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Hospitality Investors Trust Inc. (“HIT”, formerly known as ARC Hospitality Trust, Inc.) has announced that it is buying back shares for $9.00 a share, which is a discount of approximately 35% to what it the company claims is the shares’ net asset value (NAV) of $13.87 a share.  It is also a far cry from the $25.00 a share price at which most investors initially acquired shares.

Building Demolished
HIT is a non-traded real estate investment trust (REIT) focused on ownership of hotels and other lodging properties in the United States.  As a publicly registered non-traded REIT, Hospitality Investors Trust was permitted to sell shares to the investing public at large, oftentimes upon the recommendation of a broker or financial advisor.  The REIT sold shares to the public for $25.00/share.  Some investors may not have been properly informed by their financial advisor or broker of the complexities and risks associated with investing in non-traded REITs.

HIT’s board has adopted the share repurchase program, effective October 1, 2018, for shareholders who desire immediate liquidity, and recommends that investors do not sell their shares unless they need immediate liquidity because (according to HIT) the initial repurchase price is well below the current and potential long-term value of the shares.  Shares bought at any time are eligible for repurchase under the program, and the first repurchase date under the to the program is scheduled for December 31, 2018.

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On September 18, 2018, the SEC initiated a civil action (the “Complaint”) against Defendants World Tree Financial, LLC (“World Tree”), Wesley Kyle Perkins (“Perkins”), and Priscilla Gilmore Perkins (“Gilmore”).  The Complaint alleges that Perkins and Gilmore, husband and wife owners of World Tree, engaged in a purported “cherry-picking” scheme.  Specifically, the SEC has alleged that World Tree would routinely allocate winning trades to themselves or favored clients at the conclusion of the trading day, to the detriment of disfavored clients who received the losing trades.  As alleged in the Complaint, this practice, referred to in the securities industry as “cherry-picking”, amounts to an impermissible allocation of trades in violation of various securities laws, including Sections 209(d), 209(e)(1), and 214 of the Investment Advisers Act of 1940 (“Advisers Act”).

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World Tree was co-founded in 2009 by Perkins and Gilmore and is structured as a Louisiana corporation with its principal place of business in Lafayette, LA.  Until June 15, 2012, World Tree was registered with the SEC as a registered investment advisor (“RIA”), at which time it withdrew its registration.  Currently, Word Tree remains registered in the State of Louisiana as an investment advisor.

As alleged by the SEC, World Tree manages all of its clients’ assets on a discretionary basis, meaning that it has authorization to trade securities on behalf of its clients.  According to the Complaint, from December 2009 – October 2015, World Tree conducted all of its trades through an omnibus account at a third-party registered broker-dealer.  As alleged in the Complaint: “In general, an omnibus trading account allows an investment advisor to buy and sell securities on behalf of multiple clients simultaneously, without identifying to the broker in advance the specific accounts for which a trade is intended.”

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Money Whirlpool
As discussed in a prior blog post, on June 29, 2018, the board of directors of American Finance Trust, Inc. (“AFIN” or the “Company”), formerly known as American Realty Capital Trust V, Inc., announced the approval of a plan to list AFIN common stock on the Nasdaq Global Select Market (“NasdaqGS”), under the symbol ‘AFIN’.  Pursuant to that plan, half of AFIN’s shares — AFIN Class A shares — were recently listed on NasdaqGS.  Specifically, since July 16, 2018, shares of AFIN have been publicly traded and are currently priced around $17.50 per share.  Therefore, investors who participated in the IPO and paid $25 per AFIN share and continue to hold their position have incurred substantial unrealized losses on their investment of approximately 30% (exclusive of commissions, as well as distributions paid, to date).

Most recently, the AFIN board of directors announced that in connection with their public listing, the former non-traded REIT now intends to convert its Class B-1 shares, which represent approximately 25% of AFIN shares outstanding, into Class A shares one week earlier than previously planned, on October 10, 2018.  At this time, Class B-2 shares are still scheduled to convert to AFIN Class A shares on January 15, 2019, as previously planned.

AFIN shareholders have expressed concern that the Company’s plan to list its shares on NasdaqGS in such an incremental, phased manner will likely serve to dilute the value of the AFIN Class A shares, thus creating downward selling pressure on a stock that has already suffered considerable decline from its IPO pricing.  In addition, some shareholders have expressed concern over the fact that AFIN recently cut its dividend from approximately $1.30 to $1.10, effective July 1, 2018.  This amounts to a reduction in distribution of approximately 15% and is of particular concern to the many retail investors who initially purchased AFIN shares for their income component.

