Bad Apple: REITs fined $1.5 million for disclosure violations

CEO and COO also ordered to pay $175,000 in penalties .
FEB 13, 2014
A series of nontraded real estate investment trusts called the Apple REITs failed to make a number of key disclosures to investors in the years after the credit crisis, resulting in $1.5 million in civil fines issued by the Securities and Exchange Commission. The Apple REITs failed to value the REITs properly, disclose numerous related-party transactions and divulge executive compensation of four REITs, according to a SEC cease-and-desist order, which was a settlement between the SEC and the various respondents. The order was disclosed Wednesday evening. The nontraded REITs – Apple REIT Six Inc., Apple REIT Seven Inc., Apple REIT Eight Inc. and Apple REIT Nine Inc. – violated SEC rules between 2008 and 2011, immediately following the global collapse in the real estate market. The one broker-dealer that sold the Apple REITs, David Lerner Associates Inc., wasn't named in the SEC order. Glade M. Knight, the chairman and chief executive of the four Apple REITs, was ordered to pay a civil penalty of $125,000. The chief financial officer of the REITs, Bryan F. Peery, was ordered to pay a civil fine of $50,000. “We are pleased to have resolved this matter, which we neither admit nor deny, consistent with standard SEC practice,” Apple REIT spokeswoman Kelly Clarke wrote in an email. “The settlement does not impact any of the Apple REITs' financial statements, and we have addressed the disclosure concerns of the SEC, as we have understood them, over the past several years.” Each of the REITs was sold to investors at $11 a share. Investors of such REITs often reinvest dividends, and that is where the Apple REITs valuation disclosure and methodology fell short, according to the SEC order. “Despite receiving internal and third-party analysis indicating a value below $11 per unit and despite significant decreases in operating performance, [Apple REITs Six, Seven and Eight] collectively sold more than 25 million [dividend reinvestment plan] units following the 2008 global financial crisis while maintaining that the arbitrarily established initial offering price of $11 constituted 'fair market value' of those REIT shares, according to the SEC order. The SEC order didn't disclose what the appropriate valuation of those REITs was at the time. The four Apple REITs also "failed to disclose numerous related-party transactions involving short-term transfers between REITs to meet cash needs and commercial loans personally guaranteed by Knight between 2008 and 2011," according to the order. The four REITs "further failed to disclose significant compensation paid by the [REIT] advisers and Knight to their executive officers between 2008 and 2010," according to the order. The Apple REITs owned full-service, limited-service and extended-stay hotels. REITS Six, Seven and Eight each raised about $1 billion, starting in 2004 and ending in 2008. REIT Nine raised $2 billion from 2007 to 2010. Apple REIT Six had a “liquidity event” last year, merging with an unrelated entity.

Latest News

Northern Trust names new West Region president for wealth
Northern Trust names new West Region president for wealth

The new regional leader brings nearly 25 years of experience as the firm seeks to tap a complex and evolving market.

Capital Group extends retirement plan services further with a focus on advisors
Capital Group extends retirement plan services further with a focus on advisors

The latest updates to its recordkeeping platform, including a solution originally developed for one large 20,000-advisor client, take aim at the small to medium-sized business space.

Why RIAs are the next growth frontier for annuities
Why RIAs are the next growth frontier for annuities

David Lau, founder and CEO of DPL Financial Partners, explains how the RIA boom and product innovation has fueled a slow-burn growth story in annuities.

Supreme Court slaps down challenge to IRS summons for Coinbase user data
Supreme Court slaps down challenge to IRS summons for Coinbase user data

Crypto investor argues the federal agency's probe, upheld by a federal appeals court, would "strip millions of Americans of meaningful privacy protections."

Houston-based RIA Americana Partners adds $1B+ with former Morgan Stanley director
Houston-based RIA Americana Partners adds $1B+ with former Morgan Stanley director

Meanwhile in Chicago, the wirehouse also lost another $454 million team as a group of defectors moved to Wells Fargo.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.