Real estate investment trusts not trustworthy to Naples retirees who lost savings

$1 bill.

$1 bill.

— After selling his motorcycle dealership near Chicago for more than $1 million, Bill McCabe searched for a safe place to invest his money.

He sought a steady income – and said he thought he'd get it after following the recommendations of a financial adviser he found on the Internet in 2005.

The adviser pitched a financial product McCabe hadn't heard of – non-traded real estate investments trusts, or REITs, which buy real estate with a pool of investor money.

McCabe bought into the trusts based on promises of higher returns and lower taxes on his capital gains, he said.

"It sounded like it was the only thing there was," said McCabe, 60, of Estero.

It didn't work out that way — he's lost most of his retirement savings.

Through Naples attorney Chris Vernon, McCabe filed a claim with the Financial Industry Regulatory Authority, a self-regulating agency that tries to resolve disputes between investors and brokers outside of court.

During the past few years, unlisted REITs have come under increased scrutiny from regulators for the way they're sold and valued:

** In 2011, the Financial Industry Regulatory Authority received 54 percent more complaints about the investment trusts than it did in 2009.

** In November of last year, the authority fined Wells Investment Securities Inc. $300,000 for misleading investors in the sale of its non-traded REITs.

** For more than a year, David Lerner & Associates Inc. in New York has been in the hot seat for selling billions of dollars worth of REITs to unsophisticated and elderly investors, which triggered class-action lawsuits. In May, an arbitrator ordered Lerner to give customers back their money in exchange for their shares in unlisted REITs.

** In April, Vernon Healy and another law firm in Atlanta filed $2.3 million in claims with the authority for three retirees who were sold non-traded REITS and other risky investments by brokers with VSR Financial. Two of the retirees live in Southwest Florida; one sought safe investments because of his long battle with cancer, Vernon said.

** One of Vernon's other clients, a 58-year-old retired manufacturing executive in Naples, told a VSR broker he wanted safer investments because he'd already lost a chunk of his savings in a Ponzi scheme in 2002 – yet the broker steered $1.3 million of the man's money into risky alternative investments, according to the man's claim.

The broker was fired by VSR in September 2010 and later barred from working for any Financial Industry Regulatory Authority financial firm after he failed to answer questions about possible undisclosed outside business activities and private securities transactions.

Jon Stanfield, a co-president for VSR Financial Services, said the company doesn't comment on pending litigation.

* * * * *

Like many other seniors who have invested in the high-risk non-traded real estate trusts during the past decade, McCabe, who has lived in Southwest Florida year-round since 2008, regrets he didn't know better. His investments have lost more than half their value, the distributions he counted on have stopped and he's been forced to borrow money from his parents to get by, he said.

"My father just passed away. He was 100 years old. My parents as much as possible have helped," McCabe said.

He believes high commissions motivated his adviser to sell him REITs. The adviser put more than $830,000 of the retiree's nest egg into speculative investments in two years.

McCabe wants his money back, plus damages and lost interest. His claim is against SII Investments in Wisconsin and its adviser who sold him the REITs and put another $85,000 of the retiree's money in Ridgewood Energy, another bad investment, said Vernon, the Naples investor rights attorney.

McCabe's money is tied up in Behringer Harvard REITs that have suspended distributions and restricted their share buy-back programs. After struggling to recapitalize mature debt related to Frisco Square, a mixed-use property in Texas, a subsidiary of Behringer Harvard Opportunity REIT I Inc. and its special purpose entities voluntarily filed for Chapter 11 bankruptcy protection in June.

Jason Mattox, chief operating officer for Behringer Harvard, said the company doesn't comment publicly about specific clients and their situations.

"In general, a historically severe recession has reduced the value of all commercial real estate in the U.S., and the assets held by Behringer Harvard's investment programs have not been immune to this trend," he said.

* * * * *

Unhappy investors are calling Vernon almost daily.

"Not only are they stuck in the REITs, but they are not getting any income from the REITs and they're fearful the value will continue to decline until all the money is gone," Vernon said.

He's talked to investors who have as little as $10,000 and as much as $9 million tied up in the trusts, which are frequently sold by smaller broker-dealers, he said.