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Piggy Bank in a Cage
On September 14, 2018, the SEC initiated a civil action (the “Complaint”) in federal court in the Southern District of Indiana against Ms. Tamara Rae Steele (CRD# 3227494) (“Steele”), as well as her eponymous investment advisory firm, Steele Financial, Inc. (“Steele Financial”), alleging that Ms. Steele had defrauded a number of her advisory clients through recommendations to invest in certain high-risk securities issued by Behavioral Recognition Systems, Inc. (“BRS”), in a scheme that purportedly generated $2.5 million in commissions for Ms. Steele’s benefit.  According to publicly available information through FINRA, Ms. Steele, a former middle school math teacher, first began working as a financial in or around 1999.  Most recently, she was affiliated with broker-dealer Comprehensive Asset Management and Servicing, Inc. (CRD# 43814) (“CAMAS”) from January 2009 – July 2017.  Ms. Steele’s CRD record showing her employment history and customer claims filed with FINRA is accessible below.

tamara rae steele

As alleged by the SEC in its Complaint, Ms. Steele was terminated by her former employer, CAMAS, when the “broker-dealer learned that [she] was selling BRS securities outside the scope of her employment with the firm and without the firm’s knowledge and approval, a practice called ‘selling away’ from the firm.”  Specifically, the SEC has alleged that Ms. Steele fraudulently recommended “over $13 million in extremely risky securities issued by a private company, Behavioral Recognition Systems, Inc. (‘BRS’).”  Further, the SEC has alleged that Ms. Steele violated her fiduciary duty to her clients — many of whom were unaccredited retail investors who were either current or former teachers and public-school employees — by purportedly failing to disclose that she was earning “[c]omissions ranging from 8% to 18% of the funds raised for BRS.”  The SEC Complaint is accessible below:

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Brokerage firm SII Investments, Inc. has been ordered by Massachusetts Secretary of the Commonwealth William Galvin to refund money back to clients who were sold non-traded REITs by SII.

money backing hard money real estate deal
Galvin charges that SII failed to adequately supervise the sale of nontraded REITs to customers.  As a result of the settlement, any Massachusetts investor who was identified by Mr. Galvin’s office as having been improperly sold the REITs by SII will be offered their money back.  While this conduct may have occurred in other states, only Massachusetts investors are affected by the action by Galvin’s office (and other investors will not receive a refund as a result of this action).

Of note, the Massachusetts action focused on SII treating clients’ annuities as liquid assets rather than nonliquid assets for purposes of calculating the amount of the client’s assets that could be invested in non-traded REITs: “SII’s suitability and disclosure form for nontraded REITs stated that no more than 10% of an investor’s liquid net worth may be invested in any particular nontraded REIT… While SII’s own internal policies made clear that annuities are illiquid products, SII nevertheless included annuities with substantial pending surrender fees as liquid for nontraded REIT liquid net-worth calculations.”

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As we discussed in a recent blog post, a $283 million Chapter 11 bankruptcy filing on July 27, 2018, by the Hallandale Beach, FL firm 1 Global Capital (a/k/a 1st Global Capital, or 1GC) has negatively impacted investors nationwide.  Unfortunately, many retail investors committed their hard-earned money, in many instances their retirement funds, into so-called 1GC “memorandums of indebtedness” which were also sometimes referred to as First Global Capital Notes (“Notes”).  Publicly available records indicate there are more than 4,000 1GC accounts across the country, sold by many advisors in various states.

1st-Global-Capital
Formed approximately 5 years ago, 1GC was purportedly in the business of financing small business by providing capital to a range of businesses including restaurants, construction companies, manufacturing operations, and healthcare companies.  1GC issued its Notes to retail investors, often referred to in the contract as “lenders” or in other instances as “creditors.”  In exchange, these lenders or creditors invested in supposedly safe, short-term deals that would pay out around 7% in interest at the end of the term (e.g., 9-month term).

Upon information and belief, a number of 1GC investors were steered into these Notes by advisors.   Advisors who have recommended Notes reportedly may include Matthew Walker or others working for his Overland Park, Kansas-based group of Pinnacle Plus companies.

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Building DemolishedInvestors in AR Global’s Healthcare Trust, Inc. (“HTI”), may have FINRA arbitration claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stock broker.  AR Global’s HTI was incorporated on October 15, 2012, as a Maryland corporation that elected to be taxed as a real estate investment trust (REIT).  HTI invests in multi-tenant medical office buildings and, as of year-end 2017, owned a portfolio consisting of 8.4 million-square-feet including 164 properties, with a total purchase price of $2.3 billion.

As a publicly registered non-traded REIT, HTI was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or money manager.  HTI terminated its offering in November 2014 after raising approximately $2.2 billion in investor equity.

Recently, third party real estate investment firm MacKenzie Realty Capital, LP (“MacKenzie”) initiated an unsolicited mini-tender offer to purchase up to 1 million shares of HTI for $10.99 per share.  Accordingly, investors who acquired HTI shares through the offering at $25 per share will incur substantial losses on their initial investment of approximately 55% (exclusive of commissions paid and distributions received to date).

