LPL Financial, LLC Settles Charges by Massachusetts Securities Enforcement Division over Improper Sale of Non-Traded REITs
LPL Financial, LLC (“LPL”) has settled charges brought against it by the Office of the Secretary of the Commonwealth Securities Division for Massachusetts for $2.5 million. In December 2012, the Massachusetts Securities Enforcement Section filed a complaint against LPL based upon its sales practices in non-traded Real Estate Investment Trusts (“REITs”). According to the complaint, the Enforcement Section started investigating LPL based upon the sales of Inland American Real Estate Trust, a large, non-traded REIT which has received a significant amount of press coverage for its failure. The investigation then grew to encompass and include Cole Credit Property Trust II, Inc., Cole Credit Property Trust III, Inc., Cole Credit Property 1031 Exchange, Wells Real Estate Investment Trust II, Inc., W.P. Carey Corporate Property Associates 17, and Dividend Capital Total Realty.
However, while investigating the sales practices surrounding that particular product, the Massachusetts Enforcement Section discovered significant and widespread failures in the sales practices and supervision of many different non-traded REITs. LPL representatives were completely disregarding requirements in the various REITs’ prospectuses, as well as disregarding Massachusetts specific requirements for their sale. According to the Enforcement Division stated that “the Division’s investigation unearthed a boat with many holes.”
The claims made in the complaint are quite stark and should be completely shocking in this industry. The Massachusetts Enforcement Section claims that the managers, compliance officers, and/or other supervisory employees had only a cursory understanding of what specific requirements were in various states for the sale of non-traded REITs, Massachusetts requirements included. One supervisor with LPL was apparently completely unaware that Massachusetts even had requirements or regulations concerning the sale of non-traded REITs.
LPL brokers themselves were no better off. Representatives received little to no training on the products or supervision in their sales. The Enforcement Section gave examples of LPL brokers resorting to flying to the headquarters of a non-traded REIT issuer at his own expense in order to learn about what the product was. In other instances, brokers were being courted directly by wholesalers of non-traded REITs to sell the products, despite this complete dearth of training.
The Enforcement Section reviewed 597 transactions involving Massachusetts residents in its investigation. These transactions followed 7 non-traded REITs that received over $28 million in investments from Massachusetts investors between 2006 and 2009. In the same time period, LPL charged gross commissions in excess of $1.8 million from the sale of non-traded REITs to Massachusetts investors. Of the 597 transactions reviewed, the Enforcement Section concluded that 569 of them were sold in direct violation of the prospectus requirements of the product. Stated another way, only 28 transactions that the Enforcement Section reviewed did not violate the prospectus requirements.
In February 2013, LPL and the Secretary of the Commonwealth of Massachusetts agreed to settle this issue for a total of $2.5 million. Of that, $2 million is designated to provide restitution to Massachusetts investors who invested money in the non-traded REITs investigated as part of the complaint. LPL also agreed that it will pay a $500,000 fine. LPL has also agreed that it will separately review all other purchases of other non-traded REITs by Massachusetts investors and will offer further restitution where those purchases were made in violation of the rules. Ultimately, it is unclear how much, if any, additional payments this will obligate LPL to make.