This case involves a capital market investment adviser who was working for a financial services company that sold non-traded REITs to clients. The adviser told clients that REITs were safe and conservative investments and that no risk was involved in this kind of investment. The adviser also told clients that there was no way that a client could lose any money by investing in non-traded REITs. The adviser told clients that the liquidity of the REITs was guaranteed. The adviser made several recommendations to clients including telling one client to invest 100% of his net worth in REITs. The adviser also sold a client an 80% concentration of REITs. In several cases, the adviser misstated the net worth of his clients to the company and also misstated the income and investment objectives in order to get the company’s approval for his investment recommendations. In several cases, the adviser told clients to sign blank forms which he completed later using inaccurate information. In some cases, the adviser altered account forms to gain company approval of his investment recommendations. State securities regulators imposed various fines on the adviser.
Question(s) For Expert Witness
- 1. Can an investment adviser be held liable for making misrepresentations to clients and his company about the risks associated with non-traded REITs?
Expert Witness Response
A non-traded REIT is a type of real estate investment trust that is relatively illiquid. Many investment advisers sell REITs to clients promising that they can provide consistently high dividend income. In this case, the investment adviser probably violated several state securities laws by misrepresenting information to his clients and his company. The adviser probably violated state securities laws about fraud and making false statements by telling clients that the liquidity of REITs was guaranteed. Since REITs are not sold on a major exchange, their liquidity is drastically reduced. Clients who purchase non-traded REITs usually do not have the ability to sell or liquidate the REIT, so the information the adviser gave to clients about this is probably fraudulent. The adviser also probably violated state securities laws about making unsuitable recommendations about investments. Usually, there are specific suitability guidelines for investors in non-traded REITs. A minimum income of $70,000 and a net worth of $250,000 is usually required from a client who wants to invest in a non-traded REIT. Since the adviser did not check to see if his clients met these guidelines and recommended that several clients invest their whole net worth in non-traded REITS, he probably violated state securities laws against making investment recommendations that are unsuitable for clients based on their financial situation.