In the past few years, numerous non-traded REITs have seen their values plummet. Falling commercial real estate values have taken a toll, but Vernon said the problems with the trusts run much deeper, including the high costs of operating them.

"I don't think it's a cost-efficient way to invest in real estate," he said. "There is just so much money flowing to the issuers and the sales people."

High commissions can be a powerful motivator for brokers to sell the risky investments even when they're unsuitable for clients, Vernon said.

"The tragedy is you are going to end up with an entire generation, frankly the baby boomers out there, upper middle class people, that are going to have a wad of this stuff in their portfolios, whether it's suitable or not," Vernon said. "It may be suitable for some people. But it's not going to be suitable for many people."Kevin Hogan, CEO of the Investment Program Association, an advocacy group for non-traded REITs, said they're not a bad product, they're just misunderstood.

"If a senior or any other investor needs to have access to their money, they should not be in a non-listed (non-traded) REIT," he said. "It's just like buying a home or other real estate. They are typically long-term holds. And those periods range from 7 to 10 years. What's unfortunate is people forget this, they don't realize that, or it's sold the wrong way."

He points out many financial products took a hit with the economic downturn, including mutual funds.

"A lot of people would argue that this is a fantastic time to be investing in non-listed REIT products because they are buying real estate holdings at a time when they are at historical lows," Hogan said. "It's just about timing. It's just like buying your home."

* * * * *

The industry continues to work on standardizing how dividends are paid and how shares are valued to promote a better understanding of the product, Hogan said.

While the high commissions for brokers have been criticized, he said if you spread the cost over the life of the investment, it's less than 1 percent a year.

For McCabe, there are no good arguments for why his broker steered so much of his hard-earned money into the unlisted REITs. That's why he believes the broker was motivated by lucrative commissions.

The only way McCabe can get money out of his REITs now is to sell at a deep discount in a limited secondary market — worth about 25 cents on the dollar, he said.

He said the broker led him to believe he could sell his shares back to the REITs at any time, but then the issuers suspended their buy-back programs.

"I pay my bills," McCabe said. "But I'm not able to enjoy the lifestyle that I feel I should be living with what I acquired."

After owning a motorcycle dealership for 25 years, he expected a comfortable lifestyle in Southwest Florida retirement. He got something far different.

__ Connect with Laura Layden at www.naplesnews.com/staff/laura_layden

© 2012 Naples Daily News. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Comments » 29

granitestater writes:

What a sad story. It is said that there are only two motivators in the markets, fear and greed. There should be a third, dumbness!

Greed applies here. There's no way a retiree should be advised to buy into such a risky proposition as non-listed REIT. Greedy adviser savoring commissions!

Dumb investor. Never invest in anything which you cannot explain, in detail, how it works, what the costs are, what the risks are and in which the returns are unrealistic.

If the investor firmly believed he'd done his due diligence he should have invested no more than 5% of his retirement funds or $50,000 but surely not $830,000!!! And to put the entire investment into only TWO investments...where's the diversification? Dumb! Dumb! Dumb!

And finally, NEVER NEVER, NEVER invest money which you cannot afford to lose, especially in retirement!!!

aj writes:

LEARN A LESSON-----DO YOUR OWN RESEARCH ON AN INVESTMENTS RISK FACTOR. IF YOU GOT A MILLION DOLLARS TO INVEST AND ARE DUMB ENOUGH TO JUST "HAND IT OVER' AND NOT EVEN ASK IF YOUR ADVISER IS COMMISSION OR FEE PAID THEN YOU SHOULD HAVE PUT YOUR MONEY IN 4 BANKS. YOU SHOULD NOT BE IN THE MARKET. THE GREED FACTOR GET'S YOU EVERY TIME. STOP CRYING AND HIRING LAWYERS TO "FIND SOMEBODY TO SUE" TO MAKE UP FOR YOUR VERY BAD INVESTMENT SELECTION. NEXT TIME CHECK OUT YOUR REP AND MAKE SURE THEY ARE A CFP OR EQUIVALENT.

martinm_1 writes:

I AGREE WITH AJ,I MAKE MY OWN INVESTMENTS AND DO MY OWN RESEARCH,IF ITS SOUNDS TO GOOD TO BE TRUE,ITS IS.

manforpeace writes:

I lost 10 dollars last night playing Powerball. Who can I sue to get that money back?
Laura Layden = PROPAGANDA

Hey Laura, did NABOR approve this story?

micirisi writes:

Investing 101, Diversify. Investing 201, Be weary of hucksters you meet on the Internet. Those two courses should be required for anyone with a million bucks.

wentfishn writes:

Just another form of gambling with a fancy name, read em and weep.

