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Nontraded REIT group in tit-for-tat with NY Times

IPA argues paper's use of 'wave of fraud' simply incorrect

Feb 15, 2013 @ 12:37 pm

By Bruce Kelly

The nontraded real estate investment trust industry is peeved with the Gray Lady, the grand dame of journalism.

On Monday, The New York Times published a front-page story titled “Speculative Bets Prove Risky as Savers Chase Payoff.” The story's lead stated that securities regulators “across the country are confronting a wave of investor fraud” due to investments in complex, alternative investments, including nontraded REITs.

Let's be fair here. It's true that several large, older nontraded REITs created pain for investors during and after the credit crisis by cutting dividends and dropping their valuations. (As regular readers know, InvestmentNews has been on top of that story for the past couple of years.) And yes, the largest such REIT, the $11 billion Inland American Real Estate Investment Trust Inc., said last year that the Securities and Exchange Commission was undertaking a fact-finding investigation of the REIT.

But when broker-dealers have gotten into trouble for REIT sales, it's been more due to how the product was sold rather than whether there was widespread fraud involved. The recent $2.5 million settlement between LPL Financial LLC and the Massachusetts Securities Division was for failing to sell REITs properly, not for fraud.

In a letter last week to The Times, Kevin Hogan, chief executive of the industry's trade group, the Investment Program Association, stated: “There's simply no 'wave of fraud.' In fact, we know of no 'finding of fraud' against a person or entity related to a non-listed REIT, [business development company], or firm that offers private placements.”

Mr. Hogan does not, however, mention that independent broker-dealers sold $2.8 billion of securities from Medical Capital Holdings Inc. and Provident Royalties LLC, each of which the SEC charged with fraud in 2009. That's where investors of such “alternative investments” have seen the most losses, with those two scams wiping out about half of investor principal. The Times and other national media, including the business press, ignored those stories.

There is no doubt that investors, desperate for yield, are pouring money into such products. It appears that those outlets are finally waking up to the importance of clear-eyed coverage of alternative investments as an asset class.

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