Monthly Archives: August 2013

FINRA Proposes Rule Change for Reporting of Non-Traded REIT Valuations

In March 2013, FINRA submitted a proposed rule change to NASD Rule 2340 (Customer Account Statements) and FINRA Rule 2310 (Direct Participation Programs) to the Securities and Exchange Commission that would “modify the requirements relating to the per share estimated values for unlisted DPP and REIT securities included in customer account statements.”

Through its proposed rule change, FINRA hopes to require brokerage firms that have sold such non-traded REITs as Behringer Harvard, CNL Lifestyle Properties, KBS, NetREIT, and Dividend Capital, to provide their customers more reliable estimates of the current value of their holdings.  Specifically, FINRA proposes to require brokerage firm to choose one of three valuation methods:

  1. for two years after breaking escrow, “net investment,” consisting of gross offering price less any cash distributions to investors and “organization and offering expenses” (as defined by Rule 2310) that are funded through borrowing or offering proceeds (a firm may rely on the issuer’s periodic reports for this information);
  2. at any time, a valuation performed by an independent valuation service, which (under a proposed amendment to Rule 2310) the issuer must commit to provide and must perform at least once every three years; and
  3. a periodic valuation by any program that provides them according to a methodology disclosed in the prospectus.

Unfortunately, FINRA’s proposal is not calculated to make any difference whatsoever as most every firm already uses option 3 and would continue to do so.  Option 3 is problematic because the operators of non-traded REITs have every incentive to use a methodology that overstates the current value of the REIT stock: the more the operator says the stock is worth, the more stock the operator will be able to sell going forward, and the more up-front commissions the REIT’s sponsor will get paid.

A rule that would actually help provide more transparency would require brokerage firms to employ a standardized methodology for determining estimated value based upon the entities’ financial data.  To be of any real value, the formula would need to take into account the REIT’s performance in a far more sophisticated manner than method 1 above, but there is no doubt that an adequate formula could be developed.

Blau & Malmfeldt is a law firm that represents investors across the United States in disputes with financial industry members.  If you have suffered losses through non-traded REITs, please call us at 312-443-1600 for a free consultation.





Recovery Options for Victims of National Prearranged Services, Inc.

It may be possible for victims of National Prearranged Services, Inc. (NPS) to recoup losses by pursuing claims in arbitration against the securities brokers and/or broker-dealer firms that sold them the investments.

Between 1992 and 2008, NPS’s customers paid approximately $150M for prearranged funeral services and were told that their funds would be kept safe until their time of need.   Last week, David Wulf – the adviser to the trusts that took possession of the funds — was convicted in a federal court trial in Missouri on 18 counts, including bank fraud and wire fraud.  According to the FBI press release, NPS operated a giant Ponzi scheme and Mr. Wulf and his co-defendants stole funds and/or received funds stolen from the trusts.  Each of the co-defendants, James Douglas Cassity, Brent Douglas Cassity, Howard Wittner, Randall Sutton, Sharon Nekol Province, pleaded guilty earlier this year.  Each of the defendants will be sentenced in November.

Under FINRA’s rules (NASD Rule 3040) a broker-dealer firm is ordinarily responsible for supervising the outside business activities of its brokers.

Vctims who dealt directly with Mr. Wulf can pursue claims in arbitration against Moloney Securities, Inc., (Moloney Securities), the broker-dealer firm through which Mr. Wulf was registered.   According to FINRA’s records, Mr. Wulf was associated with Moloney Securities between September 1999 and August 2013.

If you are a victim of NPS and/or David Wulf and would like to explore your recovery options, please call Blau & Malmfeldt at 312-443-1600 or email Paul Malmfeldt at for a free consultation.

Valuations of Non-Traded REIT Stock

For many investors holding shares of stock in non-traded REITs, the value of their holdings remains a mystery.  This is due to the absence of public markets.

In February 2009, the Financial Industry Regulatory Authority (FINRA) issued a notice to its members firms (NTM 09-09) notifying them that they would be required to discontinue their practice of listing the value of non-traded REIT stock on their customers’ brokerage statements as the offering price regardless of the performance of the underlying REITs.  In response, the operators of non-traded REITs began providing estimated valuations which the brokerage firms then began reporting on their customers’ statements.

Unfortunately for investors, the valuations that non-traded REIT operators provide is arbitrary and often overstated.

We believe that the book value non-traded REIT stock — the remaining shareholder equity divided by the number of shares outstanding – provides a far more objective and realistic estimate.

It is worth noting, however, that shares of non-traded REIT stock often trade at substantial discounts to book value on secondary markets.  For Example, TIER REIT, Inc. (f/k/a Behringer Harvard REIT I, Inc.) stock currently trades on secondary markets for approximately $1.70/share.  The book value of the stock, according to TIER REIT’s 10-Q report for the second quarter of 2013, is currently $2.56/share.   TIER REIT currently reports an estimated share value of $4.01/share.

In August 2013, many non-traded REITs filed reports for the second quarter of 2013 with the Securities and Exchange Commission (SEC).  Book value can be calculated from the data contained within these reports.  Here’s how the book values of several non-traded REIT stocks have changed since the end of 2012:

TIER REIT, Inc. (f/k/a Behringer Harvard REIT I, Inc.): $2.56/share (down from $2.62).

NetReit, Inc.: $5.59/share (unchanged).

KBS REIT I, Inc.: $3.94/share (down from $4.03).

CNL Lifestyle Properties, Inc.: $4.97/share (down from $5.42).

Dividend Capital Diversified Property Fund, Inc.: $4.00/share (down from $4.38).

Blau & Malmfeldt is a law firm that represents investors across the United States.  If you believe that your broker misled you with respect to the risks associated with non-traded REITs, please call us at 312-443-1600 for a free consultation or email Paul Malmfeldt at



Blau & Malmfeldt’s Investigation of Reef Oil and Gas Partnerships

Blau & Malmfeldt is investigating the potential liability of broker-dealer firms in connection with their sale of promissory notes and partnership interests in several Reef Oil and Gas entities including Reef SWD 2007-A LP (“Reef SWD”), Reef Oil & Gas Income and Development Fund, LP (“Reef Development Fund”), and Reef 2010 Drilling Fund LP (“Reef 2010 Drilling Fund”), among others.

In 2010, Reef SWD filed a petition for bankruptcy protection in the United States District Court for the Northern District of Texas, and in May 2013, the bankruptcy proceeding was concluded.  Documents filed with the court indicate that promissory note holders received pennies on the dollar on their claims.

Reef Development Fund’s limited partners have received correspondence indicating that the partnership will be dissolved.  The entities’ financial statements indicate that investors will likely receive substantially less than their principal investment.

There were always substantial risks associated with Reef Oil and Gas securities and these products were unsuitable for many investors.  If you believe that your broker misled you about the risks of a Reef Oil and Gas investment, or recommended that you concentrate your savings in risky oil and gas investments, please contact Blau & Malmfeldt at 312-443-1600 or email Paul Malmfeldt at for a free consultation.