A FINRA arbitration panel recently awarded a group of 40 investors $9.1 million in compensatory damages and attorneys fees arising out of the sale of failed non-traded private placements. The award may be the single largest arbitration award stemming from such investments. However, the firms who sold the placements have gone under meaning it is unlikely the plaintiffs (or their lawyers) will actually recover anything.
Non-traded private placement REITs are highly complicated and very risky investments, generally reserved for very experienced, wealthy investors. The investments are exempt from federal filing requirements, meaning that investors can find it very difficult to get thorough and accurate information regarding the risks and valuation of the investments. They also are difficult to value, frequently illiquid, and generally involve high fees and high commissions.
They are not for your every-day investor.
And yet, in surprising number, that is who invested. Many investors with low to moderate risk-tolerance levels ended up in such investments and many have arbitrations, class actions, and federal investigations proceeding on their behalf.
One reason for this unsuitable pairing is that, in a market where traditional investments were making modest – if any – returns, many investors were drawn to these non-traditional investments, some of which were advertising 6-10% returns. With an increased return, of course, comes increased risk. However, there are serious questions as to whether those risks were properly disclosed, and whether brokers properly considered them when recommending them to investors.
FINRA has initiated proceedings against several of its member firms and individuals, accusing them of failing to perform proper due diligence in connection with the marketing and sale of the investments. It also has issued warnings to investors,and is
seeking to impose stricter rules on such investments.
The SEC has been busy as well, filing against companies that sold the placements with insufficient, inaccurate, or incomplete disclosures. One notable and recent example is that of Securities America, a subsidiary of Ameriprise Financial, who recently settled with the SEC for $17.3 million, resolving allegations that they failed to disclose certain payments that were made in connection with the sale of REIT shares, the conflicts of interests created by such payments, and the controversial existence a series of "mislabeled invoices" to the REITS from Ameriprise which resulted in "undisclosed revenue payments." (See the SEC News Release on the settlement here )
But as this most recent arbitration award makes clear, even with a successful outcome, actual recovery can be difficult as the issuing companies continue to fail. It also underscores the importance of undertaking proper due diligence when selecting a broker or financial advisor with whom to entrust your savings.
To research a broker or brokerage firm, use FINRA's free BrokerCheck tool, available here.
If you are concerned about the propriety of investments that were recommended or sold to you, you can contact us here.