Broker-dealers that sold UDF REITs to face investor claims

Independent broker-dealers that sold the distressed series of UDF real estate investment trusts could soon be facing arbitration claims from angry investors, according to Alan Rosca, a plaintiff’s attorney.

The firms that have been most prominent in Mr. Rosca’s discussions with UDF investors are: IMS Securities Inc., Berthel Fisher & Co. Financial Services Inc., Centaurus Financial Inc. and VSR Financial Services Inc. Those four firms were not the only ones that sold the UDF REITs, but are the most widely named in discussions with investors, he added.

Other industry sources separately confirmed that those four broker-dealers sold UDF nontraded REITs or private real estate deals.

Mr. Rosca said in an interview Wednesday that he began advertising on the Internet for UDF investors after after an investor website in December published a report that alleged that United Development Funding IV, which was a nontraded REIT that later listed as a publicly traded REIT, operated for years like a Ponzi scheme.

Last week, the FBI raided the REIT’s offices in suburban Dallas. The Nasdaq last Thursday halted trading of UDF IV shares at $3.20, down 81% over the last 12 months. UDF IV was a mortgage and development REIT. UDF REITs and private deals were high yield offerings, promising investors returns of 8% to 10%.

Mr. Rosca, a partner with Peiffer Rosca Wolf Abdullah Carr & Kane, said that he has spoken with about 50 UDF investors. He has not yet filed any arbitration claims with the Financial Industry Regulatory Authority Inc. but intends to do so. Claimants will file claims individually or in groups, he said.

The clients who bought UDF REITs and private deals were mostly retirees, with some investing in a series of UDF-labeled deals, Mr. Rosca said. In certain cases, half a client’s net worth was invested in UDF products, he said. “The allocation is horrific.”
Class action attorneys have already filed claims against UDF in federal courts.

Jackie Wadsworth, the CEO and owner of IMS Securities, did not return a call on Wednesday to comment. Centaurus Financial’s general counsel, Paul King, also did not return phone calls.

“We have not yet received an arbitration claim related to this matter,” said Joseph Kuo, a spokesman for VSR Financial, said. “We will review and address as appropriate if and when that occurs.”

“Some of Berthel Fisher’s customers did invest in certain of United Development Funding’s offerings at a time when the investments were publicly registered and the subject of clean audit opinions by a reputable public accounting firm,” wrote a lawyer for Berthel Fisher, Vince Louwagie, in an email. “Berthel Fisher has no reason to believe that the audit reports were not accurate.”

VSR Financial in 2015 was acquired by RCS Capital Corp., which recently filed for bankruptcy protection, and now operates under the Cetera Financial Group umbrella of broker-dealers.

In a twist, RCS Capital, or RCAP, also owned Realty Capital Securities, was the wholesaling and marketing broker-dealer for two UDF-branded REITs. Realty Capital Securities raised more than $47 million for UDF V in 2015, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.