Protecting Investors - Schwab YieldPlus Fund, Auction Rate Securities, Lehman Brothers Principal Protected Notes

Unlisted REITs such as Piedmont/Wells, Inland, Behringer Harvard, Cole, Desert Capital, Dividend Capital, Grubb & Ellis, Whitestone, and KBS illustrate redemption and valuation risks for investors

More and more investors in unlisted REITs are awakening to the “Hotel California” effect: They can’t get out of their REIT investment. 

According to “The Non-Listed REIT Blog,” a subscription newsletter covering non-listed REITs for due diligence analysts and others, six of the biggest REITs  have halted their redemption programs.  These six REITS are:  Piedmont Office Realty Trust, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II, Behringer Harvard REIT I and Cole Credit Property Trust II.   The same Non-Listed REIT Blog is also reporting that other REITS such as Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT have stopped redeeming or been unable to redeem all the submitted shares. 

Accompanying this illiquidity problem, are potential valuation problems.  For example,  after closing the redemption program, Piedmont/Wells reported a net asset value decline of 15 percent — from $8.38 to $7.40 per share — along with a dividend reduction.   

These examples highlight the valuation and liquidity risk issues faced by investors with unlisted REITs.  Arguments that private and non-traded REITs perform better than publicly traded REITs is cold comfort if an investor can’t redeem at par or above — or can’t redeem at all because redemptions have been frozen or limited to a small number of investors. 

A potential inability to trade and liquidate shares, coupled with a decreased dividend, places unlisted REIT investors in dangerous financial waters. These investors find themselves with essentially illiquid assets with decreasing yields in a deteriorating economic environment.  We believe this is an especially troubling situation with respect to REITs that have a concentration of commercial properties purchased around 2006 or 2007 in bubble areas such as Florida or California and/or REITs with weak commercial tenants and/or high leverage and low liquidity.   

The value of shares in a publicly traded REIT is more reliable and discernible because these investments are priced daily by way of investors’ purchases and sales in an open market. In contrast, shares of privately traded REITs with little or no market are priced by the same REIT managers and operators who selected properties for inclusion in the REIT portfolio. In essence, they are giving themselves their own report cards. 

What is most troubling about this pricing issue for unlisted REITs is that it enables incompetent or unethical financial advisors who heavily promote and sell these products to inappropriately downplay the true risks of these unlisted REITs simply because the prices don’t move daily on an exchange.   When this lack of price transparency is coupled with the high commissions that unlisted REITs pay to financial advisors to sell these REITs, the REITs are dramatically oversold to investors looking to avoid the risks of the equities markets, we believe.  

In our opinion, investors who believe they were not informed of the true characteristics and risks of unlisted REITS and/or investors who are in or near retirement with significant portions of their investable assets in nonpublic or private REITs should have their portfolios independently evaluated. 

Vernon Healy represents investors who have been the victims of negligence or unethical behavior by investment professionals and who have suffered significant investment losses.  For more information about Vernon Healy’s efforts on behalf of investors click here.

Schwab YieldPlus Fund: Where Are The Schwab Private Client and Schwab Managed Portfolio Claimants?

Vernon • Healy, in partnership with a team of lawyers, represents clients throughout the United States who invested in the Schwab YieldPlus Fund as a result of the advice they received from the Charles Schwab brokers assigned to their accounts.  However, Charles Schwab also offers two programs to investors who are interested in obtaining and paying for more comprehensive advice with respect to managing their investment portfolios.  Did those Charles Schwab customers receive the same advice about their Schwab YieldPlus investments?

The Schwab Private Client program assigns a Charles Schwab Financial Consultant to the client who works with a Portfolio Consultant to provide “customized guidance that reflects your unique situation and goals” and make “. . . fact-based recommendations . . .”  to the client, according to the Charles Schwab website (March 30, 2009).  This service is available for an annual asset-based fee starting at 0.75% for equities and 0.50% for fixed income investments.

Charles Schwab also offers a “Schwab Managed Portfolios” program to its clients.  Charles Schwab investment professionals design a diversified asset portfolio consisting of Schwab and/or non-Schwab mutual funds.  After the portfolio has been designed, the portfolio managers monitor the performance of the portfolio, replacing low-rated funds and engaging in asset class rebalancing as needed.  According to the Charles Schwab website, portfolio managers rely upon recommendations from the Schwab Center for Financial Research in designing and restructuring the client’s managed portfolio.  Charles Schwab clients presently pay fees that range from 0.25% to 0.50% of the non-cash assets in the portfolio.

