In a February 14th., 2012, article in InvestmentNews.com, Bruce Kelly writes that LPL Financial, LLC, is on the hook for a $1.4 million arbitration awarded to an elderly couple who bought real estate deals. According to the attorney for the plaintiffs, the property investments relied on “tricks” to boost their yields before they collapsed.

Heinrich and Araceli Hardt, bought two tenant-in-common exchanges, one in 2007 and another in 2008, from former LPL broker David Glenn, according to a separate, continuing lawsuit the investors have filed against the sponsor of the real estate deals, Direct Invest LLC.

“There was a fraudulent picture painted of investors receiving monthly income checks from the properties,” said the attorney. That cash flow “would replace the income received from income-producing properties that they were selling,” he said. “The monthly check is the focal point of sale” by the broker, he said. The investors asked for damages of $8 million.

Kelly writes that the Finra panel issued the award Friday and, as is typical, gave no explanation for its decision. According to the award, the Hardts, both 76, made several allegations, including federal securities fraud and elder abuse. The Hardt’s claim was also filed against two other broker-dealers, Orchard Securities LLC and Meridian Capital Partners LLC, but the plaintiffs dismissed those claims in December.

“While we do not know the factual or legal basis for this award, the arbitration panel did not make a finding of elder abuse in this matter,” said Michael Herley, a spokesman for LPL. “Given the amount of the award in comparison to the alleged damages, we believe that the arbitrators rejected many, if not most, of the claimants’ claims.”

Also, Mr. Herley added that LPL played no tricks on its clients. “The TIC investors, including the Hardts, approved the operating budgets for the investment programs each year, which included projected revenue, expenses and cash flow. Thus, it’s more than a little disingenuous to say the investors were ‘tricked’ into anything, as they were included in the budgeting process.”

Known as a TIC, Kelly writes, the vehicle is a form of real estate ownership in which two or more parties have a fractional interest in the property. TICs gained in popularity after a favorable 2002 Internal Revenue Service ruling that allowed investors to defer capital gains on real estate transactions involving the exchange of properties. After the real estate bubble burst, many TIC investors saw their properties falter.

Further, one of the biggest TIC sponsors, DBSI Inc., declared bankruptcy in 2008, and broker-dealers that sold those deals have faced dozens of arbitration complaints filed with Financial Industry Regulatory Authority Inc.

The InvestmentNews.com article said that this claim against LPL did not involve DBSI but another sponsor, Direct Invest. The broker, Mr. Glenn, left LPL in 2010 and is now affiliated with United Planners’ Financial Services of America. Mr. Glenn was not named in the complaint.

“When these deals were structured, they used tricks,” the attorney said. A euphemism known as a “yield enhancement” for the TICs relied on “borrowed money” and “returning investors’ money back to them,” he said.

Kelly writes that the two real estate deals in question were “not producing any natural cash flow,” their lawyer claims. Distributions were made for a couple of years, and then “the money ran out. The defense in the case is, everybody was doing it. And we said, ‘No, this is wrong.’ It was clear LPL knew that these yields were not being generated by [the properties] but by financial trickery.”

“Reserve accounts were established to pay for anticipated expenses, such as tenant improvements and leasing commissions,” Mr. Herley said. “These accounts were typically required by the lender and were disclosed in the offering documents, which were offered only to accredited investors.”

Mr. Herley added that the structure of the programs and the projected cash flows were described and disclosed in comprehensive private-placement memoranda. “As everyone knows, the commercial real estate market experienced an unexpected and historical decline beginning in 2008 which also impacted these programs,” Mr. Herley said.

In the federal lawsuit, which was filed last year in U.S. District Court for the Southern District of California, the Hardts purchased their first TIC in December 2007 at a price of $3.7 million, with $1.6 million in cash and the remainder the assumption of a loan. They bought the second TIC in March 2008 at a purchase price of $4.2 million. About $1.8 million was in cash, with the balance the assumption of a loan. Both TICs owned commercial properties in the suburban Boston market. By the end of 2009, the Hardts stopped receiving payments on both deals, according to the lawsuit.

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In an InvestmentNews.com article by Bruce Kelly, he writes that failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC have forced dozens of broker-dealers to close, be sold or seek bankruptcy protection.

Failed real estate tenant-in-common syndicator DBSI Inc. is threatening to have the same result, with DeWaay Financial Network LLC claiming in federal court last month that bankruptcy looms, due to lawsuits by clients who bought DBSI securities.

Kelly writes that DeWaay Financial Network asked a federal judge in Delaware in October for a temporary injunction to halt eight arbitration claims that investors have filed with the Financial Industry Regulatory Authority Inc. stemming from DBSI losses.

DeWaay Financial Network “lacks sufficient funds to satisfy the claims in eight arbitration claims pending against it — let alone the potential claims of 304 other customers that have not yet brought suit. The threat posed by these mounting costs and the attendant potential for liability hangs over defendant’s limited funds like the Sword of Damocles,” according to the firm’s memorandum, which was filed in U.S. District Court in Delaware on Oct. 19.

“Absent injunctive relief, that sword’s descent is imminent and in all likelihood would force defendant to declare bankruptcy,” according to the memo.

DeWaay’s request for an injunction is part of its strategy to create a settlement with investors, president Matt Stahr said.

“We still feel like we’re in the right,” as the firm did its due diligence on the DBSI products, but the costs of defending the firm in individual arbitration claims are prohibitive, he said. The firm has made substantial progress toward reaching a settlement but hasn’t had a hearing yet regarding its request for an injunction, Mr. Stahr said.

DBSI raised $1 billion from investors by selling real estate deals through independent broker-dealers. The real estate firm declared bankruptcy in 2008, writes Kelly.

The InvestmentNew.com article said that according to court filings, the eight DeWaay Financial Network clients suing the firm in Finra arbitration bought $2.9 million in DBSI securities. DeWaay Financial Network so far has spent $46,000 defending those claims and expects to spend another $1.1 million in defense costs. Beyond those investors, DeWaay Financial Network sold DBSI securities to an additional 304 clients, and the firm’s total exposure exceeds $24 million.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with DeWaay Financial Network LLC, and/or were sold DBSI TICs, through DeWaay or other broker/dealers, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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