Washington-area resident Judith Britt, a widow who invested in 1987 in what she thought was a conservative real estate limited partnership, is nervous these days.
She had heard about the growing phenomenon called "rollups," where limited partnerships are converted into publicly traded entities, and she knew that many investors had lost a lot of money when the stock in these new entities dropped sharply in value after coming on the market. Now, she fears it may be happening to her.
"I'm concerned about getting my money back -- and the possibility of a loss ... " Britt said. "I thought it was a safe investment."
Britt's fears are not unfounded, according to many observers. Statistics released Wednesday by the California-based Liquidity Fund state that about 285,500 investors in 15 limited partnerships around the country have lost $1.4 billion in the past five years as a result of rollups.
And more losses may be on the way: Liquidity Fund reports that the rollup process is becoming ever more popular for the real estate syndicators who sponsor the conversions.
With the real estate market in a recession throughout the country, investor interest in limited partnerships has virtually disappeared. But the conversions of existing partnerships into the new stock entities produce large fees for the syndicators, and that reduces the value of the partnerships.
At least five more proposed rollups that could involve another 192,500 investors are awaiting approval. But as the rollup process accelerates, it is provoking increasing scrutiny and criticism in Congress and at the Securities and Exchange Commission.
Rollups appear attractive, critics say, because they seem to offer investors the chance to cash out of risky investments, particularly in real estate. But Liquidity Fund reported that in the case of real estate partnerships, the shares have dropped between 50 percent and 95 percent in price shortly after being offered to the public.
Now Britt is watching and waiting to learn if the other investors in her partnership agree to the rollup. If they do, it means she will be forced to go along with it whether she likes it or not.
Unlike stocks, where investors can sell out quickly if they don't like the direction things are going, limited partners can't readily sell their holdings. At this point, Britt feels she is helpless.
Britt's situation as a limited partner investor is becoming increasingly common, many said.
For Britt, the story started in the mid-1980s, when her husband died. She invested some of the insurance money she received in a real estate limited partnership that she had been assured was both conservative and secure.
She bought 1,500 shares at $20 each, for a total $30,000 investment, in the Boston-based Krupp Co.'s Cash Plus III. Her money was to be invested in a mixture of real estate purchases and mortgage-backed securities.
For three years, she received regular dividends.
But in November, she received by mail a thick packet of technical legal documents that informed her that her money was being shifted, subject to an investor vote, into an entirely new kind of investment, a real estate investment trust to be called Berkshire Realty Co., which seems to her to be riskier.
"I really don't know what I can do about it," Britt said, adding that she voted against the proposal.
At this point, it is unclear what will happen. A Krupp spokeswoman said investors will be told the outcome of the vote in April.
But, meanwhile, the nervousness of Britt and thousands of other investors like her is capturing congressional and regulatory attention.
On Feb. 27, the Senate securities subcommittee will hold hearings on limited partnership rollups and abuses, while the House telecommunications and finance subcommittee will hold its second round of hearings on the topic next month.
Meanwhile, the SEC has been asked by Congress to investigate the issue. Its report is expected to be released within a few weeks.
In addition, the National Association of Securities Dealers is considering banning the practice of "differential compensation," in which brokers who bring in "yes" votes for the rollup earn commissions, while those whose investors vote against it get no commission at all. In about half the rollups, these differential compensation strategies have been used to convince brokers to urge their clients to agree to the rollup.
"It creates a conflict of interest between brokers soliciting a yes vote" and their clients, who are depending on their brokers for an impartial analysis of the pros and cons of the proposal, said Charles Bennett, director of the NASD's corporate financing department.
Other relief measures are also being considered. Rep. Edward Markey (D-Mass.) of the House telecommunications and finance subcommittee is expected to propose a rollup reform package that could include provisions permitting limited partner investors to escape from rollups if they wish and outlaw differential compensation.