Wells Investment Securities Fined $300,000 for Misleading Advertisements in REIT Offering
Yoomi Lee | Bloomberg Law
FINRA News Release, FINRA Fines Wells Investment Securities $300,000 for Use of Misleading Marketing Materials for REIT Offering(Nov. 22, 2011); FINRA Letter of Acceptance, Waiver and Consent No. 2009019893801 (Nov. 21, 2011)
The Financial Industry Regulatory Authority (FINRA) announced that Wells Investment Securities, Inc. (WIS) submitted a Letter of Acceptance, Waiver and Consent to settle charges for using misleading marketing materials in connection with the sale of Wells Timberland REIT, Inc. (Wells Timberland), a non-traded Real Estate Investment Trust (REIT). Without admitting or denying the charges, WIS accepted censure and consented to a $300,000 fine. In determining the appropriate sanctions, FINRA considered WIS’s proactive measures in conducting an investigation and notifying the appropriate authorities and affected customers.
According to FINRA, WIS was the dealer manager and wholesaler for the public offering of Wells Timberland. FINRA alleged that from May 21, 2007 through September 30, 2009, WIS reviewed, approved, and distributed at least 116 communications for Wells Timberland that contained misleading or exaggerated statements, or failed to disclose material information. For example, the marketing materials purportedly failed to disclose the significance of Well’s Timberland’s non-REIT status or contained misleading statements suggesting that Wells Timberland was a REIT at a time when it had not so qualified. Specifically, the initial offering prospectus stated that Wells Timberland intended to qualify as a REIT for the year ending December 31, 2007, even though it could not qualify for REIT election until December 2009 due to certain restrictions. Further, Wells Timberland communications allegedly contained other misleading statements, including, among other things, (1) portfolio diversification, (2) the ability to make distributions and redemptions, and (3) investment benefits. Accordingly, FINRA charged that WIS violated NASD Rules 2110, 2210(d)(1)(A), 2210(d)(1)(B), 2211(d)(1), and FINRA Rule 2010.
Inadequate Supervisory Procedures
FINRA also alleged that WIS’s numerous failures to comply with FINRA’s advertising content rules were pervasive throughout the materials used in its promotion of Wells Timberland, indicating that WIS failed to implement its supervisory system effectively from May 21, 2007 through September 30, 2009. As such, FINRA claimed that WIS violated NASD Rules 3010(a), 2110, and FINRA Rule 2010. Finally, FINRA alleged that WIS violated Rule 30 of Regulation S-P because it failed to establish and maintain a supervisory system reasonably designed to safeguard confidential customer information. Specifically, WIS did not have procedures for the encryption of data while stored on laptops, which resulted in 37,864 customers’ personal and confidential information being placed at risk when a laptop containing this information was stolen.
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