REIT Unsuitability Violations: Interview with Attorney Christopher Gray

New York, NYWhen it comes to securities fraud claims, one of the areas of concern is suitability violations--when a broker-dealer or financial advisor recommends investment products that are unsuitable for the client. Christopher Gray, senior attorney at Law Office of Christopher J. Gray, PC, says he is seeing numerous suitability violation claims related to the sale of non-exchange traded real estate investment trusts. Those claims may result in an arbitration being filed on behalf of the investor.

Non-exchange traded real estate investment trusts (REITs, or non-traded REITs) involve investors purchasing shares in a portfolio of income-producing real estate properties. Ordinarily, REITs are traded on exchanges and are liquid investments. Non-traded REITs, however, are not traded publicly, making them less liquid than typical REITs. Furthermore, non-traded REITs often have high fees and investors who attempt to redeem their shares early can face even higher fees. Unfortunately, some investors say they were sold the non-traded REITs as safe, liquid investments.

"Investors allege broker-dealers or financial advisors who sold them non-traded REITs did not explain risks associated with the REIT," Gray says. "This includes not telling investors about the inability or limited ability to sell the non-traded REIT or the loss of principal in the non-traded REIT due to the amount of money borrowed by the non-traded REIT to buy assets."

Some non-traded REITs involved billions of dollars in shares sold. And although the losses vary from REIT to REIT, Gray says a lot of non-traded REITs, which became popular in 2004, have lost between one-third and two-thirds of their initial value.

"I'm seeing retirees with half or more of their assets in non-traded REITs, and people with relatively low net worth who can't afford principal loss, put into those REITs," Gray says.

Essentially, investors allege the non-traded REITs were unsuitable investments because of their financial situation. People on a fixed income--such as retirees--who cannot afford a loss in the principal and cannot afford illiquid assets, may have been victims of suitability violations if their broker-dealer or financial advisor sold them non-traded REITs.

"The fees that brokers received for selling these shares are among the highest that brokers receive for selling any product," Gray says. "Often brokers received between five and 10 percent of the client's purchase price as a commission. So people should be aware that it's not necessarily an accident that these products get recommended to them. It could be because of the unusually high level of financial compensation that the broker recommends these products."