David Lerner & Associates Hit With More Than $14 Million in Sanctions
The Financial Industry Regulatory Authority (“FINRA”) has ordered New York-based David Lerner & Associates (“DLA”) to pay $12 million in restitution to customers who invested in Apple REIT 10, a non-traded real estate investment trust that invests in extended stay hotels. According to InvestmentNews, it is the largest single restitution order involving REITs.
DLA was the sole distributor of the various Apple REITs, including Apple REIT 10. DLA’s founder, President and CEO, David Lerner, was personally fined $250,000 and suspended from working in any capacity in the securities industry for one year followed by an additional two year suspension from acting as the principal of any securities firm.
According to the Order Accepting Offer of Settlement dated October 22, 2012, DLA marketed and sold more than $442 million of the illiquid Apple REIT 10 to elderly and unsophisticated investors without performing adequate due diligence to determine if the REIT was a suitable investment for the customers. To date, DLA has received commissions of $42 million on sales of Apple REIT 10, according to the Order.
The Order further asserts that since at least 2004, shares of Apple REITs Six through Nine have been unreasonably valued at $11 notwithstanding market fluctuations, declines in performance and leverage increases. FINRA claims that despite the obvious irregularities in valuation, DLA did not sufficiently investigate the valuation of the REITs prior to marketing them to investors and provided misleading information on DLA’s website regarding distributions.
According to FINRA, between April and November 2011, DLA and Lerner personally made false and exaggerated claims regarding the investment returns, market values and performance of Apple REITs to over 1,000 potential investors during at least four investment seminars. The Order reflects that DLA and Lerner made misrepresentations that a past series of Apple REITs would merge and go public at a price of up to $20, well above the initial $11 offering price, and omitted to disclose that the income from the REITs was insufficient to support the promised 7%-8% returns.
In addition the Apple REIT 10 sanctions, FINRA fined DLA $2.3 million for charging excessive markups on municipal bond and collateralized mortgage obligations (“CMO”) during the period January 2005 to January 2007. FINRA also fined DLA’s head trader, William Mason, $200,000 and suspended him from the securities industry for six months.
FINRA found that DLA charged excessive markups to its customers in more than 1,000 municipal bond transactions and over 1,700 CMO transactions during this 2 year period. FINRA rules require that markups be fair and reasonable. According to FINRA, DLA’s municipal and CMO trades reflected a pattern of intentional excessive markups charged to DLA’s customers.