broker fraud

LPL Financial LLC must pay $1.4 million to an elderly couple who claimed they were the victims of fraud in connection with real estate deals. The award was issued by an arbitration panel of the Financial Industry Regulatory Authority (FINRA) on Feb. 10.

Heinrich and Araceli Hardt, both 76, bought into real estate deals known as Tenant-in-Common (TIC) exchanges in 2007 and 2008, according to a report from Investment News.

Tenant-in-Common (TIC) exchanges refer to deals though which investors buy fractional ownership in commercial real estate, usually marketed as income producing properties. TICs grew popular after a change in the tax law in March 2002 gave investors the ability to avoid capital gains taxes by investing the proceeds from the sale of a property into a TIC.

According to Court Documents

Court documents show the Hardts paid $3.7 million for their first TIC in December 2007. About $1.6 million was paid in cash and the remainder was assumption of debt. They purchased the second TIC in March 2008 for $4.2 million. About $1.8 million of that price was paid in cash, with the balance in assumption of debt.

Both TICs owned commercial properties in suburban Boston. The Hardts stopped receiving payments on both of them by the end of 2009, according to court documents.

The Hardts purchased the TICs from former LPL broker David Glenn, and the investments were sponsored by Direct Invest LLC, which is being sued separately by the Hardts in California.

Glenn, the broker, was not involved in the arbitration claims against LPL and is not named in the California suit. He left LPL in 2010.

Hardt’s Attorney, Brian Miller

Brian Miller told Investment News that the elderly couple was sold on a fraudulent scenario in which they would receive monthly income from the TIC properties to replace the income from the properties they were selling. The monthly income was central to the broker’s sales pitch, Miller said.

The arbitration award indicated that the Hardts’ claims included federal securities fraud and elder abuse. The claims were originally filed against LPL, Orchard Securities LLC and Meridian Capital Partners LLC — all broker-dealers — but the Hardts dismissed the claims against the latter two firms in December.

While the Hardts had asked for total damages of $8 million, the FINRA panel awarded $1.4 million. The award was issued without explanation, as is often the case.

According to an LPL Financial Spokesman

An LPL spokesman cited the difference in damages, telling Investment News that the amount led LPL to believe that the arbitrators had rejected many, if not most, of claims. The spokesman also noted that the arbitration panel did not make a finding of elder abuse.

LPL is no stranger to arbitration. While most claims were for much less in money terms than the Hardt case, FINRA public disclosure records show that LPL has been involved in 40 arbitrations.

Like many types of investments, TICs were hit hard when credit dried up and the real estate market all but disappeared in 2008. Perhaps the most high-profile TIC investment boondoggle involved DBSI Inc., which filed for bankruptcy in 2008 along with dozens of its affiliates, all special purpose entities set up for the purpose of running TIC deals.

DBSI got its revenue through the creation of TIC transactions. As syndicator, DBSI would acquire an interest in a commercial real estate property and sell off fractional interests – up to 35 per transaction — to the tenants in common.

After DBSI sought bankruptcy protection, hundreds of broker-dealers who sold these TICs faced arbitration claims before FINRA, according to the Investment News report.

Miller, the Hardts’ attorney, told Investment News that the two TIC interests owned by his clients did not produce any real income. The Hardts received distributions for a few years, and then the money dried up. Miller said whatever yields were paid out were generated not by the properties, but by “financial trickery.”

Guiliano Law Group

Our practice is limited to the representation of investors in claims, for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

Comments are closed.