The Financial Industry Regulatory Authority (FINRA) is investigating and considering legal action against a “captive” broker-dealer of a real estate investment company for the second time in three years. (See InvestmentNews article by Bruce Kelly entitled “Nontraded REITs’ B-D faces another probe”).
Pacific Cornerstone Capital is the broker-dealer manager of two nontraded real estate investment trusts that have undergone steep declines in value. Terry Roussel is the firm’s owner and Vincent Finnegan is its chief executive officer.
In March, Cornerstone Core Properties REIT Inc. reportedly informed investors who had put $158 million into the nontraded REIT that it had been devalued to $2.25 a share, from $8, a 72% decline.
The Cornerstone Healthcare Plus REIT Inc., which raised $127 million from investors at a price of $10 a share recently declined to a value of $9.02 a share. At about the same times, it changed its name to Sentio Healthcare Properties Inc. and replaced the adviser of the fund.
Pacific Cornerstone Capital recently filed to deregister with the Commonwealth of Massachusetts and disclosed that it was “involved with an arbitration proceeding before FINRA and one FINRA investigation,” according to the article.
FINRA fined Pacific Cornerstone Capital $700,000 in 2009 for misstating material facts involved in the sale of private placements according to the firm’s CRD profile on FINRA’s BrokerCheck.
“Cornerstone is just in a world of hurt,” Tony Chereso, chief executive of FactRight LLC, a consulting and due-diligence firm for alternative investments such as nontraded REITs, was quoted as saying, adding: “First, the regulatory culture at Cornerstone was not strong, and second, they were thinly capitalized. Third, they had layers of costs burdening programs you don’t typically see on nontraded REITs.”
With FINRA allowing broker-dealers who sell nontraded REITs to use up to 15% of investors’ money to pay themselves, it is hard to understand what Mr. Chereso meant by “layers of costs burdening programs you don’t typically see on nontraded REITs.”
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.