The stunning collapse of the Schwab YieldPlus ultrashort bond fund from June 2007 Net Asset Value (“NAV”) - $9.67 per share on June 29, 2007 through April 30, 2009 (NAV - $4.65, down 51.9% - has been discussed at great length by financial journalists, attorneys and investors on internet posts.  When the fund started to experience huge redemptions in August 2007, it was forced to sell illiquid asset-backed and mortgage-backed securities at distressed prices.  These sales prompted more and more redemptions and distressed sales of illiquid securities throughout the remainder of 2007 and in 2008.  The total assets managed by the Schwab YieldPlus fund has plummeted from $13.491 billion on July 31, 2007 to $159 million as of March 31, 2009 (down 98.8%).

The steepest decline in the Schwab YieldPlus Fund’s NAV took place from January 31, 2008 through April 1, 2008.  This decrease coincides with the time period that the portfolio managers of the Schwab Retirement Income Fund and four of the Schwab Target Funds were selling a total of almost 3 million Schwab YieldPlus Fund shares from these funds’ respective portfolios.

On January 31, 2008, the Schwab YieldPlus Fund NAV closed at $8.93 per share (a decline of a little less than 10% from the Summer 2007 price).  On April 1, 2008, Charles Schwab posted the following notice on its website: “Several Schwab Funds have redeemed shares of the Schwab YieldPlus Fund.  On April 1, 2008, the Schwab Retirement Income Fund redeemed its last remaining shares, resulting in Schwab Funds no longer holding the Schwab YieldPlus Fund.”  The Schwab YieldPlus Fund closed at $6.80 per share on that day, down (-27.82%) from the fund’s June 29, 2007 NAV of $9.67 and down (-21.84%) from January 31, 2008, the date that the Schwab Retirement Income Fund and the four other Schwab Funds collectively held almost 3 million shares of the fund.

Members of our team have spoken to over 100 Schwab YieldPlus Fund investors who sustained significant losses in the fund.  Based upon those interviews, we know that Charles Schwab financial consultants and fixed income specialists were widely soliciting and recommending the fund to Charles Schwab customers.  We also know that Charles Schwab was aggressively marketing the fund to all of its customers on its website, in press releases and in its investor newsletters.  It is statistically improbable that not a single Charles Schwab Private Client or Schwab Managed Portfolio client would have contacted our team, unless these clients were advised to sell their shares in the fund in sufficient time to incur more modest losses relative to those who were not advised.

Schwab YieldPlus Fund investors’ losses accelerated very quickly in March of 2008, immediately prior to Charles Schwab’s April 1, 2008 announcement that the Schwab Retirement Income Fund and other Schwab proprietary funds had sold all of their Schwab YieldPlus Fund shares.  We have spoken to one investor whose Charles Schwab financial consultant told him on or about March 12, 2008 that substantial numbers of Charles Schwab Private Clients had owned the Schwab YieldPlus Fund and that Charles Schwab had already started advising these particular clients to sell the fund.

We are continuing to investigate the issue of when Charles Schwab advised its Schwab Private Advice clients to sell the Schwab YieldPlus Fund and when portfolio managers managing the Schwab Managed Portfolio clients’ accounts sold their clients out of the fund. As part of our continuing investigation, we would like to hear from Schwab Private Client or Schwab Managed Portfolio Program participants to discuss their experiences with the Schwab YieldPlus Fund.  In addition, is our belief that Schwab Private Clients and Schwab Managed Portfolio clients may have valid Schwab YieldPlus Fund claims worth pursuing.

If you are a Schwab Private Client or a Schwab Managed Portfolio Program participant, please contact Vernon • Healy.

Vernon • Healy Set to File Additional Lehman Notes Case against UBS

Naples, Florida – Vernon • Healy is talking with investors throughout the US as well as international investors with potential claims relating to the sale of Lehman structured notes by UBS.

For example, a newly retired couple from the Midwest (winter residents of Southwest Florida) have retained Vernon • Healy to represent them in their claim against UBS for gross misconduct. The couple were approached by their trusted brokers at the Bonita Springs branch of UBS to put both retirement money and inherited money into a new investment product – Lehman Brothers Principal Protected Notes.

Shortly after they purchased the notes, Lehman Bothers declared bankruptcy. The couple have now been offered less than three (3) cents on the dollar (i.e. less than 3% of the 2008 purchase price from a third-party buyer).

As investment professionals, UBS was well aware, or should have been well aware, that credit risk was an issue, especially since it sold the couple the Lehman notes after Bear Stearns’ collapse. After Bear Stearns’ insolvency crisis and near bankruptcy, UBS was well aware (or was recklessly ignorant) that credit risk had become an even greater concern for purchasers of structured notes. Nevertheless, UBS sold Lehman notes to these retirees.