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As recently reported, on August 15, 2018, the SEC initiated formal charges against Defendants Jerome Cohen, Shaun Cohen, and their companies — Equitybuild, Inc. (“Equitybuild”) and Equitybuild Finance, LLC (“Equitybuild Finance”) — in connection with the SEC’s efforts to halt a purported Ponzi scheme.  As alleged in the SEC’s Complaint, “Since at least 2010, Defendants … have raised $135 million from more than 900 investors.  Defendants raised these funds by falsely promising investors safe investments, secured by income-producing real estate, that generated returns of 12% to 20%.”

Money Whirlpool
According to the SEC, investors were allegedly defrauded in several ways.  For example, the Defendants’ purportedly failed to disclose sizable up-front fees of 15-30% taken off the top of investor equity.  In addition, the Defendants allegedly misrepresented the returns earned on various real estate deals, touting their “impressive returns” when, in actuality according to the SEC, investors sustained heavy losses on investments in predominantly South Side Chicago real estate deals.  The SEC has further alleged that rather than inform investors of financial distress, father and son Defendants Jerome and Shaun Cohen, respectively, elected instead to continue “[t]o solicit investors with offers of safe investments and outsized returns.”

Equitybuild is structured as a Florida corporation.  Since at least 2010, the company has solicited investments, promising returns that were to be generated through the purchase, renovation and development of Chicago real estate.  Equitybuild Finance, f/k/a Hard Money Company, LLC, is structured as a Delaware limited liability company.  Both companies were founded by Defendant Jerome Cohen, 63 years of age, and currently a resident of Naples, Florida.  Defendant Shaun Cohen is a resident of New York, New York, and serves as the President and sole officer of Equitybuild Finance.

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On August 14, 2018, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed a Complaint against StockCross Financial Services, Inc. (“StockCross”) (CRD# 6670), as well as one of its registered representatives, Mr. Peter E. Cunningham (“Cunningham”) (CRD# 2400211).  Through its administrative action, the Division has alleged that Cunningham engaged in “[i]mproper buys and sells of an investment known as a unit investment trust (“UIT”) throughout Cunningham’s Massachusetts client accounts.”  The Division also alleges that StockCross failed to properly supervise Cunningham, and even promoted him, despite its awareness of Mr. Cunningham’s previous checkered regulatory history — including six customer complaints resulting in approx. $330,000 in settlement payments to investors.

Piggybank in a Cage
A UIT is a type of security that shares some similarities to mutual funds and closed-end funds (CEFs), insofar as a UIT consists of a basket of different investments.  Historically, most UITs were structured as vehicles in which to purchase a basket of municipal bonds.  Over time, UITs have evolved to the point where today, retail investors might invest in a variety of UITs offering exposure to various asset classes and economic sectors.  However, unlike traditional mutual funds or CEFs, UITs are structured with a finite lifespan, and thus cease upon a given predetermined date.  Additionally, UITs generally charge investors high fees, as high as 3-5% of the initial investment.  Unfortunately, as a result of their fee structure, some brokers and investment advisers will encourage their clients to actively trade in and out of UITs, a practice commonly referred to as “switching” and akin to churning an investment portfolio, in an effort to generate excessive commissions for the benefit of the broker, and to the detriment of the uninformed investor.  Switching transactions that appear to be fee-motivated may give rise to investor claims against advisors.

As alleged by the Division, since as early as 2012, “[C]unningham has engaged in short-term UIT trading in the accounts of his Massachusetts clients.  Of [his] approximate 180 clients, nearly 60, or approximately 30%, are Massachusetts residents.  Statements from [his] Massachusetts client accounts reflect sales of UITs as soon as 26 days after purchase and sometimes years before the UIT is predetermined to reach its maturity date.  Cunningham often used proceeds of the sales to buy other UITs.”

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If you invested in what are commonly referred to as future income payments (FIPs, or structured cash flows), through Future Income Payments, LLC (“FIP LLC”), you may be able to recover your losses through securities arbitration before FINRA, or in litigation, based on your particular circumstances.  FIPs, or structured cash flows, are a type of investment product that are primarily sold as a growth and income product by insurance agents, as well as through independent marketing organizations.

Formed in April 2011, FIP LLC is structured as a Delaware limited liability company, with its principal place of business in Irvine, CA.  Formerly, FIP LLC conducted business as Pensions, Annuities & Settlements, LLC.  Additionally, FIP LLC has business relationships with the following marketing affiliates: Cash Flow Investment Partners, LLC, BuySellAnnuity, Inc. and Pension Advance, LLC.

FIP LLC’s business model is predicated on soliciting pensioners through the websites of its marketing affiliates to enter into certain contracts, pursuant to which the pensioner receives a lump sum of money in exchange for some or all of the respective pensioner’s monthly pension payments, for a fixed period of time (typically, 5-10 years).  In addition, FIP LLC enters into contracts with investors (primarily retail investors), through which the investors provide money for the lump sum cash payments and subsequently receive some or all of the pensioner’s monthly payments.

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