William Galvin, Massachusetts Secretary of State and chief securities regulator, is investigating 15 brokerage firms for possible misconduct in the sales of “alternative investments.” These investments include Real Estate Investment Trusts (REITs), Tenancy-in-Common interests (TICs), private placements and oil and gas partnerships. Massachusetts shares our growing concern that these investments are frequently peddled to senior citizens. While there is nothing inherently wrong with these investments as a class, they are frequently unsuitable for older Americans and those with the need for quick access to their cash.
Many alternative investments are illiquid meaning there is no ready secondary market. Some, like oil and gas partnerships, can be quite risky too. They may be fine if you don’t need your money right away or can afford to speculate. Many older investors need ready access to their investments to help them through retirement. That means their investments must be liquid (able to be sold as necessary) and safe. Unfortunately, many alternative investments such as TICs and REITs are neither.
Investors like these products because most promise an above market rate of return. Stockbrokers like them because they often pay an above market commission.
Brokers have a legal obligation to only recommend suitable investments for their customers. They are also required to fully understand their client’s financial situation and needs (“Know Your Customer” rules). Finally, brokers must also perform some fundamental due diligence into the products they sell. In the case or TIC interests sold by DBSI and Carlton Cabot, the investments were often not properly understood or explained. Sometimes they carried personal guaranty obligation that bind the investor. Sometimes they were complete scams.
The investigation by Massachusetts authorities comes as no surprise. In May, Galvin disclosed settlements with Ameriprise, Commonwealth Financial Services, Securities America, Lincoln Financial Advisors and Royal Alliance Associates over sales of REITs. That settlement resulted in almost $1 million in fines and millions more in restitution. Earlier in the year Massachusetts entered into another multimillion dollar settlement with LPL Financial.
When questioned about this week’s new probe, Galvin responded, “While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents [looking to score] large commissions.” We agree.
Massachusetts sent subpoenas to Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services LLC, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade Inc., ING Financial Partners Inc., LPL Financial LLC, Commonwealth Financial Network, MML Investor Services LLC, Investors Capital, Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc. Simply because the state is investigating does not mean any of these firms has engaged in any wrongdoing.
If you purchased a REIT, TIC, secured note or private placement and can’t sell it or find that it didn’t perform as advertised, you may have a claim. While no stockbroker or investment advisor can guarantee results, they are responsible for your losses if they failed to follow industry suitability and know your customer rules. Act quickly since smaller brokerage firms have limited capital reserves and insurance. When it is gone, chances of recovery plummet. We have already seen several brokerage firms go out of business because of claims from Cabot TICs, DBSI, Medical Capital Holdings and Provident Royalties.
If you have a nonperforming TIC or REIT and think you may have a claim, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All calls are protected by the attorney – client privilege.
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Post by Brian Mahany, Esq