Securities Arbitration is Your Best Chance to Recover
Your Desert Capital REIT losses
Klayman & Toskes' sole focus is the representation of investors in large and complex securities arbitration and litigation matters. The quality legal representation provided by Klayman & Toskes to its clients has resulted in the recovery of over $100 million in securities arbitration claims and over $250 million in other securities litigation matters. We have represented numerous investors who sustained losses in investment products like Real Estate Investment Trusts (“REITs”), hedge funds, arbitrage funds, bond funds, CDOs, and CMOs.
Our law firm is handling securities arbitration claims in the arbitration forum established by the Financial Industry Regulatory Authority ("FINRA") to recover losses sustained in non-traded Desert Capital Real Estate Investment Trust ("REIT"). Among other allegations, the claims involve causes of action for unsuitability, misrepresentation and omission, breach of fiduciary duty, negligence, and failure to supervise. Sold by many independent broker-dealers, including Questar Capital Corp., Desert Capital was represented to many investors to be a safe, low risk fixed income investment. However, Desert Capital was an illiquid product and carried exposure to risky loans, including subprime and below investment grade loans.
Under FINRA Rules, brokerage firms have an obligation to make only suitable recommendations, and to fully disclose all risks associated with a recommended product. Moreover, brokerage firms have a duty to conduct a reasonable investigation of the issuer and the securities they recommend before approving them for sale to their customers.
Desert Capital REIT
Desert Capital REIT invested in loans to builders and developers to buy, develop and build on commercial or residential land. The REIT did not invest in traditional residential mortgages. The loans were structured so that the REIT received monthly interest payments during the life of the loan and a balloon principal payment upon the maturity of the loan. These types of loans carry much more risk than traditional mortgages. Towards the end 2007, Desert Capital REIT started experiencing a substantial number of borrower defaults. By 2008 and 2009 almost all of Desert Capital's borrowers defaulted on their loans. When the real estate market crashed, defaults on the loans increased, liquidity dried up and the value of Desert Capital REIT declined.
Earlier this year, the SEC issued a subpoena to Desert Capital REIT “pertaining to payments and transactions with [its] related party, CM Capital.” On May 5, 2011, an involuntary petition for protection under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq., was filed against Desert Capital REIT with the United States Bankruptcy Court for the District of Nevada, Las Vegas Division. Creditors with claims of over $43 million filed the petition to put Desert Capital into involuntary Chapter 11 bankruptcy. Initially, Desert Capital REIT objected to the involuntary bankruptcy. However, in June of 2011, Desert Capital REIT advised the bankruptcy Judge that it was withdrawing its objection to the bankruptcy proceeding. In addition to participating in the bankruptcy proceeding, investors who purchased Desert Capital REIT from a brokerage firm may be able to recover their losses by filing an individual securities arbitration claim.
FINRA Rules Regarding REITs
In October of 2011, FINRA issued a new Investor Alert called Public Non-Traded REITs-Perform a Careful Review Before Investing to help investors understand the benefits, risks, features and fees of these investments. While investors may find non-traded REITs appealing due to the potential opportunity for capital appreciation and the allure of a robust distribution, investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. Additionally, early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.
According to FINRA, "Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs' high yields and stability, while glossing over the lack of liquidity, fees and other risks."
REITs pool the capital of numerous investors to purchase a portfolio of properties--from office buildings to hotels and apartments, even timber-producing land--which the typical investor might not otherwise be able to purchase individually. There are two types of public REITs: those that trade on a national securities exchange and those that do not. FINRA's alert focuses on publicly registered non-exchange traded, or simply non-traded REITs.
Public Non-Traded REITs outlines the features, complexities, risks and costs associated with non-traded REITs.
Distributions are not guaranteed and may exceed operating cash flow. In newer programs, distributions may be funded in part or entirely by cash from investor capital or borrowings. Distributions can also be suspended for a period of time or halted altogether.
Lack of a public trading market creates illiquidity and valuation complexities. Most non-traded REITs are structured as a "finite life investment," meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate. Many factors affect the valuation of non-traded REITs, including the portfolio of real estate assets owned, strength of the trust's balance sheet, overhead expenses and cost of capital.
Early redemption is often restrictive and may be expensive. Most non-traded REITs place limits on the amount of shares that can be redeemed prior to liquidation. These limits can be as restrictive as 5--or even 3--percent of the weighted average number of shares outstanding during the previous year. Additionally, the redemption price is generally lower than the purchase price, sometimes by as much as 10 percent.
Non-traded REITs can be expensive. State and FINRA guidelines limit front-end fees to 15 percent, but a 15-percent front-end fee on a $10,000 investment means that only $8,500 is going to work for an investor.
Public Non-Traded REITs-Perform a Careful Review Before Investing also warns investors about private REITs--generally sold only to accredited investors--which not only do not trade on an exchange, but are also generally exempt from Securities Act registration. FINRA cautions that it is extremely difficult for investors to make an informed decision about private REITs due to their lack of disclosure documents.
Klayman & Toskes has successfully obtained recoveries for clients over the last several years in these same types of illiquid investment products. The danger of clients investing in illiquid products like these is that they are not freely tradable in the market place, but instead are dependant on valuation procedures which may not properly value the securities. Over the years, these valuation procedures have created conflicts of interest. This conduct appears to repeat itself as we have seen this many times before.
For more information on how to start a claim, or to find out if you have a claim, please contact our law firm for a free consultation. Be aware, there are strict time limitations, which in some cases are as short as one or two years. Don't lose your opportunity to get your money back!
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