Non-Traded REIT Fraud Lawyer: Recover Investment Losses in FINRA Arbitration

Non-traded real estate investment trusts (REITs) have raised tens of billions of dollars from individual investors, yet they remain among the most frequently misrepresented investment products sold by retail brokers. High upfront commissions, illiquid structures, opaque valuations, and complex distribution mechanics create compounding opportunities for broker misconduct — and compounding harm for investors who trusted their financial advisors.

At Varnavides Law, we represent investors who suffered losses in non-traded REITs through FINRA arbitration and, where applicable, federal and California securities litigation. Our practice centers on investors with substantial losses from products that were misrepresented, inappropriately recommended, or sold without adequate disclosure of the risks and costs involved. Gary Varnavides brings a unique perspective to these cases — a decade of insider knowledge from the other side of the table that he now uses entirely on behalf of investors.

What Are Non-Traded REITs? Understanding the Structure and the Risk

A REIT is a company that owns or finances income-producing real estate. Congress created the REIT structure in 1960 to allow individual investors to participate in large-scale real estate without directly purchasing property. Most investors are familiar with publicly traded REITs — shares that trade on major exchanges such as the NYSE or NASDAQ, with prices publicly quoted throughout each trading day.

Non-traded REITs are fundamentally different. They are registered with the Securities and Exchange Commission (SEC) and sold by licensed broker-dealers to retail investors, but they do not trade on any public exchange. Once an investor purchases shares, there is no ready secondary market. Redemption programs exist at many sponsors’ discretion, but they are typically subject to severe volume caps and may be suspended entirely. The SEC’s Office of Investor Education and Advocacy has warned investors that non-traded REITs are “difficult to value” and “may be illiquid for many years.”

This structural distinction matters enormously for the suitability analysis. An investor who might appropriately own publicly traded REIT shares in a diversified portfolio may have no business owning non-traded REITs if they require liquidity, have a short investment horizon, or cannot tolerate the opacity of sponsor-estimated valuations.

Why Non-Traded REITs Are Frequently Misrepresented

The financial incentive to sell non-traded REITs is unusually large. Broker commissions on non-traded REIT sales have historically ranged from 7% to 10%, compared to fractions of a percentage point on publicly traded securities. Selling concessions, dealer-manager fees, and due diligence reimbursements can push total offering costs to 15% or more of the total amount raised. That fee structure creates a powerful incentive for brokers to recommend these products regardless of whether they are appropriate for the investor.

Common misrepresentations and omissions in non-traded REIT sales include:

• Presenting the investment as “safe” or “conservative”: Non-traded REITs carry risks that do not exist in publicly traded REITs, including illiquidity risk, valuation risk, and the risk that distributions funded from offering proceeds will erode principal.
• Failing to disclose total fee loads: Brokers sometimes present only their sales fee while omitting dealer-manager fees, organizational and offering costs, and acquisition fees — all of which reduce net invested capital from day one.
• Mischaracterizing distribution yields: A 6% or 7% annual distribution rate sounds attractive, but if the distribution is funded partly or entirely from investor capital or borrowed money rather than operating income, it is not a return — it is a return of the investor’s own money, reducing the value of their investment.
• Minimizing the liquidity lockup: Investors are sometimes told they can “get out” through the redemption program, without adequate disclosure that redemption programs are typically capped at 5% of outstanding shares per year and can be suspended at the sponsor’s discretion.
• Overstating diversification: A non-traded REIT holding a concentrated portfolio of specific property types or geographies does not provide the sector diversification many investors expect from a REIT product.

The Applicable Legal Framework: Suitability, Best Interest, and Fraud

Multiple overlapping regulatory standards govern the sale of non-traded REITs to retail investors. A non-traded REIT fraud lawyer will evaluate your claim under all applicable frameworks to identify the strongest grounds for recovery.