Klaatu writes:

BOO HOO !
Had your investments turned out the way YOU thought, you would have been laughing all the way to the Bank!

YOU took the risk !
YOU Gambled and lost !
YOUR greed got the better of you!
YOU already had enough to live comfortably, but wanted more!!!
YOU'RE TO BLAME!
YOUR NOT A VICTIM!!!
No one held a gun to your head!
YOU DID IT all on your own!

I have no sympathy for YOU what so ever!

beetlejuice writes:

in response to Klaatu:

BOO HOO !
Had your investments turned out the way YOU thought, you would have been laughing all the way to the Bank!

YOU took the risk !
YOU Gambled and lost !
YOUR greed got the better of you!
YOU already had enough to live comfortably, but wanted more!!!
YOU'RE TO BLAME!
YOUR NOT A VICTIM!!!
No one held a gun to your head!
YOU DID IT all on your own!

I have no sympathy for YOU what so ever!

wtf?
YOU sound like you have issues
Advisors can be corrupt
stock traders can go to jail
stock market analysts can make mistakes
stock market is gambling on a win
loser advisor = wtf is advisor doing in market in first place?
WTF?

Corporate writes:

Ignorance to investing can be a disaster. Did people learn nothing from Bernard Madoff?

BillBrasky writes:

This is why these crooks band together and pay Lobbyists to push for deregulation. Think of how many people they could defraud if the average investor had no recourse or if the fraud was loop-holed so its not a crime.
Regulations are there to protect us.

SaveaRat writes:

Even if he didn't know how to explain his investment, he knew the acronym began with RE. Real Estate. No real estate guarantees anything. Not now. Not then. Real estate has always been risky because it's not a liquid asset. I'm sure his parents who lived through the depression warned him many times about real estate investing! Mine did. Lots of people lost their pants. Investors and regular people. I remember a Coldwell Banker realtor telling me this $995,000 lot on Marco Island was a "sound investment.". She's just reselling the same lots as short sales at 1/10th of the price!!! Banks on Marco giving loans on land with 10% down. As long as you had a pulse you were guaranteed a loan with this bank. Bunch of crooks. But they're coming after all the investors when they were the predators like sharks on the move. The investor is the dummy. The crooks are out there still making outrageous comments about real estate, it's just a "great investment ". FDIC shut down the bank. The crooks scurry away to other banks to work, like roaches when a light is turned on at night. . Everyone lost everything. Poof. It's gone. Don't cry over spilled milk. You're not alone. You were warned about the bubble. Your momma taught you about bubbles. They touch a leaf and explode. They fall to the ground and disappear. Wind catches a big one and poof it bursts. Everything you needed to know you learned in Kindergarten. And from your parents who lived through the depression.

Klaatu writes:

in response to beetlejuice:

wtf?
YOU sound like you have issues
Advisors can be corrupt
stock traders can go to jail
stock market analysts can make mistakes
stock market is gambling on a win
loser advisor = wtf is advisor doing in market in first place?
WTF?

Markets change
Markets evolve
There's no such thing as a sure bet!

Blaming others because you weren't paying attention to what you've invested in or who you invested with is your own fault!

The signs were there in 2005 and 2006 that the bubble was about to burst!

Bear Stearns, Goldman Sachs, Lehman Brothers, Countrywide, AIG,
No one went to jail or even charged with a crime.

