Articles Posted in Real Estate

Stoltmann Law Offices, P.C. has represented hundreds of investors in arbitration actions against brokerage firms for losses in connection with non-traded Real Estate Investment Trusts (REITs). Non-Traded REITs are the darlings of brokers and their firms because of the huge commissions and “hands-free” management approach they foster. Brokers sell non-traded REITs under the guise of “high income” and “non-stock market risk”, when the money investors receive from REIT distributions is mostly made up of their own money, and are actually as speculative to invest in as the stock of any company.

According to FINRA, the regulatory agency responsible for policing brokers and their firms, Mike Patatian sold made 89 unsuitable recommendations to 59 clients who invested more than $7.8 million in non-traded REITS. FINRA alleges that Patatian did not understand the REITs he sold, including basis features and risks, and therefore lacked a reasonable basis to make the recommendations. Patatian is also alleged to have recommended that clients liquidate annuities, incur surrender charges, and then roll the proceeds into non-traded REITs. He is also accused of inflating client net worth on forms in order to circumvent REIT limitations. Patatian denies FINRA’s allegations, which can be found here.

Stoltmann Law has blogged extensively on issues related to non-traded REITs. Between the speculative risk, high commissions, lack of liquidity, and complicated structure, there are numerous better options for an investor who wants exposure to the real estate sector. There are hundreds of fully liquid REITs traded on the New York Stock Exchange every day for investors that want to invest in REITs. There is no reason to invest in a non-traded REIT other than the sales pitch by the broker selling them.

Chicago-based Stoltmann Law Offices, P.C. continues to see a surge of investor cases involving “alternative” investments like non-traded REITs, BDCs, oil and gas LPs, and other private placements. These “alts” are almost always considered to be on the speculative end of the risk scale, and frankly, they usually perform poorly and result in investor losses.

Alternative investments cover a wide variety of unconventional investment vehicles. They may employ novel or quantitative trading strategies or pool money for investments in commodities or real estate, for example. The one thing they all usually have in common is steep management fees along with commissions. Both expenses come out of investors’ pockets. Examples of alternative investments, or “alts” in industry parlance, include unlisted or “private” Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds. While they are generally sold to high-net worth investors who can afford to take on increased risk, they are usually illiquid and complex. Brokers who sell these vehicles may not fully disclose how risky they are. Most of these investments are unregulated, so supervision by regulators is typically light or non-existent.

Investors can file arbitration claims with FINRA if brokers sell inappropriate alternative investments to clients. A year ago, FINRA censured and fined the broker-dealer Berthel Fisher in connection with sales of “inappropriate” alternative investments. FINRA awarded six investors $1.1 million and fined the firm $675,000. Berthel Fisher has had a history of running afoul of investors and regulatory fines. In 2014, the firm was fined $775,000 by FINRA for “supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs).” The firm was also selling managed commodity futures; oil and gas programs; business development companies; leveraged and inverse Exchange Traded Funds and equipment leasing programs.

Stoltmann Law Offices is investigating claims made by the Securities and Exchange Commission (SEC) against Robert Gravette, Mark MacArthur, and their Registered Investment Advisory firm, Criterion Wealth Management Insurance Services, Inc. According to the complaint filed by the SEC on February 12, 2020, Gravette and MacArthur orchestrated a scheme whereby they funneled their clients’ money into four private placement funds without disclosing that the fund managers, with whom they were personal friends, paid them compensation in excess of $1 million for doing so. This compensation arrangement was recurring, so Gravette and MacArthur had an undisclosed financial incentive to keep their clients’ money in these funds, as opposed to allocating the money elsewhere, when appropriate.  Further, the huge fees Gravette and MacArthur received reduced the investment returns that the investors would have otherwise received.  The SEC alleges that these acts violated the fiduciary duties owed by Gravette and MacArthur to their investment advisory clients, and constituted fraud.  The SEC complaint alleges an impressive list of federal statutory violations, including Sections 206(1), 206(2), 206(4), and 207 0f the Advisers Act, 15 U.S.C. sections 80b-6(1), 80b-6(2), 80(b)-6(4), and 80b-7, and Rule 206(4)-7 thereunder.

At all times relevant to these allegations, both Gravette and McArthur were dually registered representatives with a FINRA registered broker/dealer called Ausdal Financial Partners. According to the SEC, Ausdal Financial was involved in these transactions because Criterion opened accounts for them at Ausdal and the private placement funds were held on Ausdal’s account statements.  Under FINRA Rules and regulatory notices, Ausdal Financial, at all times relevant, had a duty to supervise the disclosed Advisory activities of its registered representatives.  See FINRA Rule 3280, NTMs 91-32, 94-44, and 96-33.  The dual-registration of investment advisors creates supervisory challenges for brokerage firms like Ausdal because under SEC Rules, they must maintain and record transactions like those entered into by their dually registered agents on their books and records, or its a violation.  Since they must maintain transaction records which they did by virtue of holding these funds on their account statements, they also must supervise those transactions and the activities of their registered representatives, even if they appeared to be acting solely on behalf of their advisory firm. FINRA does not care and neither should the victims of this scam, which was executed in plain sight.  Any competent compliance department would have supervised the transitions in these real estate private placement funds.

