Charges were filed against LPL Financial LLC, the largest organization of independent financial advisors in the U.S., on the sales of nontraded REITs offered by Inland American Real Estate Trust, the largest nontraded REIT in the industry. The regulator’s investigation found that LPL brokers failed to observe 10% concentration limits meant to protect investors, downplayed liquidity issues, and other issues comprising, in their words, “a boat with many holes”. Non-traded REITs were the subject of a FINRA Investor Alert earlier this year which pointed out their complexity, high fees, adverse tax consequences, and illiquidity.

(Investment News at www.investmentnews.com)

PORTLAND, Ore.— Banks Law Office is investigating claims filed by the Financial Industry Regulatory Authority (FINRA) against David Lerner & Associates (DLA) for selling non-traded real estate investment trusts (REITs) to seniors without disclosing the risks of the investment, violating federal securities laws.

Last month, clients holding shares in non-traded REITs created by Apple REIT Cos. Inc. received account statements that showed the longtime value of the shares as “not priced.” FINRA alleges that specific REIT registration statements and prospectuses failed to disclose material information concerning the value of shares of prior Apple REITs whose share value had declined significantly using a similar investment strategy. Additionally, the case alleges that David Lerner solicited such REIT purchases by means of false and misleading statements.

Since 1992, DLA has recommended and sold nearly $6.8 billion in Apple REIT shares as the exclusive selling agent. Similarly, a Cole REIT was in the news when a government pension fund demanded and received a return of its investment because it was too risky for retirement money.

Several private class action lawsuits have been filed over the misrepresentation of the Apple REITs; however, Robert S. Banks, Jr., President of Banks Law Office, cautions all investors to carefully evaluate their options before joining a class action case.

“In my experience of representing investors for nearly 30 years, individuals with strong claims are almost always better off filing an individual claim rather than participating in a class action because individual plaintiffs have more control over the case,” said Banks. “We urge investors to consult with an attorney and consider your options before concluding that your rights will be adequately protected by a class action lawsuit.”

Investors who were sold these non-liquidable investments may have an opportunity to recover their investments through FINRA arbitration. If you wish to discuss this action, or have any questions concerning this notice or your rights, contact us toll-free at (503) 358-8292.

In response to a number of recent inquiries from clients of Scott McKee, we are posting updated information. Here is what we can tell investors as of October 5, 2011.

• McKee No Longer at Morgan Stanley

Mr. McKee’s last day at Morgan Stanley was September 30, 2011. At Morgan Stanley’s request, and after Mr. McKee did not respond to our several requests to discuss certain investments with him, we provided evidence to Morgan’s Stanley’s attorneys in San Francisco concerning an unauthorized investment that McKee had sold to one of our clients while he was at Morgan Stanley. We do not know if the evidence we provided had anything to do with McKee’s departure from the firm, but he was gone less than a week after Morgan Stanley received the documents from Banks Law Office, P.C.

• FINRA Investigation Continues

Banks Law Office continues to cooperate with the attorneys at FINRA Enforcement who have requested documents and interviews of our clients who had dealings with Mr. McKee. FINRA has requested additional interviews and we are working to arrange them. FINRA’s investigation continues.

• Master Investments

A number of investors have asked us about their investments in Master programs. To our knowledge, there are two Master investments that McKee sold. One was Master Private Equity, and the other was Master Fixed Income. The offering documents for Private Equity state that it was designed to (a) develop and invest in real estate projects, and (b) invest in securities selected by Mr. McKee. There are a number of fees identified in the offering documents including a 5% annual management and administration fee, plus marketing fees and finders fees. The offering documents state that the investment will continue for 7 years, and can be extended to 9 years. During that time, investors are not entitled to withdraw their funds. In addition, there is a stated distribution schedule that, at the conclusion of the investment, after a return of principal, any profits are to be distributed 80% to investors and 20% to the operators of the fund.

The Master Fixed Income Fund was designed to lend money to the Private Equity Fund. Thus, the two investments are different, but related.

