Leo Wells, CEO of Wells Real Estate Funds, told broker-dealers that his firm will not register any new nontraded REITs pending new guidelines that are expected to be published by the Financial Industry Regulatory Authority (FINRA). He indicated that his firm needs “clarity” before marketing any new products (“All’s not well as Wells halts REIT offerings,” InvestmentNews).
The NASD, FINRA’s predecessor, sanctioned Wells Investment Securities in October 2003 for providing improper incentives, such as lavish entertainment and travel perquisites, to registered representatives to sell the company’s REITs. The NASD also censured Mr. Wells and imposed a one-year suspension on him during which he was prohibited from acting in a principal capacity.
Recently, nontraded REITs have come under regulatory scrutiny as a result of many abuses and problems. They include high selling commissions and fees, illiquidity, lack of transparency, the selling brokers’ failure to conduct proper due diligence, and the misleading of investors by the use of improper valuation methods, by brokers valuing the REITs at cost on client account statements long after their intrinsic value had declined, the recycling of investors’ capital to them as distributions, and the payment of distributions with borrowed funds.
According to the article, “Wells’ REITs are extremely popular with independent broker-dealers, and it has as many as 200 selling agreements with such firms.” Popularity with brokers is largely a function of the high selling commissions and is indicative of one reason why nontraded REITs are said to be products that are sold (pushed), not bought (demanded).
Page Perry is investigating nontraded REITs that were registered by Wells Real Estate Funds, as well as those from other companies. Investors who are stuck in nontraded REITs that have suspended or reduced distributions and suffered declines in value may have compelling claims to recover their losses, and should speak with an attorney who is experienced in representing investors to determine their rights.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.