• November 27, 2020
• REIT

The Wolper Law Firm, P.A., P.A. is currently investigating claims against various brokerage firms who permitted their Financial Advisors to sell Sierra Income Business Development Company shares without fully disclosing the characteristics and risks to their retail customers. The Wolper Law Firm, P.A. has filed arbitration claims seeking the recovery of investment losses in Sierra Income Corp.

Over the last two years, the Wolper Law Firm, P.A. has received calls from dozens of clients, who purchased shares of non-traded real estate investment trusts (“Non-Traded REITs”) and non-traded business development companies (“BDCs”). Most of these clients purchased the Non-Traded REITs and BDCs between 2013-2016 with assurances made by Financial Advisors that they would receive stable dividends, principal protection and liquidity within 1-3 years. None of these assurances have come to fruition and, over the last two years, many of the Non-Traded REITs and BDCs have either suspended their dividends, lowered their dividends and/or experienced substantial price per share depreciation.

Business Development Companies, or BDCs, are closed-end investment companies that help small companies meet their capital needs. The BDCs make loans to small businesses and finance those loans through capital raised from investors. Many BDCs do not trade on a public exchange and, consequently, are also highly illiquid.

BDCs also have high internal expenses, commonly known as middleman expenses, which dramatically lower the returns to investors. These fees, which can be between 12%-15%, erode the investment return. In order to overcome those high internal expenses, the BDC revenues have to remain sustainably high. Otherwise, returns are negatively impacted.

In 2020, the COVID crisis has disparately impacted BDCs, many of which which have strong ties to the commercial real estate market. Business closures, unpaid rent and the economic slowdown all contribute to increasing the price and dividend pressure on Non-Traded REITs and BDCs, which were already experiencing difficulties.

Sierra Income Corp. was initially offered to investors at $10 per share. As of October 2020, these shares were trading on the secondary market at prices as low as $1.50, according to Central Trade and Transfer. Moreover, Sierra Income Corp. suspended its dividend for a period of time, which eliminated all of the investment benefits of owning the BDC. In October 2020, Sierra Investment Corp. reinstated its dividend but only at $0.01 per share.

Many brokerage firms and Financial Advisors failed to fully disclose the characteristics and risks of the Sierra Income Corp. investment prior to making the recommendation. As a result, investors are stuck holding illiquid, non-traded shares, paying virtually no income.

Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses. In addition, brokerage firms have a duty to conduct due diligence into the Non-Traded REIT and BDC issuers prior to recommending the investments.

The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at mwolper@wolperlawfirm.com.