NorthStar Healthcare Income REIT Investment Losses with Taylor Capital Management Inc. Broker Michael Pellegrino?

NorthStar Healthcare Income Real Estate Investment Trust
NorthStar Healthcare Income Real Estate Investment Trust

Did your broker recommend you over-concentrate your investment portfolio in NorthStar Healthcare Income REIT? Erez Law is currently investigating brokers across the country who recommend their clients invest in NorthStar Healthcare Income Real Estate Investment Trust (REIT), a public, non-traded REIT that was formed to originate, acquire and asset manage equity and debt investments in healthcare real estate. 

According to public records, a former client of Taylor Capital Management Inc. filed a FINRA arbitration alleging that their Taylor Capital Management Inc. broker Michael Pellegrino (CRD# 5900843) solicited them to invest in Northstar Healthcare Income REIT. It is alleged that the customer was told to purchase Northstar Healthcare Income REIT and hold the investment and that it would pay out consistently plus return principal within a few years. However, it is alleged that the client was not informed of risks and high commissions that he and Taylor Capital Management Inc. received for recommending Northstar Healthcare Income REIT. 

In January 2021, FINRA sanctioned him to pay a $10,000 civil and administrative penalty and fine and suspended him for two months after he, “consented to the sanctions and to the entry of findings that he distributed a retail communication to retail investors, which promoted an investment in a short-term, high yield contract issued by a limited liability company that contained misleading statements, improper projections of future performance, and omitted material information. The findings stated that the issuer pooled investor monies and distributed the funds to small businesses as a merchant cash advance. The investors expected investment returns based on a percentage of the merchants’ future revenues. Although the communication stated that the product was not a security, it promoted a financial instrument and referenced the member firm. The communication made investment projections by multiple references to 6-10 percent investment returns. The communication further used the terms consistent, predictable, and high yield contract when describing the investment. This language was misleading because the product provided no contractual obligation for the issuer to distribute any investment returns. The use of these terms was further misleading because of the significant risk that the small businesses would be unable to generate revenue. The communication additionally stated that the investment would be backed by collateral and would involve no stock market or interest rate risk. The communication’s references to collateral were misleading because the collateral was not a tangible asset, rather an interest in merchant cash advance contracts and future proceeds that would only be paid at the issuer’s discretion. By claiming that the investment involved no stock market risk, the communication incorrectly suggested that the investment was risk averse. Finally, the communication omitted material information regarding the risks and features of the investment, causing it to be misleading. Specifically, the communication failed to include any statements that investing in cash advances could result in complete loss of principal, that the investment was illiquid, automatically renewed, had fees, and relied upon revenues from small businesses that often use merchant cash advances as a funding option of last resort.”

In March 2022, the Securities and Exchange Commission (SEC) barred Michael Pellegrino. The SEC found that between May 2017 and June 2018, he and Anthony Pellegrino offered and sold $37 million of 1 Global Capital LLCsecurities to “advisory clients and insurance and annuity customers in unregistered transactions and did not adequately disclose to their clients the fees that they received from 1 Global.” In total, the brokers, through GFG, received approximately $1.6 million in fees from 1 Global for selling the securities.

BrokerCheck indicated that “1 Global marketed its investment as a safe and secure alternative to the stock market and baselessly claimed that investing in 1 Global’s merchant cash advance business would achieve high single-digit or low double-digit annual returns. Like other 1 Global sales agents, Anthony Pellegrino and Michael Pellegrino repeated those claims to prospective investors. Unbeknownst to Respondents or their clients, 1 Global’s business was a fraud. 1 Global and its chairman and chief executive officer Carl Ruderman (“Ruderman”) were misrepresenting how they were using investor money, syphoning off millions in investor funds to fund Ruderman’s luxury lifestyle and operate unrelated businesses. 1 Global’s business came to a crashing halt when it filed for bankruptcy in July 2018, leaving many of Respondents’ clients and thousands of other investors with hundreds of millions of dollars in losses. During the time Respondents offered and sold 1 Global securities, 1 Global did not register its securities offering with the Commission, and there was no applicable exemption for this offering.”

NorthStar Healthcare Income REIT Update

In February 2019, NorthStar Healthcare Income REIT ceased distributions to investors in order to preserve capital and protect the company’s financial position. According to the DI Wire, “In December 2017, the company reduced its distribution rate from 6.67 percent to 3.31 percent on its $10.20 final offering price. Shares originally sold for $10.00.” The company also said that there can be no assurance that distributions will be declared again in any future periods or at any particular rate. “In December 2018, the REIT lowered the net asset value of its common stock from $8.50 per share to $7.10 per share. At the time, the company cited numerous factors which contributed to the decline in net asset value, including occupancy challenges in select markets, increased labor costs, restructuring leases, replacing tenants, and capital expenditures while continuing to make consistent distributions to its shareholders.”

