According to FINRA, Mark Sam Kolta was named as a respondent in a FINRA complaint alleging he made unsuitable recommendations to customers to purchase more than $4.8 million in shares of a non-traded real estate investment trust (REIT).

The complaint alleges that Kolta's recommendations caused his customers to lose more than $4.1 million, while he generated more than $290,000 in commissions. Kolta's recommendations were allegedly unsuitable in view of the customers' investment profiles and the fact that his recommendations over-concentrated the customers' investable assets and liquid net worth in illiquid and high-risk securities.

The complaint also alleges that Kolta caused his member firm's books and records to be falsified and inaccurate. Kolta allegedly caused the customers' reported net worth, investable/liquid assets, and annual income on the firm's customer account records (new account forms), customer account record updates, and REIT investment documents to be falsified and dramatically inflated, as compared to these customers' actual net worth, investable/liquid assets, and annual income. Kolta also often allegedly caused these customers' reported investment objectives and risk tolerance, as well as these customers' reported assets held away from the firm, to be inaccurate and falsified.

The complaint further alleges that Kolta sent retail communication emails to retail investors that were misleading, unwarranted, and promissory and that were not fair and balanced. Kolta also allegedly failed to obtain the required approval of a qualified principal of the firm prior to sending any of these retail communication emails.

It is important to note that this is a complaint only, and findings have not yet been made regarding these allegations. The complaint represents FINRA's charges, and Kolta will have an opportunity to respond and defend against these allegations in a formal hearing process.

Non-traded REITs are real estate investment trusts that are not listed on stock exchanges. While traditional publicly traded REITs can be bought and sold easily through stock exchanges, non-traded REITs are illiquid investments that are difficult or impossible to sell before the REIT liquidates its properties or conducts a liquidity event such as listing on an exchange or being acquired.

Non-traded REITs typically pay high commissions to selling representatives—often 7 percent or more of the investment amount. These high commissions create significant conflicts of interest, as representatives may be motivated to recommend non-traded REITs even when they are not suitable for customers.

The allegations in the complaint paint a troubling picture. Customers allegedly lost more than $4.1 million on investments totaling more than $4.8 million, representing losses of approximately 85 percent. Meanwhile, Kolta allegedly earned over $290,000 in commissions. This disparity—massive customer losses paired with substantial representative compensation—is characteristic of unsuitable high-commission investments.

The alleged over-concentration in non-traded REITs is a common suitability concern with these products. Because non-traded REITs are illiquid, investors cannot easily exit the investment if they need their money or if the REIT performs poorly. Concentrating a large portion of investable assets in such illiquid investments can be unsuitable, particularly for customers who may need access to their funds.

The allegations regarding falsification of customer financial information are particularly serious. Representatives may inflate customer financial information on account forms to make unsuitable investments appear suitable. For example, by falsely inflating a customer's liquid net worth, a representative can make it appear that a large investment in an illiquid non-traded REIT represents an acceptable percentage of the customer's liquid assets, when in reality it might represent an excessive concentration.

Falsifying customer investment objectives and risk tolerance can similarly be used to justify unsuitable recommendations. A conservative investor should not be concentrated in high-risk, illiquid investments, but by falsely documenting that the customer has an aggressive risk tolerance, a representative can make such investments appear suitable.

The allegations regarding misleading retail communications and failure to obtain principal approval represent additional compliance failures. Retail communications must be fair and balanced, and communications about investment products typically require principal approval before use.

For investors, this case (though still unresolved) illustrates important warning signs. Be extremely cautious about non-traded REITs and other illiquid, high-commission investments. Ask about commissions and understand that high commissions create conflicts of interest. Review all account forms carefully and ensure that your financial information, investment objectives, and risk tolerance are accurately reflected. Never sign forms that contain inaccurate information, even if your broker assures you it is just a formality.