Massachusetts securities regulators today sued LPL Financial LLC over sales practices of brokers regarding the REITs.
Secretary of the Commonwealth William Galvin charged LPL Financial with a failure to supervise registered reps who sold the nontraded REITs in violation of both state limitations and the company’s rules. The Securities Division also charged LPL Financial with dishonest and unethical business practices.
The charges stem from sales of $28 million of nontraded REITs to almost 600 clients from 2006 to 2009. Of those transactions, the Securities Division found that 569 had regulatory violations. Those included sales made in violation of Massachusetts 10% concentration limits; sales made in violation of prospectus requirement; and sales made in violation of LPL compliance practices.
The firm received gross commission of $1.8 million for those sales, according to the complaint.
Of the REITs listed in the complaint, the largest amount of sales was for Inland American Real Estate Trust Inc., the largest nontraded REIT in the industry, with $11.2 billion in real estate assets. Massachusetts investors put at least $20.1 million in Inland American, which is currently the focus of a fact-finding investigation by the Securities and Exchange Commission.
Massachusetts’ investigation “revealed significant and widespread problems with LPL’s adherence with product prospectus and (state) requirements,” according to the complaint. By testimony of LPL reps, the Securities Division “uncovered similar issues with other nontraded REITs. In many ways, the division’s investigation unearthed a boat with many holes.”
“On paper, LPL set forth stringent requirements for the sale of nontraded REITs,” according to the complaint. “In practice, LPL failed to review properly sales of nontraded REITs. While purporting to conduct a thorough review of offering documents, LPL overlooked prospectus requirements in numerous sales of nontraded REITs.”
“LPL’s supervision employees had only a cursory understanding of specific state requirements, including Massachusetts concentration requirements,” according to the complaint. Many nontraded REIT prospectuses contain a 10% concentration limitation, designed to cap an individual investor’s purchase to 10% of his or her liquid net worth, the complaint stated.
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James A. Dunlap Jr. & Associates LLC