In October 2018, the company informed shareholders that it will only repurchase shares in connection with the death or qualifying disability of a stockholder, according to the DI Wire. 

Additionally, now that distributions have been suspended, investors risk a substantial decline in value of their principal.

Many financial advisors at brokerage firms across the country did not disclose the significant risks involved with investments in NorthStar Healthcare Income REIT.

According to the fund’s website, “NorthStar Healthcare is focused on making investments in the needs-driven senior housing sector, which we define as independent living facilities, assisted living, memory care and skilled nursing facilities. We believe this sector is an attractive asset class to invest in as these types of facilities generally provide the broadest level of services to residents in a more cost effective setting… NorthStar Healthcare, with its experience, relationships and vision, is ideally positioned to capitalize both as an equity investor and lender in this industry and provide investors an opportunity for both income and long-term growth.”

According to the website, NorthStar Healthcare Income REIT is intended for investors:

  • Seeking income through regular cash distributions
  • Wanting the potential for capital appreciation, reduced portfolio volatility and a low correlation to traditional asset classes
  • Looking for commercial real estate exposure in today’s growing healthcare sector

NorthStar Healthcare Income REIT launched in February 2013. NorthStar Healthcare Income REIT raised more than $2 billion to date, and oversees a $3.5 billion portfolio, which includes more 642 properties as of December 31, 2018, according to their website.

A REIT is a company, modeled after mutual funds, that owns or finances income-producing real estate and provides investors of all types regular income streams, diversification and long-term capital appreciation. Unlike other real estate investments, REITs are often entirely illiquid. Non-traded REITs hold additional risks for investors because they often feature limited redemption programs, high fees and commissions, and internal conflicts of interest. Unlike stocks on the New York Stock Exchange, REITs are not publicly traded and cannot be sold through an exchange, only through secondary market auctions. 

Michael Pellegrino Customer Complaints

Michael Pelligrino was registered with Taylor Capital Management, Inc. in Oakbrook Terrace, Illinois from 2012 to 2018. In March 2022, he was terminated from Goldstone Financial Group, LLC, which he was registered with from July 2015 as an investment advisor representative.

He has been the subject of 11 customer disputes between 2015 and 2019, three of which were closed without action and one was withdrawn , according to his CRD:  

July 2019. “Pellegrino was named in a customer complaint that asserted the following causes of action: breach of fiduciary duty; violation of FINRA Rules; breach of contract; negligence; and negligent supervision.” The customer was awarded $154,574.23 in compensatory damages. 

June 2019. “Pellegrino was a subject of the customer’s complaint against his member firm that asserted the following causes of action: unsuitable investment recommendations; fraud; negligent misrepresentation; breach of fiduciary duty; negligent failure to supervise; negligence; and fraudulent concealment.” The customer was awarded $100,000.

April 2019. “Claimant alleges that former TCM RR Michael Pellegrino made numerous misrepresentations during his presentation of a REIT investment to Claimant.” The customer is seeking $50,000 in this pending customer complaint. 

January 2019. “Claimants alleged that Respondent MP fraudulently recommended that claimants invest in Global Capital, LLC Memorandums of Indebtedness failed to disclose material facts regarding Global Capital, LLC.” The customer is seeking $161,089.32 in this pending customer complaint. 

December 2018. “Allegations against Respondent Michael Pellegrino include sale of a high-risk and fraudulent investment, misrepresentation and omissions of material facts, and unsuitable recommendations.”  The customer is seeking $341,182.80 in this pending customer complaint. 

November 2018. “Respondent and Pellegrino solicited Claimant to invest in non-traded Real Estate Investment Trust (REIT)-American Realty Finance (AFIN) and was advised that this investment would pay out consistent income plus return of principal in a few years.” The customer is seeking $200,000 in damages. 

September 2018. “Claimants began investing with Respondent Pellegrino in or around 2012. In or around June 2017, Pellegrino recommended that Claimants consider investing in 1st Global Capital Short-Term Notes which was an unsuitable recommendation and investment for the Claimants. Pellegrino pursued an unsuitable investment strategy in Claimants’ accounts through material misrepresentations and omissions in disregard of Claimants’ rights, interests and investment objectives.” The customer is seeking $315,000 in this pending customer complaint. 

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the country may be liable for investment or other losses suffered by Michael Pelligrino’s customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.