The Financial Industry Regulatory Authority is ordering David Lerner Associates, Inc. to pay $14M for allegedly engaging in unfair sales practices involving its Apple REIT Ten and charging clients excessive markups. $12 million of this will be restitution to the investors that bought shares in the $2 billion non-traded real estate investment trust, as well as to clients that were overcharged. $2.3 million is FINRA’s fine against the brokerage firm for charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds.
According to the SRO, David Lerner Associates solicited thousands of clients to get them to buy shares in the Apple REIT TEN, of which it is the sole distributor. Elderly and unsophisticated investors were among its sales targets, even as it failed to do enough due diligence to make sure these investments were appropriate for these clients. Instead, the financial allegedly used marketing collateral that was misleading and showed customers performance results for closed Apple REITs without revealing that their incomes were not enough to support distributions to unit owners.
As part of the settlement, the financial firm has agreed to modify its advertising procedures. For example, for three years it will video record sales seminars involving 50 or more participants. It will also prefile its sales literature and ads with FINRA at least 10 days before they are made available for use. Additionally, per FINRA mandate, the brokerage firm will bring in independent consultants to look at proposed modifications to its supervisory system, as well as the training involving the pricing of municipal bonds and CMOs and the sale of non-traded REITs.
By settling, David Lerner Associates and its CEO and founder David Lerner are not denying or admitting to the FINRA charges. Even now they continue to maintain that the investments involved were suitable for their clients. They have, however, consented to an entry of FINRA’s findings. Also, Mr. Lerner has agreed to a one-year suspension from the securities industry, and then a two year-suspension from serving in a principal capacity, as well as a $250,000 fine.
Regarding the unfair prices charged on CMOs and municipal bonds, these were sold over a period of 30 months. For his alleged involvement, David Lerner Associates Head Trader William Mason has been suspended from the securities industry for half a year and sanctioned $200,000.
Meantime, dozens of investors are still waiting to resolve their Apple REIT lawsuits and arbitration claims that they’ve filed. If you are an Apple REIT investor that has sustained resulting losses, please contact our REIT law firm and ask for your free case evaluation.
Unfortunately, many investors of non-traded REIT were not been fully apprised of the illiquidity risks and other potential consequences involved, as well as the details involving commisisons, broker fees, suspended buyback programs. Our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD LLP represent investors throughout the US.
David Lerner Associates Ordered to Pay $14 Million, NY Times, October 22, 2012
More Blog Posts:
Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 28, 2011
Private REITs: The Need for Tougher Oversight?, Institutional Investor Securities Blog, June 28, 2011