Wyoming FINRA Arbitration Attorneys

The Compliance Division for Wyoming’s Secretary of State has issued several warnings to both investors and financial firms about the risks of investing in non-traded private placements and illiquid securities, such as non-traded Real Estate Investment Trusts (REITs). Investors and retirees who did not understand the risks of these products may now be in a position where their retirement portfolios have suffered from being over concentrated in these illiquid, alternative securities products. Under both state and federal securities laws, brokerage firms and other financial firms have a duty to supervise retirement accounts and financial advisors to ensure they are acting in the best interests of their customers, and not recommending these products which are unsuitable for most retirees given their high fees and speculative risks.

One of the first things investors learn when seeking legal remedies to recover their financial losses is that many disputes with financial firms are ineligible for the courts, and that their cases must instead be heard in arbitration before the Financial Industry Regulatory Authority (FINRA). Arbitration provisions exist across many industries and, generally, are known to be more friendly to industry than consumers. This is not any different in the securities industry, although there are some advantages to arbitration when cases are brought by FINRA arbitration law firms like Malecki Law, whose FINRA arbitration attorneys are skilled practitioners in this litigation forum — whether in Wyoming or nationally — Malecki Law’s attorneys have recovered tens of millions of dollars for numerous retirees and senior investors who have suffered losses from being recommended unsuitable, illiquid securities like non-traded REITs.

Alternative investment products have become more popular than ever, offering an array of private placement products being marketed to seniors and retail investors in many forms. These products are generally pushed by financial advisors at brokerage and investment advisory firms, and typically provide a juicy fee or commission unbeknownst to most first-time investors in these products. Many of these alternative products are non-traded, and often sold as Real Estate Investment Trusts (REITs) or Business Development Corporations (BDCs), although there are many others. The U.S. Securities and Exchange Commission (SEC) published an Investor Bulletin that specifically warned investors about non-traded REITs, noting that they have elevated and different risks than investments that are publicly traded (i.e., on a public stock exchange), noting investors should be wary of these risks before investing, in particular their lack of liquidity:

“Non-traded REITs are illiquid investments, which mean that they cannot be sold readily in the market. Instead, investors generally must wait until the non-traded REIT lists its shares on an exchange or liquidates its assets to achieve liquidity. These liquidity events, however, might not occur until more than 10 years after your investment.”

Seniors and retirees do not typically have ten years to wait before exiting their investments. By definition, retirees are no longer working, and therefore, need liquidity to be able to access their money for daily living and the increased medical expenses typically associated with aging. Attempts to exit these positions any earlier than these “liquidity events” are often unsuccessful because these products — which are not sold on a public exchange like publicly traded securities — usually have no existing secondary market for investors to sell them in, i.e.., there are no buyers!

In its bulletin, the SEC also noted that investors are typically unaware that these alternative products carry excessive fees that make them speculative for just about any investor, requiring year over year gains exceeding 15% just to break even:

“Non-traded REITs typically charge high upfront fees to compensate a firm or individual selling the investment and to lower their offering and organizational costs. These fees can represent up to 15 percent of the offering price, which lowers the value and return of your investment and leaves less money for the REIT to invest. In addition to the high upfront fees, non-traded REITs may have significant transaction costs, such as property acquisition fees and asset management fees.”

Furthermore, obtaining true valuations of these products is more difficult to gauge in private non-traded securities because these fees are embedded right into the transaction cost, but also because the true supply and demand for the product cannot be assessed without an existing, open marketplace for buyers and sellers. With all these drawbacks, investors might believe that they are at least receiving compensation for the risk with the opportunity to gain outsized yields. But that is also not true, as long-term studies have shown that annual returns for publicly traded REITs have far outperformed non-traded REITs by nearly twice as much. There is little excuse for a financial adviser to recommend these products to a senior; Malecki Law’s FINRA arbitration lawyers are a skilled trial team who will make this point very clear at hearing.

In addition to warning investors generally about private placements and non-traded products, Wyoming’s securities regulator has also fined several large financial firms for supervisory failures regarding their sale of alternative products, and also specifically for non-traded REITs. In a cease-and-desist consent order, LPL Financial was ordered to “remediate losses for all non-traded REITs sold by LPL to LPL clients, from and including January 1, 2008 through December 31, 2013, who were Wyoming residents at the time they purchased the non-traded REIT.” The regulator additionally stated its finding that LPL violated industry rules for supervision “by failing to implement an adequate supervisory system for the sale of alternative investments that was reasonably designed to achieve compliance with [investor] suitability requirements.” This included findings that these products “were sold in violation of (a) the prospectus standards of the specific REIT, (b) a state concentration limit, or (c) LPL’s own guidelines for the sale of Alternative Investments, including but not limited to non-traded REITs.”

Alternative products are still being pushed by financial firms and their advisers more than ever, not just LPL. Financial advisers have a legal duty to act in the best interest of their clients with retirement accounts, which includes disclosing all conflicts of interest relating to fees and products risks before recommending such products. Malecki Law’s FINRA arbitration attorneys recognize that the securities laws are designed to ensure investors have an opportunity to provide informed consent around these risks and disclosures — legally, a firm and financial adviser are not protected from liability by sampling asking an investor to sign a form that has them agree to these fees and risks buried in the fine print of an agreement or a prospectus. Our legal team understands that investment advisory relationships are often built on trust, which is why investors will typically sign these forms based on trusting simultaneous verbal assurances of their advisers who might place greater emphasis on talking about the potential yield or gains for the investment versus their potential risks and downsides. As required uniformly under the various federal and state securities laws, investment advice must always be presented in a fair and balanced manner, such that it is not misleading.

In attempting to recover investment losses from these alternative products, misled Wyoming investors and retirees should consider the FINRA arbitration attorneys at Malecki Law, who are fully familiar with the relevant securities laws and industry rules. When illiquid securities are at issue in a case, other traditional methods of recovery may be available if the investor is still holding the illiquid security. One such remedy is known as rescission, which is the legal term to cancel a securities transaction as if it never happened, returning the full initial investment to the investor in exchange for the illiquid security being returned to the firm that sold it. Wyoming investors and seniors who have been misled by financial advisers into alternative investments like non-traded REITs should consider hiring legal representation fully familiar with the relevant securities landscape. Malecki Law is a FINRA arbitration law firm based in New York, which handles a wide variety of securities matters to recover lost investment funds, whether due to fraud, misrepresentations and omissions, negligence, or firm supervisory failures. To schedule a free initial consultation with Malecki Law, please call (212) 943-1233, or email jenice@maleckilaw.com.