The Financial Industry Regulatory Authority’s Department of Enforcement has filed a disciplinary proceeding against a former National Securities Corporation broker who it said made unsuitable non-traded REIT recommendations to 16 customers, causing them to lose some $4.1 million as he racked up $290,000 in commissions.
Finra said Mark Sam Kolta, a New York rep formerly associated National Securities Corporation, not only overconcentrated the customers’ investable assets when he recommended the product, a fund focused on New York real estate called the ARC New York REIT, but that he also sent misleading emails about the investment and caused the clients’ net worth and income and investable asset figures to appear to be higher than they were. He made the recommendations from June 2014 through August 2015, and the 16 clients had invested about $4.8 million in the product by the time its share price collapsed after the REIT went public.
Kolta later worked for the also troubled (and now defunct) Worden Capital Management until 2021. He is no longer registered with Finra. He has numerous disclosures on his BrokerCheck page, including some $16.9 million in total settlements for alleged unsuitable investments. The claims were settled from 2019 to 2021, though others were denied and others are still pending.
Kolta gave a lengthy interview to Financial Advisor in which he said that he has successfully fought and expunged several client complaints after demonstrating that his clients indeed understood the risk of their investments. He laid much of the blame for the lost money at the feet of both ARC Realty Capital and his ex-broker dealer, National Securities Corporation, which he said vetted the product with heavy documentation.
“ARC” stands for American Realty Capital, the company run by real estate manager and broker-dealer acquirer Nicholas S. Schorsch. Schorsch’s flagship American Realty Capital was plagued by an accounting scandal in 2014; he and his company were later fined $60 million by the SEC over REIT mergers in 2019 and in the same year settled a class action suit worth a billion dollars over accusations of inflated financial results.
Law firms are currently advertising services to investors for possible claims against broker-dealers who sold this and other non-traded REITs once related to Schorsch and his firms.
National Securities Corporation, Kolta’s former broker-dealer, folded last July and moved its advisors to B. Riley Financial after drawing a huge fine from Finra, in part for recommending to clients another problematic investment, GPB Capital Holdings.
Unlike regular REIT listings, non-traded REITs, as their name suggests, are not traded on an exchange and they are often criticized for their fees, redemption charges, illiquidity and lack of suitability for unsophisticated investors.
The ARC New York REIT’s first shares were issued in mid-2014 for $25 a share through mid-August 2020, Finra said. The shares weren’t traded on an exchange and there was no secondary market for them. (The fund is now public and known as the New York REIT; its ticker is “NYC.”)
“After a 2.43-to-1 reverse stock split in July 2020, 25% of the ARC New York REIT shares were listed on the New York Stock Exchange and began trading there in mid-August 2020,” Finra said in the complaint. “Almost immediately after the first [fund] shares were listed in mid-August 2020 and started trading, the price of these shares fell precipitously.” (The remaining shares of the fund were listed incrementally through August 2021, Finra said. The fund's share price now sits at under $2.)
According to the regulator, the alternative product’s prospectus warned early on that it was risky and only appropriate for those who could afford a total loss of their investment. The prospectus also said investors should either have a net worth of $250,000 or an annual gross income of $70,000 with a $70,000 minimum net worth.
In addition, Finra said National Securities Corp. had a policy against its reps recommending an investment that caused a customer to hold more than 10% of their investable liquid assets in a non-traded REIT or more than 20% in any particular alternative investment.
Finra said Kolta provided his assistant “with false and inflated information regarding customers’ net worth and investable/liquid assets in order for her to input this information on customer account records, customer account record updates and REIT investment documents.”
“That’s a bold accusation I have strong facts against," Kolta said. "Not only am I denying these charges outright. … Any ruling outside of dismissal I’m bringing to the SEC in an appeal.” He said the clients were providing numbers to his assistant. Ultimately it was National Securities’ responsibility, he claims.
Finra claimed that one of Kolta's 81-year-old retired clients opened an account at National Securities in 2013, had a net worth and investable assets of $1.25 million and an annual income of approximately $65,000.
“His investment objective was to preserve capital while seeking moderate growth and income,” Finra said, “and he had a moderate to conservative risk tolerance. Kolta caused [the customer’s] October 2013 new account form to falsely and inaccurately state that [the customer’s] net worth and investable assets were $1.5 million, his annual income was $100,000, his investment objective was speculation/capital appreciation, and his risk tolerance was moderately aggressive.”
Kolta insists his clients at National Securities Corp. were in similar risky investments both before and after their ARC New York REIT, that they didn’t disagree with their own wealth numbers when the products made money, and that they balked only after this particular product foundered, a failure he lays at the feet of Covid-19 and its effect on the New York City real estate market the fund specialized in.
Kolta said that he had multiple complaints expunged after independent Finra panels showed that the investments and their risk had been thoroughly explained to clients.
“All of the business was processed on heighted supervision,” he said of the transactions. “Specifically, there were quality control calls done with date and time stamps on them verifying the assets. When you’re on heightened supervision, it’s a loftier process of due diligence with [approximately] 40 pages of documents with disclosures and signatures.”
“There was a signing manager on my end doing all that stuff—quality control and phone calls. Then there was another one signing off on his work, then there was an alternative investment department ... with the final sign-off." In effect, he says, National Securities Corp. settled cases he wouldn’t have. He defended himself in other suits and says the firm scapegoated him, threw him under the bus.
He claimed he’s had 17 complaints expunged by Finra arbitration panels, and he provided letters for six Finra resolutions in which the panels decided that the clients had indeed been educated beforehand on the troublesome ARC product.
He also said he lost $750,000 on the fund for himself and his family. He thinks of himself as a victim too and said he was seduced by the REIT’s sales teams and National Securities Corporation.
“My $750,000 investment is about $25,000 today,” Kolta said. “That tells you how much I’ve been harmed. It’s not like I didn’t believe in the holding.”