The law firm of Smiley Bishop & Porter LLP is investigating potential claims against Wells Investment Securities, Inc. (“Wells Securities” and “Wells”) concerning its sales of Wells Real Estate Funds.
Wells Securities is a Norcross, Georgia based broker-dealer which makes most of its revenue from selling Real Estate Investment Trusts (“REITs”) and direct participation agreements. FINRA, which regulates broker-dealers, has just fined Wells $300,000 for using misleading marketing materials in selling its real estate funds. As is typical in regulatory settlements, Wells paid the fine but “neither admitted nor denied liability.”
The story behind the settlement should be an eye-opener for investors. FINRA charged that over a two year period, Wells Securities approved 116 misleading advertising and sales materials for the Wells Timberland REIT which invested in timber-producing property. The firm’s promotional materials indicated that Timberland would qualify under federal tax laws as a REIT by December 31, 2006. In reality, however, it did not qualify until the end of 2009-almost three years later. This misled investors into believing that Timberland qualified for the favorable tax treatment the IRS allows for REITs.
In addition to deceiving investors about the tax status of Timberland, FINRA alleged that sales materials falsely implied that Timberland would make distributions and redeem shares at times when it was prohibited from doing so by virtue of agreements with its lenders. FINRA also asserted that Wells made unwarranted and exaggerated claims that Timberland’s holdings were diversified when it actually only owned one property.
This case is notable because it involves an increasingly problematic investment called non-traded REITs. Non-traded REITs do not trade on the New York Stock Exchange or any other organized market. Although non-traded REITs must make SEC filings that disclose important details about their financial condition, unlike traded REITs the lack of an organized trading market makes it hard to understand their real value and harder still to liquidate them at good prices. Non-traded REITs are also plagued with high front-end fees, which basically pay the brokers who sell them and rob investors of yield.
And if high costs and low liquidity are not enough reason to avoid non-traded REITs, consider also the fact that some of the distributions they make to investors may be made with borrowed money or even a return of the investor’s own money. The bottom line on most non-traded REITs is they are great for the brokers who sell them and bad for those who invest in them.
If you have sustained losses as a result of investments in non-traded REITs which were not properly represented to you or were not appropriate for your investment needs and objectives, please contact us for a free initial consultation.
