SEC: Non-Traded REITs Must Disclose How They are Valued

Recently, David Lerner Associates (DLA) has come under fire from the Financial Industry Regulatory Authority (FINRA) for charges that its Apple REITs had not been re-priced for several years and this was misleading to investors, especially where the REITs were paying dividends with principal and borrowed funds rather than from operating income, according to the Wall Street Journal. FINRA has said that Apple REITs had been constantly valued at $11, notwithstanding the fluctuations of the market over the last several years. Investors in the Apple REITs have filed a class action suit against David Lerner Associates to recover losses exceeding $6.8 billion, alleging that the company was negligent in its marketing and underwriting of the REIT. In the complaint, it is alleged that Lerner made over $600 million in commissions and fees for selling the REITs to retail customers and were paying dividends to investors “with their own money.”

Following that investigation, FINRA and the Securities and Exchange Commission (SEC) are focusing on the selling of real estate investment trusts (REITs) that are private placements and as such not traded on an exchange. Michael McTiernan, one of the attorneys with the SEC, said “we believe investors would benefit from more information about how non-traded REITs reach their valuations” and “we told the industry we would be reviewing the annual reports for this disclosure, and if it doesn’t appear, they should expect to hear from us.”

The REIT business has grown rapidly over the past decade, due to the fact that investors, many of whom are elderly, are trying to find investments that offer better returns than those that can be gotten with certificates of deposit (CDs) and money market funds (MMF). The growth spurt reveals that sale of non-traded REITs has risen from $6 billion in 1999 to over $73 billion in the last decade, promising annual returns of around 7% but loaded with initial fees of !0% or so of the investment.

Lerner Associates has been the subject of various regulatory problems in the past. They were fined for having sales contests and other providing other incentives for pushing proprietary products over others, in 2004. In 2005, they were fined for pumping up their investment performance in their advertisements and fined $400,000 in 2006 for violating disclosure rules related to their variable insurance products. Most recently, they were charged by FINRA with overcharging investors on sales of mortgage securities and municipal bonds.

If you have suffered losses in non-traded REITs, contact our securities law firm at 1-800-259-9010 for a confidential consultation at no cost to you.

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