Structured note sales have exploded recently in the U.S. as the brokerage industry discovered how much money they can make using a pitch that fails to adequately disclose the risks, complexity, and costs of these products. Instead, brokerage firms pitch the appealing "concept" of upside potential with downside protection.

The complexity of the product effectively conceals the flaws in the "concept" and hides the true risks from the investor. Brokerage firms’ own internal pitches to local financial advisors often emphasize the high commissions (usually in the range of 3%) and the short term of the products (which allows for recurring sales opportunities), while deemphasizing the risks (especially credit risk), diversification problems in overselling these products, outrageous internal costs and the regulatory requirements for pitching structured products to retail customers.

The result has been an explosion of structured notes sales to customers in the U.S. In 2004, approximately $32 million in structured notes were sold in the U.S. Within two years, in 2006, the amount of sales of structured notes had doubled to $64 million. The next year (2007), that number nearly doubled again to more than $110 million.

The retired couple in this article is the latest in a number of Lehman structured note investors who have turned to the Vernon • Healy law firm for help in weighing their legal options, which include filing individual or group arbitration claims with the Financial Industry Regulatory Authority (FINRA). 

Vernon • Healy is a Naples, Florida based law firm that assists investors nationwide in recovering significant losses caused by all manner of financial fraud and negligence in both court and arbitration.

The firm handles a wide variety of business and investment related matters, including disputes involving various types of securities and investments — e.g., REITs (Real Estate Investment Trusts), bonds and bond funds, TICs (tenancy in common), tax shelter products and strategies, program trading, land trusts, trustee malfeasance, subprime products, debt obligations, structured products such as ETFs and ETNs, pension and retirement funds, and other financial product and strategy issues.

Vernon • Healy law firm files claim for more than $900,000 against UBS on behalf of charitable trust that invested in Lehman notes

Naples, Fla. — UBS engaged in gross misconduct when it marketed more than $900,000 in Lehman notes to a charitable trust as a safe and “principal protected” investment after public warning signs about Lehman Brothers’ financial solvency had surfaced, according to a claim filed today by the Vernon • Healy law firm. 

The charitable trust, which gives to environmental causes, the arts and youth programs, stands to lose more than a $1 million on Lehman notes and other structured products sold to it by UBS. 

According to the UBS sales pitch, principal protected notes would return the entire original principal investment back to the investor even under a worst case scenario.  However, the notes were in fact risky, unsecured loans to Lehman Brothers, according to the claim. 

When an issuer goes bankrupt, as Lehman Brothers did, holders of structured notes are left standing at the back of the line with other unsecured creditors and they may recover little, if anything, of their original investment.

Structured products, including principal protected notes, were initially sold only to institutional investors.  More recently, major brokerage firms, including UBS (UBS), Merrill Lynch (MER), Barclays (BCS) and Wachovia (WB), have pushed their sales forces to dump these products on their own retail customers, said securities attorney Chris Vernon.

As early as 2005, industry regulators from the Financial Industry Regulatory Authority (formerly known as the NASD) raised concerns about the way that complex structured products, including structured notes, were being marketed to individual investors.  At least one European country has outlawed the recommendation of structured products to retail investors.

In the case of the charitable trust, the UBS investment advisor urged the purchase of Lehman notes in February and March, 2008, after significant concerns about Lehman’s creditworthiness surfaced within the investment world that UBS operates, according to the claim.

In fact, UBS sold the trust more than $600,000 in Lehman notes after the collapse of Bear Sterns and Lehman’s 2008 first quarter report raised concerns in the financial industry about its balance sheet.  As investment professionals, UBS was well aware, or should have been well aware, that credit risk was an issue when it sold the Lehman notes, the claim asserts.   

The Vernon • Healy law firm is helping multiple Lehman structured note investors weigh their legal options, which include filing individual or group arbitration claims with the Financial Industry Regulatory Authority (FINRA). 

Through formal claims, the Vernon • Healy law firm intends to show that conflicts of interest led UBS to misrepresent and inappropriately recommend Lehman notes and other structured notes to a wide variety of its trusting base of retail clients.

Vernon • Healy is a Naples, Florida based law firm that assists investors nationwide in recovering significant losses caused by all manner of financial fraud and negligence in both court and arbitration.

The firm handles a wide variety of business and investment related matters, including disputes involving various types of securities and investments — e.g., hedge funds, TICs (tenancy in common), bonds, variable pre-paid forward contracts,  mortgage and debt obligations, pension and retirement funds.
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For more information, contact:
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
http://www.vernonhealy.com
http://www.protectinginvestors.com
(239) 649-5390
Toll Free: (877) 649-5394
email: acostanzo@vernonhealy.com