We express no opinion at this time on whether the Master Funds have operated as they are described in the offering documents. However, several investors have told us that the nature of the investment was not described to them. I believe that the investments were relatively high risk investments because of the fees and the volatile nature of the real estate markets. There is nothing illegal about selling risky investments, so long as the risks are adequately explained to the investors prior to the time of purchase. Based on the information we have from some investors, at least some sales were illegal because neither the risks nor the amount of time that the investments are locked up were disclosed.

• Not-Traded REIT Investments

Virtually all McKee clients who have contacted us were heavily invested in non-traded REIT investments. There is nothing illegal about non-traded REITs, but like other investments, the risks and characteristics of the investments have to be disclosed to investors before the time of purchase. Non-traded REITs are often laden with fees, and are usually difficult to get out of. And, it is hard for investors under current regulations to find out what their investment is worth. Values are usually based upon a stated value at the time of purchase, and may have nothing to do with the true value of the investment. And, even when investors receive payments, those payments may not represent a return of profits, but merely a return of the investor’s money. So, non-traded REITs are not appropriate for many investors, and it is rare that it is appropriate to place the majority of an investor’s portfolio into these investments. Just yesterday, FINRA (the Financial Industry Regulatory Authority) published a warning to investors on non-traded REITs. An article about the warning appeared in Business Week magazine.

• Banks Law Office Plans

Banks Law Office will be filing a FINRA arbitration claim on behalf of investors against Mr. McKee and Berthel Fischer Investments for the sale of an investment in Bedrocks Coffee, and possibly other investments that were not approved by Berthel Fischer for sale.

Non-traded REIT (Real Estate Investment Trust) sales are once again in the news. The Financial Industry Regulatory Authority (FINRA) filed an enforcement case against David Lerner & Associates for selling Apple REITs to seniors without disclosing the risks of the investment. Several private class action lawsuits have been filed over the misrepresentation of the Apple REITs. A Cole REIT was in the news when a government pension fund demanded and received a return of its investment because it was too risky for retirement money. Other investors have raised concerns about Wells REITs. Seniors in particular are becoming increasingly worried about their REIT investments when they consider getting out of the volatile real estate market, only to discover that they cannot sell them. Yet other REIT owners say they are satisfied with the returns that their REIT investments have regularly paid. So, what is the story behind REITs? Are they good or bad?

How REITS Find Their Way Into Investment Portfolios

Most REIT owners invest on the recommendation of an investment advisor who touts the fact that REITs allow common investors who don’t have the resources to purchase apartment complexes, shopping centers and hotels to make commercial real estate investments nonetheless. If an advisor recommends a REIT or any other investment, they must believe that it is a suitable investment for your individual risk tolerance, and they must tell you all important facts about the investment, both good and bad. Advisors selling non-traded REITs often tell their clients that the returns are typically above 6% and are reliable to boot. Investors are told that they are safe and offer protection and shelter from the risks of the stock market. But is that really true? What is missing from that story?

REIT Disadvantages

If you purchased a non-traded REIT (one not easily sold on the open market) there is a good chance that you were not told about the downsides of the investment. A significant problem relates to the extraordinarily high fees. The advisor who sold you a REIT may not have mentioned that he or she may have earned a 10% commission from your investment. Consider how long it took the advisor to sell you that REIT, and divide a 10% commission by the time it took to sell you the investment, and you will begin to understand why your advisor recommended it. A 30 minute sales pitch to sell a $100,000 investment yields a commission rate of $20,000 per hour for your advisor and his/her firm! That just may explain why your advisor recommended that REIT over a real estate mutual fund.

In addition commissions, REITs are loaded with other fees. There are typically charges for leasing, managing and acquiring the commercial buildings. Oftentimes there are built in conflicts of interest, with the promoters and principals of the REITS also owning the management, leasing, and acquisition firms. When it is all said and done, the fees can eat up 15% or more of the amount of your investment. In other words, your investment would have to earn 16% for you to realize a 1% return. Oh, you wanted 7%? Then, your investment needs to generate a gross return of 22%. How likely is that in today’ economy?