Get real !

wentfishn writes:

in response to SaveaRat:

Even if he didn't know how to explain his investment, he knew the acronym began with RE. Real Estate. No real estate guarantees anything. Not now. Not then. Real estate has always been risky because it's not a liquid asset. I'm sure his parents who lived through the depression warned him many times about real estate investing! Mine did. Lots of people lost their pants. Investors and regular people. I remember a Coldwell Banker realtor telling me this $995,000 lot on Marco Island was a "sound investment.". She's just reselling the same lots as short sales at 1/10th of the price!!! Banks on Marco giving loans on land with 10% down. As long as you had a pulse you were guaranteed a loan with this bank. Bunch of crooks. But they're coming after all the investors when they were the predators like sharks on the move. The investor is the dummy. The crooks are out there still making outrageous comments about real estate, it's just a "great investment ". FDIC shut down the bank. The crooks scurry away to other banks to work, like roaches when a light is turned on at night. . Everyone lost everything. Poof. It's gone. Don't cry over spilled milk. You're not alone. You were warned about the bubble. Your momma taught you about bubbles. They touch a leaf and explode. They fall to the ground and disappear. Wind catches a big one and poof it bursts. Everything you needed to know you learned in Kindergarten. And from your parents who lived through the depression.

Great post! ty.

wentfishn writes:

Lots of people just dont get it. These sales people are out there to get the money that you have with out a gun,its just that simple. Thinkaboutit?

privateroad writes:

the only honest people down here are the ones that wear a mask when they rob you. At least you know what's happening with them.

slickwillie writes:

Brokers are just that, salesman. Beware of any so called "adviser" that doesn't get paid for their advice. Because then their only motivation is selling you something to get their cut. I learned that the hard way too, just not as severely as Mr. McCabe.

checkbook_ira#259750 writes:

A few thoughts. First and foremost these investors took a risk as do all investors. Had the real estate market tripled after their investment there would be no complaints. They took a risk, more than likely didn't understand the full scope of risks, and lost. Is this any different than a guy that buys a rent house and fails to notice the prison across the street and the alley behind his house and then complains that there was little resale value? If someone is 21 and has little knowledge of investing that might be a common problem. People in the 40's and 50's or older should have the ability to understand risks and if not, get educated BEFORE they jump in. As far as managers, analysts, etc most have an interest that exceeds that of their clients. Their motivation is to THEIR pocketbooks, not their client. I wouldn't give one of them a dime and I am doing two to three times as well as any product they want to sell me! I wrote a letter to the editor recently stating I am making 12%-15% on my investments without any risk...or risk so small it is hard to measure. I am making these investments inside of my self directed 401K and the results have been wonderful. You will NEVER have a stockbroker or financial planner educate you about the possibilities because they then lose a clien, and lose money when the client leaves. Stockbrokers and financial planners LOVE uneducated clients. They are not clients ctually....actually "targets". Most people have been taught these returns are not possible, so they continue to accept pitiful returns due to their beliefs. Some people chose to attack my ideas and claims, but the bottom line is whether my letter was truthful or not. Not only was it truthful, everything I claim is backed up in black and white with signed documents and the income I claim arrives every month! The key was I chose not to trust others, dumped the wall street crooks, and stockbroker sheisters, and make my own decisions. Sad to see these people lose, but they chose to give money to someone without investigating and asking enough questions before they took action. Blame it on someone else if they wish, but the bottom line is THEY made the decision, a very poor uninformed decision, and they lost.

checkbook_ira#259750 writes:

BTW: if you want into a "trustworthy" REIT..one with a name that implies the company won't be gone tomorrow there are lots of them: T Rowe Price is one that comes to mind. I made a decent return when I sold it. It could have gone down, no doubt about that, but T Rowe at least had a track record. Today, I am out of the market for the most part. I am getting 12%-15% return, make my own decisions, and sleep very well at night with my investments. Most people I have talked to, once I show them my personal investments, typically comment they can't see any risk. That is exactly how I feel and some of these investments are over six figures, guaranteed as far as I am concerned, and making 12% or more! If I had asked anyone to do that for me they would have laughed, said it is not possible, or I would have ended up like the investors featured in this story. Instead, I did this on my own. I pay no fees to anyone, and I make LOTS more than the average investor that buys the fraud and con jobs offered by stockbroker sheisters, investment advisors con jobs, etc. You CAN do it if you invest in yourself and don't trust others.

j.j.johnson#258632 writes:

There's an old saying that a fool and his money are easily parted. A"non traded" investment should have been one warning. What about the prospectus?? That little document would have given almost anyone enough pause to question what they were looking at. How about something a little more traditional like high quality listed stocks or bonds that can be monitered on a daily basis and sold 5 days a week if so desired. Why so many people shun investments that are tried and true, especially with all the availability of firms to interview, just defies logic. There was probably a lawyer involved in the sale of the dealership, why not have one involved with an $800,000 real estate investment. At least some of the risks involved would have come to light...Again the old saying goes. The truth is that 25 cents on the dollar is probably better than what will come later....ZERO!