The very nature of these funds being “private placements” would have required an added measure of scrutiny by Ausdal compliance. Private placements tend to be speculative and exposed investors to unique risks like lack of liquidity, concentrated risk, key-man risk, and management risk not typically found in publicly traded investments like mutual funds.  The most substantial issue with a private placement is that they typically pay their brokers very high commissions compared to more standard investments.

Stoltmann Law Offices has been investigating Northridge Holdings and Glenn Mueller on behalf of several clients over the last several months. On September 5, 2019, the Securities and Exchange Commission (SEC) filed a complaint against Glenn Mueller, Northridge Holdings, and several other Mueller-controlled companies, in the United States District Court for the Northern District of Illinois.  The complaint alleges that since at least 2014, Mueller, through his tangled web of entities, has orchestrated a veritable Ponzi scheme, raising in access of $40 million from investors based on the representation that he was purchasing properties with those funds. The truth is, Mueller has not purchased a piece of property since 2012. Instead of using investor money to purchase properties, Mueller used new investor funds to make interest and principal payments to previous investors, in class Ponzi-payment fashion. These funds were also used to pay “finders” commissions for referring new investors to Northridge. The SEC also alleges that Mueller used investor funds for personal and family use, including to make loans to family members and trade stocks and options in personal brokerage accounts.

The SEC’s allegations blow the lid off of Northridge and Mueller’s schemes. Although Mueller and his finders represented the “notes” sold by by Northridge were “secured” by property, they are not. In fact, although Mueller claims the full liquidation value of his real estate is over $100 million, he owes investors and mortgages on those properties more than that. Despite all of his representations to the contrary, Mueller and his companies are “upside-down”.  The Daily Herald also details the religion-based sale pitches used by Mueller which is an all too common hook used by schemers.

The next steps for investors is to await the appointment of a receiver. According to the docket report for this case, there is a hearing on Wednesday, September 11 during which the SEC will request the court appoint a receiver and freeze all of Mueller’s and his subsidiaries’ assets. Assuming this request is granted, which given the allegations seems likely, the receiver will begin the process of marshaling assets, selling off properties, and collecting funds to repay creditors and investors.  How long this process takes and how much money investors can expect to get out of this is anyone’s guess. The fact of the matter is, and according to the SEC, Mueller owes more money than his properties are estimated to be worth. Further, any liquidation of real estate creates a buyer’s market, so whatever purported value these properties have, they will likely be sold at a discount eventually.

FINRA permanently barred former Securities America financial advisor, Bobby Wayne Coburn (“Coburn”) on August 27, 2019 after he failed to appear at the disciplinary hearing. This came after Securities America terminated Mr. Coburn on March 20, 2019 for soliciting multiple clients to invest in an unapproved private securities transaction. He also tried to settle a complaint made by a customer without notifying the firm. According Mr. Coburn’s FINRA BrokerCheck report, the securities were in the form of promissory notes and real estate securities.

On notice of Coburn’s violations, FINRA promptly initiated an investigation into Coburn in July 2019. According to the Acceptance, Waiver, and Consent (“AWC”) FINRA entered against Coburn, Securities America learned in January 2019 that Coburn sold unregistered securities to clients in 2010 and 2011. Securities America also discovered the Coburn settled a customer complaint relating to this scheme in 2016 without providing the required notice to his firm and FINRA.  When FINRA requested documents and information from Coburn, he informed FINRA that he was no longer working in the securities industry and refused to produce the documents and information, in violation of FINRA Rule 8210. FINRA also found that Coburn violated Rule 2010, which is a “catch all” rule requiring that brokers and firms conduct business with “high standards of commercial honor” and maintain “just and equitable principles of trade”. FINRA permanently barred Coburn from the securities industries for violating these rules.

Coburn’s career in the financial services industry began in 1986 at Ameritas Investment Corp. During his thirty-three year career, he bounced from firm to firm, and landed at Securities America in January 2009. He worked from the Fort Meade, Florida branch office. Two customers have filed complaints against Coburn, including one complaint related to the real estate investment scheme. According to his BrokerCheck report, Coburn sold the client an investment in a Costa Rica real estate development, which did not make the required payments pursuant to the promissory note. The complaint for $32,000 was settled for $7,000. The entire settlement was paid by Coburn. Another client of Coburn and Securities America formally complained about an unsuitable variable annuity that Coburn sold, and the $5,000 complaint was settled for nearly $55,000, with Coburn contributing $5,000.

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