FINRA Fines Wells $300K for Using Misleading Marketing Materials

The Financial Industry Regulatory Authority (FINRA) announced the other day that it had fined Wells Investment Securities Incorporated, an affiliate of Wells Real Estate Funds, $300,000 for using misleading marketing materials in the sale of the Wells Timberland REIT, a non-traded real estate investment trust (REIT). Wells was the dealer-manager and wholesaler who reviewed, approved and distributed the marketing materials containing misleading, unwarranted or exaggerated statements regarding the REIT.

The materials used for the marketing and sale of the Wells Timberland REIT represented that the investments were safe, secure and were suitable for conservative minded investors. This turned out to not only be false but served to grossly mislead investors about the product. Wells was responsible for reviewing and approving 116 marketing materials from May 2007 through September 2009, which contained completely erroneous or misleading information about its investment product. One particular example was the assertion in the offering prospectus that the investment would qualify as a REIT for the tax year ending in December 2006. However, it failed to qualify as a REIT until the tax year ending December 2009. This would be huge for investors seeking favorable tax treatment. Therefore, investors relying on the prospectus would be led to believe that such an investment would allow them to qualify for special treatment from the Internal Revenue Service (IRS) when, in fact the investment was not yet a REIT enabling them to obtain the desired tax benefits that the marketing information was touting.

The Financial Industry Regulatory Authority (FINRA) issued an investor alert on non-traded REITs on October 4, 2011, warning investors about the benefits, risks, features and fees involved with those investments. Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, issues the following statement: "By approving and distributing marketing materials with ambiguous and equivocal statements, Wells misled investors into thinking Wells Timberland was a REIT at a time when it was not a REIT. Firms need to be mindful that investors rely on marketing materials to disclose truthful, accurate and up-to-date information to help inform their investment decisions."

Another Wells REIT, Wells REIT II, which was just offered on June 30, 2011 as a safe, income producing investment is now said to have already lost more than 25% of its initial share price of $10.

Non-traded REITs carry high front-end fees of as much as 15%, are highly illiquid, carry many risks that are not disclosed to investors, have distributions that can be suspended or discontinued altogether and distributions are taxed as ordinary income versus capital gains, among other things.

If you have suffered losses in either the Wells Timberland REIT or Wells REIT II, we would like to hear from you to discuss your potential claims. Please call our securities law firm at 1-800-259-9010 for a confidential, no obligation consultation.

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