firms of some of their obligations to investors: Specifically, once unlisted REIT customers have owned their investment for a while, their monthly statements should begin to contain a reasonably current estimated per share value of the unlisted REIT investment.

FINRA also reminded brokers and brokerage firms that they are prohibited from using a per share estimated value that’s based on data that’s more than 18 months old compared to the customer’s account statement date. According to FINRA, “ … firms must not use par value in a customer account statement more than 18 months following the conclusion of an offering, unless an appraisal of the program’s assets and operations yields the same value.”

The staleness of data used to value these unlisted REITs is particularly important due to the illiquid nature of these investments.

Notwithstanding the SEC and FINRA’s actions, abuse of unlisted and listed REITs is ongoing. If you have questions regarding a REIT investment you made, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. The White Law Group is a national securities fraud, securities arbitration and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida. The firm has over 30 years of experience reviewing securities fraud claims throughout the country. To contact the firm, please call 312-238-9650. Or, for more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

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