New York City REIT is focused on real estate investments in the five boroughs making up New York City and primarily focusing on Manhattan. This non-traded real estate investment trust (REIT) was originally sold at a price of $25.00/share. In December 2019, Mackenzie Realty Capital, Inc. extended a tender offer at $10.05/share. This is less than 50% of the original value!
The New York City REIT’s stated current value based on the sponsor’s representations are reporting $20.26/share, and that figure is obviously significantly higher than the tender offer price. Notwithstanding those estimates by the sponsor, the most recent trading range reported by a secondary market source was in the $12.80/share to $13.00/share range. See Central Trade and Transfer. For buyers who paid at or near the original $25.00/share price level, or those accepting the recent tenet offer, this could reflect a significant loss.
A national securities fraud lawyer, Jason Haselkorn, Esq. a partner with Haselkorn & Thibaut, commented that his office has received a number of calls from investors who have incurred losses in non-traded REIT investments, a number of which are not represented properly at the point of sale, or investments that are the result of negligent supervision.
Suitability and Supervision Issues of Non-Traded REITS
These investments are generally offered by financial advisors working at independent broker-dealer firms. They represent one type of Direct Participation Programs (DPPs). Non-Traded REITs and BDCs are typically risky illiquid alternative investments that the United States Securities and Exchange Commission (SEC) define as a “Reg D” offerings also known as “private placement.” The reference to Regulation D provides exemptions from the typical registration requirements of Section 5 of the Securities Act of 1933.
FINRA Issues With Private Placements
A brokerage firm selling a private placement still has a duty to conduct a reasonable investigation of any securities it recommends. The types of problems that FINRA found in the past with regard to some private placements were significant and include outright fraud and sales practice abuse in Regulation D offerings. With private placements, the firm recommending the investment to a customer must also conduct a reasonable investigation into the issuer and its management, the business prospects of the issuer, the assets held by or to be acquired by the issuer, the claims being made by the issuer, and the intended use of the offering. Failure of a firm to adequately investigate a given private placement can result in a violation of antifraud provisions of federal securities law, as well as FINRA Rule 2010 (adherence to just and equitable principles of trade) and Rule 2020 (prohibiting manipulative and fraudulent devices). In addition to various cases and enforcement actions cited in Regulatory Notice 10-22 (and its endnotes), another sweep by FINRA resulted in more crackdowns on firms (and individuals) that did not conduct a reasonable investigation before selling private placements to customers.
Investors Seeking to Recover Losses
Also, with respect to private placement investments, broker-dealer firms still must supervise their brokers in the investigation and recommendation being made to the customer. In addition to the typical supervision duties that a broker-dealer firm has over its registered representatives, as required by FINRA Rule 3010, private placements necessitate additional supervisory procedures. As reminded by FINRA Regulatory Notice 10-22, those additional supervisory procedures must be reasonably designed to ensure that a broker-dealer firm’s registered representatives: (1) engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory requirements; (2) perform the analysis required by FINRA Rule 2111 (formerly, NASD Rule 2310); (3) qualify their customers as eligible to purchase securities offered pursuant to Regulation D; and (4) do not violate the antifraud provisions of the federal securities laws or FINRA rules in connection with their preparation or distribution of offering documents or sales literature. Importantly, each Reg. D offering must be properly supervised “before it is marketed to other firms or sold directly to customers.”
For some investors, a private FINRA arbitration customer dispute enables them to bring a claim and potentially recoup their investment losses. These customer disputes typically involve only paper discovery and no depositions, and they are a faster and more efficient alternative to traditional court litigation, as they provide a private forum to resolve disputes more quickly and efficiently. Experienced attorneys at Haselkorn & Thibaut, P.A. are available for a free consultation by calling 1 888-628-5590 or visiting InvestmentFraudLawyers.com.
Ruchi has an Accounting and Graduate Degree in Business from the International School and Business and Media. She is exceptionally skilled in financial databases like Bloomberg, ThomsonOne,Datastream, CapitalIQ, and Factiva. Her focus at AlphaBetaStock.com is research breaking stocks and investment stories.