FINRA Rule 2111 — Three Suitability Sub-Obligations

FINRA Rule 2111 imposes three distinct suitability sub-obligations on broker-dealers and their registered representatives. All three must be satisfied before a recommendation is compliant:

1. Reasonable-basis suitability: The broker must have a reasonable basis to believe that the recommended investment is suitable for at least some investors, based on adequate due diligence about the investment itself. A broker who recommends a non-traded REIT without understanding its fee structure, redemption mechanics, or distribution sources may fail this prong.
2. Customer-specific suitability: Even a product that is appropriate for some investors must be suitable for the specific customer to whom it is recommended, based on that customer’s age, financial situation, investment objectives, liquidity needs, risk tolerance, and investment experience. Recommending a 7–10-year illiquid investment to a retiree who will need income within 3 years fails customer-specific suitability.
3. Quantitative suitability: A broker who controls a customer account must have a reasonable basis for believing that the series of transactions in the account is not excessive, even if each individual transaction might be suitable standing alone. For non-traded REITs, this prong is triggered when a broker concentrates a disproportionate share of a client’s liquid net worth in these illiquid products.

FINRA has explicitly stated in regulatory guidance that non-traded REITs are rarely, if ever, suitable for investors who require liquidity or who have short investment horizons.

Reg BI — Four Component Obligations

Since June 30, 2020, broker-dealers making recommendations to retail investors must comply with Reg BI (17 C.F.R. §240.15l-1), promulgated by the SEC. Reg BI established a distinct best-interest standard for broker-dealer recommendations. It does not replace FINRA Rule 2111 suitability — both standards apply concurrently. Reg BI has four component obligations:

1. Disclosure Obligation: Before or at the time of a recommendation, the broker-dealer must disclose material facts about the scope and terms of the relationship, material conflicts of interest (including compensation arrangements), and the basis for the recommendation.
2. Care Obligation: The broker-dealer must exercise reasonable diligence, care, and skill in making the recommendation. The care obligation requires the broker to have a reasonable basis for believing the recommendation is in the retail investor’s best interest, considering the investor’s investment profile and the investment’s costs, risks, rewards, and alternatives.
3. Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify all conflicts of interest associated with its recommendations and to mitigate, or in some cases eliminate, conflicts that create an incentive for the firm’s financial professionals to place their interests ahead of the retail investor’s interest. The high commissions paid on non-traded REIT sales are an obvious conflict of interest requiring disclosure and mitigation.
4. Compliance Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI as a whole.

Reg BI applies to broker-dealers. The Investment Advisers Act of 1940 imposes a separate fiduciary duty on registered investment advisers (RIAs) — requiring advisers to act in the client’s best interest at all times, not only at the moment of a recommendation. If your non-traded REIT was sold through an RIA or a dually registered firm, the applicable legal standard may differ.

FINRA Rules 2090 and 4512 — Know Your Customer and Customer Account Information

FINRA Rule 2090 requires member firms to use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer — including age, financial status, tax status, investment objectives, and any other information the customer discloses. FINRA Rule 4512 specifies the account information that must be collected and maintained. Together, these rules require brokers to gather and keep current each customer’s full investment profile. When a broker fails to gather accurate customer information and uses a fabricated or outdated investment profile to justify a non-traded REIT sale, that failure supports both the failure-to-know-your-customer claim under Rule 2090 and the customer-specific suitability failure under Rule 2111.

Exchange Act §10(b) and SEC Rule 10b-5 — Federal Fraud Claims

Exchange Act §10(b) (15 U.S.C. §78j(b)) prohibits material misrepresentations and omissions in connection with securities transactions.

Federal securities fraud claims arise under §10(b) of the Securities Exchange Act of 1934 (15 U.S.C. §78j(b)) and SEC Rule 10b-5 (17 C.F.R. §240.10b-5), which prohibit material misrepresentations and omissions in connection with the purchase or sale of any security. To establish a securities fraud claim, a plaintiff must prove: (1) a material misrepresentation or omission; (2) scienter (intent to defraud or recklessness); (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. In a non-traded REIT case, misrepresentations about fees, distribution sources, liquidity, or property values may satisfy the materiality and misrepresentation elements. The scienter requirement demands proof that the broker knew or recklessly disregarded the falsity of the statement.