Trexler writes:

Repeat, ..what dont you understand!,..the main 2 crooks in SW Fla. are financial advisors and most air conditioning types...Sonny Bloch types and radio ac guys curing cancer are under every rock....

checkbook_ira#259750 writes:

in response to j.j.johnson#258632:

There's an old saying that a fool and his money are easily parted. A"non traded" investment should have been one warning. What about the prospectus?? That little document would have given almost anyone enough pause to question what they were looking at. How about something a little more traditional like high quality listed stocks or bonds that can be monitered on a daily basis and sold 5 days a week if so desired. Why so many people shun investments that are tried and true, especially with all the availability of firms to interview, just defies logic. There was probably a lawyer involved in the sale of the dealership, why not have one involved with an $800,000 real estate investment. At least some of the risks involved would have come to light...Again the old saying goes. The truth is that 25 cents on the dollar is probably better than what will come later....ZERO!

In response to your statement about "high quality listed stocks or bonds" many people saw 1/2 of their portfolio disappear in 2008. I was one of them. The stock market is RIGGED..and not for the investor. I recently saw a story where a stock went down in value almost 1/2 yet the CEO of the company got 5 million dollars. The stockholders should sue but no doubt THAT game is rigged as well. Everyone loses except the guys at the top (CEO's, fraud banksters, obomba...are you seeing a pattern here). Watch CNBC and see most of these frauds promoting a certain stock or the market in general yet they don't own that stock. They are looking for muppets to buy the stock so they can take their 3,4,5% or whatever commission while the investor takes all the risk. And if the stock goes down, the victim investor against gets cheated by the stockbroker sheisters taking 3,4,5% for getting rid of the stock. They get it from both sides regardless if you win or lose. Now THAT IS RIGGED!
The BEST thing you can do is get out of the market...NOW! Take control of your retirement funds and find alternative investments that will yield much higher returns. The bad news is when you sell your stocks or mutual funds the thieving stockbroker sheisters rip you off for 3,4,5%. The good news is that when you get rid of them they no longer can steal from you. One more last idea: the markets have another QE or "operation twist the facts" cooked into the scheme. Once the money dries up so will your portfolio. Europe just had a rate cut to .75%. The US is not much higher, and when you factor in inflation the results are nothing short of a disaster. No amount of meddling will fix the markets. Manipulated markets cannot give a true and unbiased return of investment. The only hope is for the FED to stop intervening but that will never happen when you realize that bernanke and the rest of his ilk are all ex goldman guys...all making sure that no matter what happens that goldman and the rest of the wall street sheisters will come out on top even if every household in the US implodes.

checkbook_ira#259750 writes:

Read this article from NDN a few weeks back. There's a clue! If you don't realize how vulverable the US is then you should not be invested in the markets. Actually in my opinion you should not be anyways, but this article reinforces just how bad things are and how bad they might get. Read on: http://www.naplesnews.com/news/2012/j...

Sell tomorrow. If you put your cash in the banks you will only lose 9% a year. That is a lot less than losing 1/2 when the stuff hits the fan...and it WILL. Kick the can down and road and keep walking. Eventually the can will be right back in front of you. Kick again and get the same result. The government cannot fix the problem. They are arrogant enough to believe they can (or maybe not arrogant but decidedly working to save the big boys like goldman, the fraud banksters, well connected friends, etc.) but no matter what happens intervention in a broken system cannot fix it. Let the system pick the winners and losers and we will eventually see the system fix itself. Even the upcoming election won't fix anything so don't hold your breath waiting for that to happen.

