Securities Arbitration is Your Best Chance to Recover
Your Money Invested in REITs
Klayman & Toskes' sole focus is the representation of investors in large and complex securities arbitration and litigation matters. The quality legal representation provided by Klayman & Toskes to its clients has resulted in the recovery of over $100 million in securities arbitration claims and over $250 million in other securities litigation matters. We have represented numerous investors who sustained losses in investment products like Real Estate Investment Trusts (“REITs”), hedge funds, arbitrage funds, bond funds, CDOs, and CMOs.
Our law firm is handling securities arbitration claims in the arbitration forum established by the Financial Industry Regulatory Authority ("FINRA") to recover money invested in Real Estate Investment Trusts ("REITs"). In some cases, an investor's REIT may have little to no value as the REIT has filed for bankruptcy protection. In other instances, an investor is unable to access the money placed in a REIT because of the illiquidity of the product. In either case, our law firm represents investors against the brokerage firms who recommended that they purchase REITs, and files claims to recover losses sustained and/or recession of the investment in the REIT.
Under FINRA Rules, brokerage firms have an obligation to make only suitable recommendations and to fully disclose all risks associated with a recommended product, including the fact that REITs are illiquid products. Moreover, brokerage firms have a duty to conduct a reasonable investigation of the issuer and the securities they recommend before approving them for sale to their customers.
FINRA Rules Regarding REITs
In October of 2011, FINRA issued a new Investor Alert called Public Non-Traded REITs-Perform a Careful Review Before Investing to help investors understand the benefits, risks, features and fees of these investments. While investors may find non-traded REITs appealing due to the potential opportunity for capital appreciation and the allure of a robust distribution, investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. Additionally, early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.
According to FINRA, "Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs' high yields and stability, while glossing over the lack of liquidity, fees and other risks.
REITs pool the capital of numerous investors to purchase a portfolio of properties--from office buildings to hotels and apartments, even timber-producing land--which the typical investor might not otherwise be able to purchase individually. There are two types of public REITs: those that trade on a national securities exchange and those that do not. FINRA's alert focuses on publicly registered non-exchange traded, or simply non-traded REITs.
Public Non-Traded REITs outlines the features, complexities, risks and costs associated with non-traded REITs:
• Distributions are not guaranteed and may exceed operating cash flow. In newer programs, distributions may be funded in part or entirely by cash from investor capital or borrowings. Distributions can also be suspended for a period of time or halted altogether.
• Lack of a public trading market creates illiquidity and valuation complexities. Most non-traded REITs are structured as a "finite life investment," meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate. Many factors affect the valuation of non-traded REITs, including the portfolio of real estate assets owned, strength of the trust's balance sheet, overhead expenses and cost of capital.
• Early redemption is often restrictive and may be expensive. Most non-traded REITs place limits on the amount of shares that can be redeemed prior to liquidation. These limits can be as restrictive as 5--or even 3--percent of the weighted average number of shares outstanding during the previous year. Additionally, the redemption price is generally lower than the purchase price, sometimes by as much as 10 percent.
• Non-traded REITs can be expensive. State and FINRA guidelines limit front-end fees to 15 percent, but a 15-percent front-end fee on a $10,000 investment means that only $8,500 is going to work for an investor.
FINRA also warns investors about private REITs--generally sold only to accredited investors--which not only do not trade on an exchange, but are also generally exempt from Securities Act registration. FINRA cautions that it is extremely difficult for investors to make an informed decision about private REITs due to their lack of disclosure documents.
Klayman & Toskes has successfully obtained recoveries for clients over the last several years in these same types of illiquid investment products. The danger of clients investing in illiquid products like these is that they are not freely tradable in the market place, but instead are dependent on valuation procedures which may not properly value the securities. Over the years, these valuation procedures have created conflicts of interest. This conduct appears to repeat itself as we have seen this many times before.
For more information on how to start a claim, or to find out if you have a claim, please contact our law firm for a free consultation. Be aware, there are strict time limitations, which in some cases are as short as one or two years. Don't lose your opportunity to get your money back!