Pacific Cornerstone, the broker-dealer arm of Cornerstone Real Estate Funds, is the broker-dealer manager of two non-traded real estate investment trusts that recently saw steep devaluations. 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. 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.
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 REIT offerings have seen significant changes. 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 non-traded REIT is relatively small, raising just $158 million of its $439 million target. 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. Cornerstone is also involved in a third offering, CIP Leveraged Advisors. This was a fund that was put together to help Cornerstone raise money for its other ventures. CIP Leveraged Advisors has also seen steep declines in value.
Brokerage firms have a fiduciary duty to perform adequate due diligence on any investment prior to offering it for sale to their clients. Based on what is known about Pacific Cornerstone Capital, it is clear that the brokerage firms that sold it failed to perform the adequate due diligence.
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