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Wells Investment Securities Fined for Misleading Marketing
November 22, 2011
Wells Investment Securities, the dealer-manager and wholesaler for the public offering of Wells Timberland REIT, a non-traded security, agreed to settle FINRA charges that it approved and distributed misleading marketing materials related to the offering.
Acting as the Wholesaler. From May 2007 through September 2009, Wells Investment Securities ("WIS") reviewed, approved and distributed 116 pieces of advertising and sales materials that FINRA contained misleading, unwarranted or exaggerated statements. For example:
- the initial prospectus stated that the REIT intended to qualify as a REIT for tax year ended 12/31/06. However, it did not qualify until the tax year ended 12/31/2009.
- the majority of ads and sales literature failed to disclose the significance of Wells Timberland's non-REIT status or suggested that the company was a REIT at a time when in fact it had not qualified as a REIT.
- the communications contained misleading statements regarding Wells Timberland's portfolio diversification and ability to make distributions and redemptions.
While non-traded REITs are generally illiquid, often for periods of 8 years or more, they can throw off particular tax advantages if they qualify under certain IRS requirements. Because the Wells ads didn't clearly articulate that, for several years, the investment was not a qualified REIT, the ads would have been misleading to any investors who purchased the investment on the premise that would qualify for such favorable tax treatment, when in fact it did not.
FINRA also found that Wells failed to have supervisory procedures in place to ensure that sensitive customer and proprietary information stored on laptops were being adequately safeguarded by appropriate encryption technology.
FINRA Sanctions. Wells Investment Services agreed to pay a $300K fine. [FINRA News Release, 11/22/11]
For further information on Non-Traded REITs, go to: [FINRA Investor Alert: "Public Non-Traded REITs – Perform a Careful Review Before Investing" , 10/4/11].
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