Yet, many of these REITs have paid investors what seem to be handsome returns of 6-7% or more, and consistently for several years. So, why is that so bad? Here is the problem: If the source of the dividends you receive is simply the uninvested money that the investors paid into the fund, and not revenues generated from real estate owned by the trust, it is a false return. In that case, which reportedly happens frequently, the trust is just paying back part of the money you invested. Every time investor funds are used to pay dividend, the underlying value of the investment goes down by more than the dividends distributed, once the costs of distribution is considered. You think you are winning, but you are actually losing.

Another problem with these REITs is that you never know the true value of the investment. Unlike an open end mutual fund or stock, which is priced and can be sold on the open market every day, non-traded REITs are rarely valued. REITs have been notorious for using outdated values. They continue to report the value as the purchase price, regardless of whether the value of the REIT’s property has decreased. “One common sales tactic we object to is the suggestion that they are eliminating volatility simply because they don’t tell you what the value is,” said Michael McTiernan, a lawyer for the S.E.C.’s corporate finance division. “It’s not that it’s not volatile. It’s just that you don’t know.”¹ That is changing now that FINRA and the SEC have begun to scrutinize these funds. New rules will require a new value to be assigned every 18 months, but that is small comfort to investors who are trying to evaluate the worth of their investment this year.

That leads us to the third problem of non-traded REITs, which is that you cannot sell them even if you can determine their worth. Investors have reported to us that their financial advisors often do disclose that these cannot be sold at will, but misrepresent when the can be sold. Most REITs have a life of about seven years, and investors are locked in for the duration of the REIT. There is no opportunity to reposition your investment, or to liquidate it if you need cash.

What Rights Do REIT Owners Have?

If you purchased your REIT from a financial advisor, they are required to tell you the full story about REITs before you invest. And, they cannot offer the investment if the level of risk is of your REIT is greater than you are willing to accept. That is why FINRA filed its enforcement action in May over the Apple REITs against the brokerage firm David Lerner & Associates. The advisors did not tell their investor clients that there were big risks associated with the Apple REIT investments, such as the ones described above. And, that is why the pension fund that was invested in a Cole REIT got its money back.

If you have concerns about your REIT investment, you should speak with an attorney who understand the complexities of the securities laws. They can tell you what the risks are in your particular REIT, and then evaluate with you whether the risks were adequately disclosed. For more than a decade, Banks Law Office has evaluated REIT purchases for our clients.

Class Action or Individual Claim?

Some investors have filed class action lawsuits in court to recover their REIT investments. We caution all investors to carefully evaluate their options before joining one of those cases. In my experience of representing investors for nearly 30 years, individuals with strong claims are almost always better off filing an individual claim rather than participating in a class action. As a class action plaintiff, you have no control over your case. There are no claims that are specific to you, and you have little or no say in whether a settlement offer will be accepted. Most often, you will not participate at all in a class action case. It is run by the lawyers and you won’t know anything about the case until you learn that the case has been dismissed or a settlement was reached. (Class action cases almost never go to trial.) In an individual case, you and your lawyer work together, and the case is about you and your losses. The case is filed where you reside, and you are directly involved in all aspects of the case. The only time that investors are better off in a class action than an individual claim is where the amount of the investment is small, which we define as under $75,000. We urge investors, whether they be individuals, pension funds or other retirement funds, to consult with an attorney and consider your options before concluding that your rights will be adequately protected by a class action lawsuit. I am available to discuss on a confidential basis those options with any REIT investor, including reviewing your REIT paperwork. The Banks Law Office does not charge for our time spent evaluating REIT claims.

¹From The New York Times, July 19, 2011 “A Closer and Skeptical Look at Non-Traded REITs” by Terry Pristin.

This investigation follows a formal complaint filed by FINRA alleging that DLA sold Apple REIT Ten shares “targeting unsophisticated and elderly customers” to buy illiquid securities. Glade M. Knight, the founder, chairman and CEO of Apple REIT Cos., is also being investigated.

We strongly encourage all investors to seriously consider filing individual claims before deciding to participate in a class action lawsuit. In our experience, investors who bring individual cases often recover more money than those who are merely part of a large class. We would be happy to discuss this further with any investors. Banks Law Office has been protecting investors since 1985 and has years of experience with these types of claims. Please contact us with your questions and concerns. Consultations are free.