South Florida Arbitration & Litigation Lawyer Blog
REIT (Real Estate Investment Trust) Fraud, Misrepresentation and Negligent Supervision FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
November, 2011:
FINRA Fines Wells Investment Securities $300,000 for Use of Misleading Marketing Materials for REIT Offering
The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Wells Investment Securities, Inc. $300,000 for using misleading marketing materials in the sale of Wells Timberland REIT, Inc., a non-traded Real Estate Investment Trust (REIT).
Wells was the dealer-manager and wholesaler for the public offering of Wells Timberland REIT, which invested in timber-producing land. As the wholesaler, Wells reviewed, approved and distributed the marketing materials for Wells Timberland. FINRA found that from May 2007 through September 2009, Wells reviewed, approved and distributed 116 advertising and sales materials containing misleading, unwarranted or exaggerated statements. For example, Wells Timberland’s initial offering prospectus stated that it intended to qualify as a REIT for the tax year that ended Dec. 31, 2006; however, it did not qualify for REIT election until the tax year that ended Dec. 31, 2009. The majority of the advertisements and sales literature failed to disclose the significance of Wells Timberland’s non-REIT status or suggested that Wells Timberland was a REIT at a time when in fact it had not qualified as a REIT. The communications also contained misleading statements regarding Wells Timberland’s portfolio diversification and ability to make distributions and redemptions.
Although non-traded REITs are generally illiquid, often for periods of eight years or more, they can avoid particular tax consequences if they qualify under certain Internal Revenue Service requirements. The Wells advertisements at issue did not make it clear to potential investors who might be seeking such favorable tax treatment, that the investment at issue was not yet a REIT and therefore would not be able to offer the desired tax benefits at the time the ads were being used.
FINRA’s investigation also found that Wells failed to have supervisory procedures in place to ensure that sensitive customer and proprietary information stored on laptops were being adequately safeguarded by appropriate encryption technology.
In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
If you wish to review a complete copy of Wells Investment Securities, Inc.’s Letter of Acceptance, Waiver and Consent, please follow the highlighted link.