OutfromouttatheCold writes:

@checkbook: I agree with most of your posts, Caveat Emptor. However your claim of 12%-15% returns of little or no risk smacks of the same touts of the shyster brokers you seem to hate. Please explain how you acheive them to us idiots. Or do we have to pay for a seminar or three to know?

Cruiser22 writes:

in response to beetlejuice:

wtf?
YOU sound like you have issues
Advisors can be corrupt
stock traders can go to jail
stock market analysts can make mistakes
stock market is gambling on a win
loser advisor = wtf is advisor doing in market in first place?
WTF?

(This comment was removed by the site staff.)

Woodstocker69 writes:

Granite got it right

checkbook_ira#259750 writes:

in response to OutfromouttatheCold:

@checkbook: I agree with most of your posts, Caveat Emptor. However your claim of 12%-15% returns of little or no risk smacks of the same touts of the shyster brokers you seem to hate. Please explain how you acheive them to us idiots. Or do we have to pay for a seminar or three to know?

Sorry..no seminars from me! I don't have any interest in working and even less interest in dealing with people LOL! Yes, I am making those returns. Do you think that is possible? Have you been taught that you can't make great returns? Does your stockbroker tell you it isn't possible? Actually, not one of my current investments is making 12%. All of them are making MORE than that! FYI, I am not a broker, am not selling anything, and have no knowledge of these companies or any of the investors that supposedly lost their money. I am doing a better job of making money because I rely on myself and not someone else. If I could bottle and sell what I am doing now I might consider that. Truthfully, I recently had someone encouraging me to start some sort of private equity fund...actually...two different people mentioned that to me. I know nothing about that except it sounds like work and also sounds like responsibility to other people for THEIR money. NOT INTERESTED! As long as I am investing only MY money I have nobody to answer to. So, you won't see me at any seminars (at least not planned LOL) nor will you see me seeking others money. You might see me driving a new car a few years from now as my investments pay off. FYI, there are REITS that are aligned with my investments (I actually became aware of them tonight) showing returns of 13% or more! However, unlike a REIT where the stock values can go down my investments are MUCH safer. Some of these REITS are leveraged at 9X or more. All of my investments are heavily leveraged in the other direction with the underlying assets worth 4,5,even 10 times my investment.

checkbook_ira#259750 writes:

in response to OutfromouttatheCold:

@checkbook: I agree with most of your posts, Caveat Emptor. However your claim of 12%-15% returns of little or no risk smacks of the same touts of the shyster brokers you seem to hate. Please explain how you acheive them to us idiots. Or do we have to pay for a seminar or three to know?

p.s. Sir, I did not call anyone an idiot in any post. I do feel bad for the investors but they should have asked a lot of questions. Investing 10K is a LOT different than investing almost a million dollars. As you said, and I agree caveat emptor.

volochine writes:

Why Bill McCabe ever admitted he lost all this money to an internet chat-room buddy he didn't know is beyond me. He is not only s-----, he is a masochist.

I trusted my college and high school friends who went into the financial arena. I got cold calls every day from schmucks promising the world, yet would not give me their home phone number.

Most financial people are pigs. There is no way to tell unless you have known them for 10 years or more.

I agree about buyer beware, but some of these "lipstick on a pig" purveyors knowingly commit fraud.

The ENRON fraud group were all good church-goers.

gladesgator writes:

in response to granitestater:

What a sad story. It is said that there are only two motivators in the markets, fear and greed. There should be a third, dumbness!

Greed applies here. There's no way a retiree should be advised to buy into such a risky proposition as non-listed REIT. Greedy adviser savoring commissions!

Dumb investor. Never invest in anything which you cannot explain, in detail, how it works, what the costs are, what the risks are and in which the returns are unrealistic.

If the investor firmly believed he'd done his due diligence he should have invested no more than 5% of his retirement funds or $50,000 but surely not $830,000!!! And to put the entire investment into only TWO investments...where's the diversification? Dumb! Dumb! Dumb!

And finally, NEVER NEVER, NEVER invest money which you cannot afford to lose, especially in retirement!!!

You would think that someone that ran a business for 25 years would be a bit more savy about his money.

But to say never invest money you cant afford to loose is taking it a bit to far. All investing involves some risk, diversification spreads the risk. In reality, its to risky not to take risks.

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