TAG | valuation of illiquid investments
Comments off · Posted by Securities Lawyer in FINRA
In a January 24th., 2012 article for InvestmentNews.com, Bruce Kelly writes that it’s more bad news for Behringer Harvard Holdings LLC, as an investor who saw the value of her real estate fund drop to $2,000, from an original investment of $50,000, has begun to complain to regulators.
On January 20th., 2012, D. Gayle Salyer wrote a letter to the Financial Industry Regulatory Authority Inc. to complain about the real estate firm, which has seen the estimated valuations of some its real estate investment trusts and funds slashed recently.
“What is going on with the Behringer Harvard Short-Term Opportunity Fund?” Ms. Salyer wrote. “In a six-year period, BH has blown away $48,000 of my money. I would like to know how much of my money has been taken by Mr. Behringer as salary, benefits and expenses, as well as the management team.”
At the end of 2011, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.
Kelly writes that Ms. Salyer, 70, said she had not filed an arbitration complaint against her broker, Dennis Freeman, who is affiliated with Capital Financial Services Inc. She also said she wrote the letter to Finra with the assistance of Mr. Freeman, who said that she also sent a letter to the Texas State Securities Board. Behringer Harvard is based in Addison, Texas.
The InvestmentNews.com article adds that particularly distressing is the lack of direct communication from Behringer Harvard explaining what happened to wipe almost all of the fund’s value, said Ms. Salyer, who also lost $32,000 of a $50,000 investment in Provident Royalties LLC, a series of private placements that the Securities and Exchange Commission in 2009 charged with fraud. Behringer Harvard “keeps sending me stuff that shows my money is gone,” she said. “The only communication is the [account] statement. They sent nothing to say we’re in trouble. Nothing.”
The (SEC) Securities and Exchange Commission has jurisdiction over funds and REITs, while Finra has jurisdiction over broker-dealers that sell those products, industry observers noted.
Kelly writes that Finra has recently drawn attention to the issue of how the valuation of illiquid investments — including non-traded REITs — are shown on client account statements. In September, Finra issued for comment a proposed amendment to the current rule, and the proposal would limit the time period that the initial, estimated value would be used on the client account statement. The rule change would also require broker-dealers to deduct costs of the offering, such as commissions to brokers, from that initial valuation.
“We are looking into the areas over which we have jurisdiction, including sales to investors by broker-dealers,” said Finra spokeswoman Nancy Condon. “But we can’t comment about ongoing investigations.”
“Client-specific information is confidential and Behringer Harvard does not comment publicly about specific clients,” Behringer CEO Bob Aisner said in a statement. “Our investment services team is available to speak with investors and their financial representatives about specific account questions.”
Kelly writes that the Short-Term Opportunity Fund makes information public through regular reports and filings with the Securities and Exchange Commission. In the statement, Mr. Aisner also said: “Behringer Harvard has been very committed to the success of the fund, as evidenced by $40 million of support from Behringer Harvard which will not be recouped.” That support included waived fees and cash support from the sponsor for the fund, he wrote in the statement.
“Since the inception of the fund, investors have received $2.12 per unit in total distributions, which includes both recurring monthly distributions and special distributions,” Mr. Aisner wrote. “Condominium projects and single-family lot developments, which usually depend on redevelopment, repositioning or recapitalization, were especially hard-hit, and the fund invested in these asset types before the great recession. In addition, the fund was significantly negatively impacted by the lack of availability of financing for opportunistic assets over the last several years.”
Capital Financial Services stopped selling Behringer Harvard products within the last year said the broker, Mr. Freeman.
Behringer Harvard continues to see a reshuffling of its management team. This morning, it said that Michael J. O’Hanlon has joined the firm as executive vice president and that he will be the chief executive of Behringer Harvard Opportunity REIT I Inc., which saw its estimated value decline to $4.12 per share at the end of last year, from $7.66 a year earlier. He will also be the CEO of Behringer Harvard Opportunity REIT II. He replaces Mr. Aisner, who will be vice chairman for both those REITs.
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