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]