FINRA Award Exceeding $160,000 Emphasizes Non-traded Investment Product Risks
In November 2019, a FINRA Arbitration Panel in San Francisco, CA issued an Award against Crown Capital Securities, L.P. (Crown Capital), in addition to one of its brokers, in connection with a claim made by an elderly investor who was steered into numerous non-traded investment products, including REITs and business development companies (BDCs). Notably, the Panel awarded the investor (who was over 65 years at the time the transactions occurred) $90,000 in compensatory damages, as well as awarding attorneys’ fees of $36,666, and costs of $13,054. Further, pursuant to California Civil Code Section 3345—with respect to the customer’s claim for elder financial abuse—the Panel awarded $20,000 in punitive damages.
In reaching its determination, the FINRA Panel assessed the customer’s investments in various non-traded REITs, including: ARC Hospitality Investors Trust, Steadfast Apartment, Inc., New York Real Estate Trust, Health Care Trust, Phillips Edison & Company, and Carter Validus Mission Critical REIT. In addition, the Panel also considered investments in various unlisted BDCs, including: Sierra Income Corporation and Business Development Corporation of America.
FINRA has provided ample cautionary guidance to its member brokerage firms concerning the sale of certain non-traded investment products to securities customers. Specifically, as it concerns non-traded REITs and BDCs, FINRA has stated that “While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products.”
Investors in non-traded financial products—especially elderly securities customers who may be retired, and likely have enhanced liquidity needs (as opposed to a younger investor)—are cautioned to carefully evaluate any investment in a non-traded REIT, BDC, or similar product lacking liquidity such as a private placement. Brokerage firms like Crown Capital have a legal obligation to perform adequate due diligence on any investment product recommended to customers. Furthermore, financial advisors have an affirmative duty to disclose the risk components of a particular investment (or investment strategy) to their clients. In addition, financial advisors must conduct a suitability analysis to determine if the investment (or investment strategy) conforms to an investor’s stated investment objectives and risk profile.
If you have invested in any non-traded financial products on the recommendation of your financial advisor, and have suffered losses or are unable to exit your illiquid investment position, you may be able to recover your losses in securities arbitration before FINRA. The attorneys at Giarrusso Law Group LLC have significant experience working with investors in complex and illiquid non-conventional investments, including non-traded BDCs and non-traded REITs. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost and confidential consultation.