The limitations period for private §10(b) actions is established by 28 U.S.C. §1658(b): two years after discovery of the facts constituting the violation, and no later than five years after the violation itself.

California Corporations Code §25401 — Additional State Law Claims

California Corporations Code §25401 is the substantive anti-fraud prohibition of the Corporate Securities Law of 1968; it requires no proof of scienter and provides a private right of action for investors.

California investors have access to the California Corporate Securities Law of 1968 in addition to federal remedies. California Corporations Code §25401 prohibits the offer or sale of any security through any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made not misleading. Critically, §25401 does not require proof of intent to defraud — the statute has no scienter requirement, which substantially eases the plaintiff’s burden compared to a federal Rule 10b-5 claim. Although §25401 eliminates the scienter hurdle, it is not a strict liability statute — defendants may raise a reasonable-care defense under §25501, arguing that the plaintiff knew the facts constituting the violation or that the defendant exercised reasonable care in the circumstances.

The limitations period for California securities claims under California Corporations Code §25506 is 2 years after discovery of the facts constituting the violation or 5 years after the violation, whichever is earlier. Additional claims may be governed by the California Code of Civil Procedure (CCP §338(d)), which establishes a 3-year limitations period for fraud and deceit claims (with delayed discovery), or CCP §343 (4-year period for other liability created by statute, including some fiduciary breach claims).

Forum and Time Limits: FINRA Rule 12206 Explained

Most investors who purchased non-traded REITs through brokerage accounts are bound by a predispute arbitration agreement requiring them to resolve disputes in FINRA arbitration rather than court. Understanding the forum rules is critical to preserving your rights. For additional context on FINRA’s arbitration rules, see the FINRA Rule 12206 text and NASAA REIT Guidelines.

FINRA Rule 12206 is a forum-eligibility rule that determines whether a dispute may be heard in FINRA arbitration — it is not a statute of limitations. Specifically, Rule 12206(a) provides that no claim is eligible for submission to arbitration under the Customer Code where the claim arose more than six years before the arbitration claim was filed. The six-year period runs from the date of the occurrence or event giving rise to the claim — not from the date the investor discovered the problem. This distinction is important: under Rule 12206, an investor who purchased a non-traded REIT eight years ago and only recently learned of the misconduct may have lost the right to use the FINRA arbitration forum, regardless of whether the relevant statute of limitations has also run.

Rule 12206 also gives arbitrators authority to dismiss any claim not eligible for submission under the rule, but courts have interpreted the rule as creating a forum-eligibility defense, not a substantive limitations defense. An investor whose claim is outside the six-year FINRA window may still have viable court claims under applicable statutes of limitations, including the two-year/five-year periods under 28 U.S.C. §1658(b) for federal securities claims and the periods under California law described above.

FINRA Arbitration — The Primary Recovery Mechanism

FINRA arbitration is the most commonly used forum for recovering investment losses caused by broker-dealer misconduct. Most brokerage account agreements contain a predispute arbitration clause that requires disputes to be resolved through FINRA’s dispute resolution process rather than court. For investors, FINRA arbitration offers a structured forum with specific discovery rules, arbitrators experienced in securities disputes, and a procedurally efficient path to a hearing.

According to FINRA’s 2024 Dispute Resolution Statistics, FINRA received 562 customer arbitration filings in 2024. The average case duration from filing to award was 11.8 months. Mediation achieved an 89% settlement rate — reflecting that brokerage firms frequently prefer to resolve meritorious claims before a hearing rather than risk an adverse arbitration award.

