LPL Financial Sanctioned Due To Alleged Unsuitable Non-Traded REIT And Leveraged ETF Sales

Oakes & Fosher is currently interested in hearing from customers of the independent broker dealer, LPL Financial, that believe they experienced losses due to purchasing non-traded real estate investment trust (REITs) that they were financially unsuited for. Following the multi-state investigation by the North American Securities Administrators Associate, which is a task force dedicated to investigating securities violations on a multi-state level, it was determined that LPL Financial executed approximately 2,000 transactions involving highly unsuitable non-traded REITs. LPL brokers were allegedly executing these transactions all over the United States. These alleged sales took place over a six year period between January 1st, 2008 and December 31st, 2013. LPL Financial and state regulators reached a settlement in 2015 that resulted in a $1.43 million dollar fine meant to partially reimburse the afflicted customers. This fine was to be spread across 48 states.

What Are Non-Traded REITs?

Non-traded REITs are private investment funds used to fund the purchase of real estate properties. They are an alternative type of investment, which means they do not trade on public securities exchanges like regular equities do. Non-traded REITs have significant drawbacks that are usually not made apparent to investors by recommending brokers. Specifically their incredibly speculative and illiquid nature, and their extremely high cost structure.

Publicly traded equities are accompanied by what are known as guaranteed redemptions. This means that an investor can redeem their shares for the stated market value at a moments notice should the need to do so arise. This is not the case with alternative investments like non-traded REITs. Individuals managing these private products often need to hang onto cash infused to fund operations. Because of this, investors cannot simply redeem their shares for the stated market value whenever the need to do so arises. They may have to wait until scheduled buy outs, or take buy out offers from third party investment companies at prices significantly lower than the stated market value. This means that investors may literally find themselves trapped in a failing investment with no means of escape.

Investors are also charged significant upfront fees when purchasing these products. This actually proves to be the main motivation behind brokers recommending these products to unsuited investors. Commissions for these products can be as high as ten percent of the investor's principal. This insane commission is given to the recommending broker simply for brokering the trade. On top of other fees, an investor's principal may be lowered by 17 percent when purchasing a non-traded REIT before any money is actually put toward the investment.

Leveraged Exchange Traded Funds

In addition to the settlement reached between state regulators and LPL Financial for their alleged unsuitable non-traded REIT sales, LPL also reached a settlement with state regulators regarding unsuitable sales of products known as leveraged exchange traded funds. LPL was fined $1.8 million for the alleged unsuitable sales of leveraged ETFs to 200 investors throughout the state of Massachusetts.

ETFs are investment products that encompass a variety of different securities meant to mirror a particular index. These products adjust identically to whatever the mirroring index adjusts to. Some less than scrupulous brokers looking to supplement gains will recommend using leverage when purchasing exchange traded products. This essentially uses derivatives like options and futures to multiply gains. This means that the investor's product will actually increase more than the mirroring index. For instance, if the index rises by one percent, the leveraged ETF may rise 2 or even 3 percent. However, this works both ways, meaning that a customer's losses are also multiplied should the value of the index go down. This makes these products incredibly risky.

Leveraged exchange traded funds are also incredibly unsuitable for long term trading. In actuality, these products are specifically designed to be bought and sold within a single trading day. This is because leverage is reset on a daily basis. The fact that an index is at a greater value than the day you purchased the product, does not mean that the investment is as well. If the index experienced more trading days where losses occurred then gains, then the product could actually be utterly worthless. Brokers who recommend their customers hold on to leveraged ETFs for long periods of time either do so out of incompetence or maliciousness as it is under no circumstances a smart financial decision.

Oakes & Fosher Can Help

Firms like LPL Financial that allow brokers to recommend such unsuitable investment products need to be held accountable. This is true in all instances--whether it was an under the table initiative, or simply just a lack of supervision. It is the securities firm's job to have adequate procedures in place designed to supervise its registered brokers and prevent them from engaging in any potentially harmful activities. Oakes & Fosher targets securities firms like LPL Financial for both intentional disregard for its customers or extreme negligence. We dedicate our entire legal practice to helping investors across the nation. If you, or someone you know, have lost money while investing with LPL Financial, please contact Oakes & Fosher today as you may be entitled to damages. We work on a contingency basis, which means there are no fees charged unless we collect for you.