Behringer Harvard client wants answers after fund dropped 96%

It is more bad news for Behringer Harvard Holdings LLC, as an investor who saw the value of her real estate fund drop to $2,000, from an original investment of $50,000, has begun to complain to regulators.

On Jan. 20, D. Gayle Salyer of Ames, Iowa, fired off a letter to the Financial Industry Regulatory Authority Inc. to complain about the real estate firm, which has seen the estimated valuations of some of its real estate investment trusts and funds slashed recently.

“What is going on with the Behringer Harvard Short-Term Opportunity Fund?” Ms. Salyer, 70, wrote in her letter.

“In a six-year period, BH has blown away $48,000 of my money. I would like to know how much of my money has been taken by Mr. Behringer as salary, benefits and expenses, as well as the management team,” Ms. Salyer wrote.

At the end of December, in-vestors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.

Particularly distressing is the lack of direct communication from Behringer Harvard Holdings explaining what happened to wipe almost all the fund's value, said Ms. Salyer.

Behringer Harvard Holdings “keeps sending me stuff that shows my money is gone,” she said.

“The only communication is the [account] statement. They sent nothing to say we're in trouble — nothing,” Ms. Salyer said.

In an interview, Ms. Salyer said she wrote the letter with the assistance of her broker, Dennis Freeman, who is affiliated with Capital Financial Services Inc. Mr. Freeman said she also sent a letter to the Texas State Securities Board since Behringer Harvard Holdings is based in Addison, Texas.

OTHER LOSSES

Ms. Salyer has also lost $32,000 of a $50,000 investment in Provident Royalties LLC, a series of private placements that the Securities and Exchange Commission has charged were fraudulent.

Capital Financial agreed to a $200,000 settlement with Finra in August in connection with the sale of $60 million of Provident shares and $100 million of another private placement, Medical Capital Holdings Inc., which also was called fraudulent by the SEC.

Capital Financial “failed to have reasonable grounds” to believe that the private placements “were suitable for any customer” and “failed to conduct adequate due diligence on the two series of offerings,” according to a Finra letter of acceptance, waiver and consent.

Ms. Salyer said she hadn't filed complaints against Capital Financial or Mr. Freeman in connection with her losses at either Behringer Harvard Holdings or Provident Royalties.

The Securities and Exchange Commission has jurisdiction over funds and REITs, while Finra has jurisdiction over broker-dealers that sell those products, industry observers said.

Finra has recently drawn attention to the issue of how the valuation of illiquid investments — including nontraded REITs — are shown on client account statements.

In September, Finra issued for comment a proposed amendment to the current rule that would limit the time period that the initial, estimated value could be used on the client account statement. The rule change also would require broker-dealers to deduct the costs of the offering, such as commissions to brokers, from that initial valuation.

“We are looking into the areas over which we have jurisdiction, including sales to investors by broker-dealers. But we can't comment about ongoing investigations,” said Finra spokeswoman Nancy Condon.

“Client-specific information is confidential, and Behringer Harvard does not comment publicly about specific clients,” the firm's chief executive, Bob Aisner, said in a statement. “Our investment services team is available to speak with investors and their financial representatives about specific account questions.”

Mr. Aisner noted that the Short-Term Opportunity Fund makes information public through regular reports and filings with the SEC.

In the statement, he also said: “Behringer Harvard has been very committed to the success of the fund, as evidenced by $40 million of support from Behringer Harvard which will not be recouped.”

WAIVED FEES

That support included waived fees and cash support from the sponsor for the fund, Mr. Aisner wrote in the statement.

“Since the inception of the fund, investors have received $2.12 per unit in total distributions, which includes both recurring monthly distributions and special distributions,” he wrote.

“Condominium projects and single-family-lot developments, which usually depend on redevelopment, repositioning or recapitalization, were especially hard-hit, and the fund invested in these asset types before the recession. In addition, the fund was significantly negatively impacted by the lack of availability of financing for opportunistic assets over the last several years,” Mr. -Aisner wrote.

Mr. Freeman said that Capital Financial Services stopped selling Behringer Harvard Holdings products in the last year.

Meanwhile, Behringer Harvard continues to see a reshuffling of its management team.

Last week, it said that Michael J. O'Hanlon has joined the firm as executive vice president and that he will be the chief executive of Behringer Harvard Opportunity REIT I Inc., which saw its estimated value decline to $4.12 a share at the end of last year, from $7.66 a year earlier. He will also be the chief executive of Behringer Harvard Opportunity REIT II.

Mr. O'Hanlon replaces Mr. Aisner, who will be vice chairman for both those REITs.

Mr. O'Hanlon has worked for several real estate investment firms, including most recently Billingsley Co. From 2005 to 2009, he was chief executive of Inland Western Retail Real Estate Trust Inc., and before that, he was an executive vice president and managing director of the Midwestern region of Grubb & Ellis Co.

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Related Topics: Financial Industry Regulatory Authority, Industry