Claims Available in Non-Traded REIT Arbitration

Depending on the facts, a non-traded REIT arbitration claim may assert one or more of the following:

• Unsuitable recommendation under FINRA Rule 2111 (any or all three sub-obligations)
• Failure to comply with Reg BI under 17 C.F.R. §240.15l-1 (any or all four component obligations)
• Misrepresentation or omission of material facts — orally at the point of sale, or in written materials provided to the investor
• Breach of fiduciary duty — applicable to investment advisers and, in some jurisdictions, to broker-dealers in discretionary accounts
• Failure to supervise under FINRA Rule 3110 — the broker-dealer’s independent duty to supervise registered representatives
• Violations of FINRA Rules 2310 and 2340 — relating to due diligence on direct participation programs and the obligation to provide customers with accurate per-share values
• Know Your Customer violations under FINRA Rules 2090 and 4512

The Warning Signs of Non-Traded REIT Broker Misconduct

Not every non-traded REIT investment that loses money is the result of broker misconduct. Market conditions, interest rate movements, and real estate sector downturns can affect performance. But certain patterns are strong indicators that the problem was not market risk — it was your broker.

Recoverable Damages in Non-Traded REIT Claims

In a successful FINRA arbitration or court action involving non-traded REIT losses, recoverable damages may include:

Why Varnavides Law

Gary Varnavides built Varnavides Law, PC on a foundation that few plaintiff-side securities attorneys can claim: a decade spent on the other side of these disputes, defending broker-dealers at a prominent New York securities defense firm. He knows the playbook — the procedural moves, the document preservation disputes, the expert witnesses, the suitability defenses — because he built those defenses. That inside knowledge now works entirely for investors.

Today, he uses that knowledge to represent investors. He understands how brokerage firms evaluate which claims they will fight and which they will settle, what evidence the defense will focus on during discovery, and how to position an investor’s damages case for maximum credibility before an arbitration panel.

Fee Structure

We handle non-traded REIT fraud cases on a contingency fee basis. This means you pay no attorney fees if we do not obtain a recovery for you. Case costs — which are separate from attorney fees — are discussed during your consultation. We serve investors across California and represent clients nationwide in FINRA arbitration.

Frequently Asked Questions About Non-Traded REIT Fraud Claims

Why Non-Traded REIT Losses Are Recoverable

Non-traded REIT fraud cases are recoverable because the product’s structural features — illiquidity, opacity, and high upfront costs — make regulatory violations unusually easy to establish and document. When a broker recommends a 7–10-year illiquid investment to an investor who needs income within three years, or concentrates 40% of a retiree’s liquid net worth in a product with no secondary market, the suitability violation is apparent on the face of the account records. Three parallel legal frameworks — FINRA Rule 2111 suitability (three sub-obligations), Reg BI’s Care and Conflict of Interest Obligations (17 C.F.R. §240.15l-1), and federal securities fraud under Exchange Act §10(b)/Rule 10b-5 — provide overlapping grounds for recovery, any one of which may independently support a claim depending on the facts.

California investors carry an additional advantage under Cal. Corp. Code §25401, which requires no proof of scienter. In cases where the misrepresentation was negligent rather than intentional, the federal fraud elements may be difficult to satisfy — but a §25401 claim can proceed without that burden. Combined with FINRA arbitration’s relatively efficient path to a hearing (average 11.8 months from filing to award), investors with substantial losses have meaningful options regardless of whether the misconduct was deliberate or reckless.

The critical determinant in most non-traded REIT cases is timing and documentation. FINRA Rule 12206’s six-year forum-eligibility window runs from the date of the event giving rise to the claim, not discovery — meaning investors who only recently learned of their losses may nonetheless be time-barred from FINRA arbitration. Early consultation preserves options. Account statements, prospectus documents, broker correspondence, and suitability questionnaires are the foundation of these claims; the sooner they are gathered, the stronger the evidentiary position.

Schedule a Free Consultation

If you suffered significant losses in a non-traded REIT and believe your broker may have misrepresented the investment, recommended it without adequate basis, or failed to disclose material risks and fees, you have options. FINRA arbitration is a structured and relatively expedient process for recovering investment losses from broker-dealer misconduct.

Gary Varnavides brings a decade of broker-dealer defense experience and California and New York bar admissions to every case he handles. He evaluates cases thoroughly before advising on viability, so you receive an honest assessment — not a sales pitch.

Varnavides Law, PC represents investors in California and New York and pursues FINRA arbitration claims on behalf of investors nationwide.