In a complaint last week against noted real estate investor Tony Thompson, the
Financial Industry Regulatory Authority Inc. alleged that he deceived and defrauded investors who bought $50 million in high-yield promissory notes sponsored by Thompson National Properties LLC, Mr. Thompson's main business enterprise.
Thompson National Properties had provided a purported guarantee of principal and interest for the notes when they were sold.
Thompson National Properties sold three notes programs from 2008 to 2012 using a network of independent broker-dealers, according to the complaint. Mr. Thompson's broker-dealer is TNP Securities LLC and is also named in the complaint, which is dated July 30.
TNP Securities and Mr. Thompson “engaged in transactions, practices or courses of business which operated as a fraud or deceit upon the purchaser” of the note securities, according to Mr. Thompson's profile on Finra's BrokerCheck system. According to the complaint, one of those series of private notes is in default, while two others have stopped making payments to clients.
Mr. Thompson and TNP Securities are allegedly in violation of Securities and Exchange Act of 1934, as well as Finra's Rule 2020, which prohibits the use of manipulative, deceptive or other fraudulent devices by registered representatives and broker-dealers. They are also allegedly in violation of Finra Rule 2010, which requires registered reps and broker-dealers to adhere to high standard of commercial honor and trade.
Finra has had Mr. Thompson and TNP Securities under investigation since last winter for allegedly failing to cooperate in a Finra investigation, but last week's complaint is the first formal action by Finra against Mr. Thompson, who has long been a fixture in the independent-broker-dealer industry for his sale of real estate deals, including 1031, or “tenant in common,” exchanges before the 2007 and 2008 real estate crisis.
Finra’s complaint focuses on the level of disclosure of financial difficulties at Thompson National Properties in the PPMs, said Mr. Thompson’s lawyer, Thomas Fehn. Those difficulties were appropriately disclosed, he said.
“We’re going to defend” the complaint, said Mr. Fehn. “It’s a matter of opinion what is state of the art disclosure. And we’re going to find out.”
“We’re taking the position that” financial difficulties at Thompson National Properties were disclosed, he said. “It was artfully done under the circumstances and we’ll see where we end up.”
When asked by
InvestmentNews in an e-mail whether he had committed fraud, Mr. Thompson replied: “No.”
Mr. Thompson is perhaps best known for a merger of one of his former holdings, NNN Realty Advisors Inc., in 2007 with Grubb & Ellis Co. That deal failed to prosper. Burdened by debt, that once-iconic commercial real estate company filed for bankruptcy protection last February and then sold its remaining assets for $30 million.
He started Thompson National Properties in 2008, eventually raising $250 million from investors through a series of real-estate-related offerings. One of those is a struggling nontraded real estate investment
trust, TNP Strategic Retail Trust Inc., which eliminated its
dividend to investors this year. Mr. Thompson has since publicly blamed a three-person special audit committee of the board for the lack of dividends from the
REIT.
The three note programs at the heart of the Finra complaint are the TNP 12% Notes Program LLC, the TNP 2008 Participating Notes Program LLC and the TNP Profit Participation Program LLC. According to the Finra complaint, the parent company, Thompson National Properties, quickly racked up losses and a sudden erosion of equity, but those were not reflected in the offering documents or “private-placement memorandum” dubbed PPMs in the industry.
“Consequently, by no later than Jan. 1, 2009, the increasing operating losses and declines in total equity that [Thompson National Properties] suffered comprised material changes on the financial condition of [Thompson National Properties] that only worsened as time went on,” according to the Finra complaint. “During the offering periods for 12% Notes and 2008 Participating Notes, losses in 2009 of [$25.6 million] took the company's equity to [-$13.6 million].”
Thompson National Properties' negative financial performance was not disclosed to those note program investors, according to Finra. “Potential investors, however, saw only the PPM balance sheets that reflected total equity of either $8.5 million or $5 million, respectively,” according to the Finra complaint.
None of the PPMs for the three offerings, nor their supplements “disclosed the increasing likelihood that [Thompson National Properties] would not be able to meet the proffered guarantees of principal and interest” for an investor to be able to assess a risk of default by the notes and that Thompson National Properties would abandon a stated guaranty, according to the complaint.
