SEC To Investigate Nontraded REITs


The Securities and Exchange Commission is scrutinizing of the selling of real estate investment trusts that are private placements, that is, are not traded on an exchange, according to an Wall Street Journal article by Anton Troianovski and Craig Karmin entitled “Nontraded REITs Are Put on Notice by SEC.” The SEC is inquiring into the operations and disclosures of nontraded REITs, according to the article.

“We believe investors would benefit from more information about how [nontraded REITs] reach their valuations,” Michael McTiernan, a lawyer in the SEC’s corporation-finance division, was quoted as saying, adding: “We told the industry we would be reviewing the annual reports for this disclosure, and if it doesn’t appear, they should expect to hear from us.”

Sales of untraded REITs have risen from $6 billion through 1999 to more than $73 billion over the past decade, as investors, many of them seniors on a fixed income, seek greater returns than those offered by certificates of deposit and money market funds. Untraded REITs promise steady annual returns of about 7% despite initial fees that often are around 10% of their investment, according to the article.

As reported earlier, investors in non-traded real estate investment trusts known as Apple REITs, which invest in hotels, have filed a class action suit against David Lerner Associates (“DLA”) to recover alleged losses of more than $6.8 billion, claiming the firm acted negligently in sales and underwriting of the REIT.

According to the complaint, which seeks class-action status, DLA, which collected more than $600 million in fees and commissions, sold the Apple REITs to retail investors and retirees at $11 per share, and failed to adjust the price, even though the REITs failed to generate enough income to pay dividends and “were paying investors with their own money.”

DLA has a history of regulatory problems. According to the article: In 2004, DLA was fined by the National Association of Securities Dealers for conducting sales contests that incentivized the sale proprietary mutual funds and variable annuity and variable life insurance products regardless of their unsuitability. In 2005, DLA was fined for exaggerating its investment performance record in its public advertisements. In 2006, DLA was fined $400,000 for violating disclosure rules in the sale of variable life insurance and annuities. The Financial Industry Regulatory Authority (FINRA) recently charged DLA with overcharging customers on sales of municipal bonds and mortgage securities.

In a recent enforcement action against DLA, FINRA charged that Apple REITs had not been re-priced for several years, and that this was misleading to investors, especially where the REITs were paying dividends with principal and borrowed funds instead of operating income.
?”Earlier Apple REITs, under the same management, inappropriately valued the REIT shares at a constant artificial price of $11, notwithstanding years of market fluctuations, performance declines, increased leverage and excessive return of capital to investors,” FINRA was quoted as stating.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving private placement or Regulation D investments. For further information, please contact us.