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Yes, many investors have filed claims to recover losses sustained as a result of their investments in NYC REIT, a real estate investment trust that purports to own “a portfolio of high-quality” commercial real estate located within the five boroughs of New York City.  This REIT began as a non-traded REIT, meaning it was not traded on an open exchange, making it is highly illiquid.  Not only was it difficult for investors to get out of their positions, share prices have dropped substantially since its initial private stock offering.  Investors were led to believe returns on the investment would exceed 10% on an annualized basis, but in reality, NYC REIT turned out atrocious for investors.  The securities lawyers at Rich, Intelisano & Katz (RIK) have been highly successful in recovering losses for investors who had positions in non-traded REIT investments.

NYC REIT is not a high-quality investment with annual returns exceeding 10%.  On the contrary, this REIT, like all REITs, is high risk and only suitable for a limited pool of investors – savvy investors who are wealthy and sophisticated with a long-term investment horizon.  First, NYC REIT is a non-traded REIT, which means it is significantly less liquid than REITs that trade on an open exchange.  As such, when investors want to sell their position, they are forced to sell their shares at a heavily discounted price.  Thus, non-traded REITs are rarely a suitable investment for most investors.  Second, NYC REIT owns only 8 mixed-use office and retail condominium buildings (which is miniscule compared to other REITS).  The limited portfolio creates an inherent high risk, such as limited diversification, less exposure to potential tenants, and the lack of ability to spread costs over a larger portfolio.  Unfortunately, NYC REIT severely underperformed and the risk associated with it became realized for many investors.

The NYC REIT was disastrous from the beginning.  The initial private stock offering price of the REIT was $25 per share.  By 2018, the price per share plummeted over 50%.  The board then decided to suspend future distributions – hurting investor cash flow.  Then, the board authorized a reverse stock split, an action that consolidates the number of existing shares of stock into fewer, proportionally more valuable shares (generally, a move to boost the company’s image if the stock price has dropped dramatically).  Then, when the REIT went public in August 2020, it was a complete failure.  NYC REIT, now trading on the New York Stock Exchange (“NYSE”) under the symbol “NYC,” dropped in value approximately 40% on the first day.  This abrupt decrease in share price left investors with significant losses.

Over the past several years, there has be an increasing number of registered investment advisors and financial advisors using omnibus accounts.  In short, an omnibus account allows an advisor to trade the same securities on behalf of multiple clients, while typically identifying in advance which trades are intended for which client accounts.  However, in some cases, trades are allocated after they are made.  This creates an increased risk of fraud since some firms’ supervisory failures have allowed advisors to “cherry-pick” which accounts get the winning trades, and which accounts suffer losses.  The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) won multiple claims against broker-dealers for allowing third parties to engage in this misconduct.

An omnibus account is intended to facilitate large purchase blocks of securities for multiple client accounts.  The idea of aggregating or bunching purchases in a single transaction is to obtain more favorable prices, lower brokerage commissions, and create more efficient execution.  After the trades are made, the advisor is supposed to allocate the trades to client accounts in accordance with the previously approved allocations.  The allocations of trades then should be reviewed by compliance and/or risk management periodically to ensure that accounts are not systematically disadvantaged by this policy.

Unfortunately, some advisors use this policy to scam their clients.  Sometimes allocation instructions are submitted after trades are executed, when the adviser has had the opportunity to view the performance of the trade over the course of the day.  By reviewing trade performance first, the advisor knows which trades are profitable and which are unprofitable, then can “cherry-pick” – that is to allocate the profitable trades to favored accounts and allocate losing trades to other disfavored accounts.

Deutsche Bank has agreed to pay a fine of $55 million to settle charges by the SEC that it filed misstated financial reports during the height of the global financial crisis relating to a multibillion dollar portfolio of derivatives.

The SEC’s multi-year investigation culminated in an Order Instituting a Settled Administrative Proceeding, available on the SEC’s website. According to investigators, the bank overvalued a portfolio of derivatives consisting of Leveraged Super Senior (“LSS”) trades, through which it purchased protection against credit default losses. This leverage created a “gap risk”, which the bank initially took into account in its financial statements, by adjusting down the value of the LSS positions. However, according to the SEC’s Order, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether. In other words, the bank slowly tweaked its formula over the months so that the risk didn’t show in its financial reports.

Therefore, “at the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions”, according to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

What are non-traditional exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs)? Why are independent broker dealers selling these complex products without proper supervision? FINRA wants to know and just slammed LPL Financial for doing such a thing.

This week, FINRA censured and fined LPL $10 million for broad supervisory failures in the sale of complex products such as leveraged ETFs and non-traded REITS. It also ordered LPL to pay an additional $1.7 million in restitution to certain customers who bought non-traditional ETFs.

This is a watershed moment for these and other complex products. First, LPL has over 14,000 brokers nationwide and is by a wide margin the largest independent broker dealer in the U.S. (Lincoln Financial Network with over 8,000 brokers is second). The biggest independent broker-dealer getting hit like this by FINRA is the equivalent of FINRA fining the old Merrill Lynch in wire house terms.

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