The broker-dealer arm of a real estate investment company is being investigated by the Financial Industry Regulatory Authority Inc. — the second time in three years that it faces a potential action by Finra.
Pacific Cornerstone Capital Inc. said in a Securities and Exchange Commission filing at the end of February that it was “involved with an arbitration proceeding before Finra and one Finra investigation.” It didn't state the specifics of the investigation in the filing, the firm's annual report of audited financials, known as a Focus report.
Terry Roussel, the firm's owner, and Vincent Finnegan, its chief executive, didn't return calls seeking comment.
Finra fined the firm $700,000 in 2009 for allegedly misstating material facts involved in the sale of private placements, according to the firm's profile on Finra BrokerCheck.
Finra spokeswoman Nancy Condon declined to comment.
Pacific Cornerstone, the broker-dealer arm of Cornerstone Real Estate Funds, is the broker-dealer manager of two nontraded real estate investment trusts that recently saw steep devaluations.
"A WORLD OF HURT'
One industry analyst said that it was simply more bad news for a firm besieged with troubles.
“I can't speak to the Finra investigation, and it could be a number of things,” said Tony Chereso, chief executive of FactRight LLC, a consulting and due-diligence firm for alternative investments such as nontraded REITs.
“Cornerstone is just in a world of hurt,” he said.
“There are very few real good options for either program,” Mr. Chereso said. “Layer on top of that ongoing regulatory issues with a sponsor — why would any broker-dealer engage a toxic sponsor and programs when other programs are more stable and well-structured?”
In its SEC filing, Pacific Cornerstone said that it didn't know what the future held regarding the Finra matters.
“Outside counsel for the company has advised that at this stage of the proceedings, they could not offer an opinion to probable outcome of the matters,” the company filing said. “Accordingly, no provision for loss has been recorded in the accompanying financial statements for 2011.”
Pacific Cornerstone's two REIT offerings have seen significant changes, industry analysts noted.
In March, Cornerstone Core Properties REIT Inc. told investors that it had been devalued to $2.25 a share, from $8, a 72% drop. That nontraded REIT is relatively small, raising just $158 million of its $439 million target, according to Commercial Real Estate Direct.
The Cornerstone Healthcare Plus REIT Inc. changed its name at the end of last year to Sentio Healthcare Properties Inc. while at the same time replacing the adviser of the fund. That REIT raised $127 million and has a value of $9.02 a share, down from its sale price of $10 a share.PULLING BACK
Pacific Cornerstone recently has pulled back its reach. In December, it filed to deregister with the Commonwealth of Massachusetts, according to its profile on BrokerCheck.
A spokesman for the Massachusetts Securities Division, Brian McNiff, confirmed Pacific Cornerstone's registration withdrawal.
Although other nontraded-REIT sponsors also recently have had problems stemming from faltering valuations, each needs to be looked at on its own merits, Mr. Chereso said.
“Cornerstone had a couple of things working against them,” he said.
“First, the regulatory culture at Cornerstone was not strong, and second, they were thinly capitalized,” Mr. Chereso said. “Third, they had layers of costs burdening programs you don't typically see on nontraded REITs.”
“Some newer sponsors have similar problems,” Mr. Chereso said, “I find that some issuers don't understand the regulatory environment they have to work in [as a broker-dealer], even though they are strong real estate operators.”
bkelly@investmentnews.com
