Dec 12 Massachusetts' securities regulator filed civil charges on Wednesday against LPL Financial LLC for failing to supervise its brokers who sold investments in non-traded real estate investment trusts (REITs), according to a complaint.
Secretary of the Commonwealth William Galvin said the unit of LPL Financial Holdings Inc, sold $28-million in non-traded REIT investments in nearly 600 transactions with Massachusetts residents between 2006 and 2009. Almost all those transactions violated state securities regulations or LPL's own compliance practices, the Massachusetts Securities Division alleged.
Galvin also charged LPL with dishonest and unethical business practices. He is seeking restitution to investors who bought the REITs, a fine and other sanctions, according to the complaint, which the company called "substantially overstated."
LPL received at least $1.8 million in commissions on the deals during the period in question, Galvin said.
REITs invest in commercial real estate, such as hotels and strip malls, allowing investors to profit from rising property values. Non-traded REITs, which do not trade on securities exchanges, can be illiquid or difficult to sell in secondary markets. Non-traded REITs also often have higher fees for investors than publicly traded REITs.
The Massachusetts probe focused on seven non-traded REITS sold by LPL brokers. Officials alleged that some sales violated state regulations barring more than 10 percent of an investor's net worth from being held in certain securities. Other transactions violated liquid net worth requirements for investors set out in the REIT prospectuses, the state alleged.
Brokers and LPL employees responsible for reviewing the transactions were "under-educated and under-supervised with respect to non-traded REIT transactions," according to the complaint. One supervisor was "completely unaware" of the state restriction for at least two years, Galvin alleged.
"We believe the claims included in the complaint are substantially overstated," an LPL spokesman said in a statement. "LPL Financial takes protection of investors' interests seriously. We have always endeavored to promote a strong culture of compliance and continue to do so."
Regulators are taking a closer look at possible sales abuses involving non-traded REITS. In October, the Financial Industry Regulatory Authority, Wall Street's industry-funded watchdog, sanctioned David Lerner Associates Inc to pay about $12 million to customers that bought into a $2 billion REIT and to those who were charged excessive markups. [ID: nL3E8LM6OL]