On October 22, 2012, the Financial Industry Regulatory Authority ordered David Lerner Associates (DLA) to pay $12 million in restitution to customers who purchased Apple REIT Ten and customers charged excessive markups.
DLA, its founder David Lerner, and the head trader were fined $2.3 million. FINRA suspended Lerner from the securities industry for one year, followed by a two-year suspension from acting as a principal.
According the FINRA newsrelease, which may be accessed here, Lerner:
“personally made false claims regarding the investment returns, market values, and performance prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers. To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a “fabulous cash cow” or a “gold mine” and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a “windfall” to investors.”
According to Brad Bennett, Executive VP and Chief of FINRA Enforcement,
“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT Ten to thousands of customers. “
If you were sold Apple REIT Ten, or any of the prior Apple REITs you may be able to recover some or all of your losses through FINRA arbitration. Please contact us for a free consultation. We have been helping investors recover stock market losses for more than 20 years.
Rex Securities Law
561 391 1900
FINRA reissued its Investor Alert on non-traded REITs as a result of the action filed by FINRA against David Lerner & Associates for failing to investigate the suitability of the investment and for marketing the REITs on its website using misleading returns.
According to the release, FINRA reissued the Alert:
“because of concern that
some investors may be the recipients of misleading information
regarding certain public non-traded REITS. Some investors may also
receive recommendations to purchase these products without adequate
investigation by the firm or individual broker to determine whether
these or similar investments are suitable.”
In their release , FINRA points out some of the same pitfalls of non-traded REITs we have been warning investors about for the past year, including:
- shares do not trade on a national exchange
- the secondary market offers very limited liquidity and shares generally trade at a substantial discount
- front end fees can be as high as 15% of each dollar invested
- share prices can fluctuate, up or down
The share price of many non-traded REITs has dropped since the date of issue. In some cases the current value is less than half of the original purchase price. Given the state of the economy, and in particular, real estate, it is not likely that shares will recover to the original purchase price for many of these REITs.
Couple with this the fact that many REITs have dramatically reduced or eliminated distributions and their lack of liquidity, those who purchased to supplement fixed income have a real problem.
If you purchased a non-traded REIT based upon misrepresentations, you may be able to recover some or all of your losses. Contact us for further information.
Free consultation. Nationwide representation.
Rex Securities Law
561 391 1900
In December 2011, the Financial Industry Regulatory Authority (FINRA) amended their complaint against the company David Lerner Associates, Inc. and added David Lerner, individually. That amended complaint contains information that should be of interest to anyone who owns any of the Lerner Apple REITs, and especially those owning Apple REIT Ten. The amended complaint can be accessed here.
Since the complaint is 58 pages long I will break this analysis into several separate posts. Here are highlights of the FINRA allegations that you should be aware of. Annotations are to the page number of the amended complaint:
- Lerner continues to solicit thousands of customers to purchase Apple REIT Ten without performing adequate due diligence that there is reasonable basis to recommend the security to any customer..….and has sold the illiquid investment to unsophisticated and elderly customers. (Pages 1 & 2)
- Through June 2011, Lerner marketed Apple Ten by using misleading results from Apple REITs Six, Seven, Eight & Nine, by misrepresenting the rate of return and the misleading investors into believing distributions are income by using slide presentations that omit material information and present statements and claims that are misleading and exaggerated. (Pages 2&3)
- Lerner , to counter negative press following the filing of the original FINRA complaint, sent out letters and conducted seminars regarding the performance , prospects, risks, a potential merger and the liquidity of the Apple REIT programs that are exaggerated and misleading. (Pages 3&4)
- The Apple REITs are illiquid and concentrated in one sub sector, extended stay hotels, however, many Lerner investors own two or more of the Apple REITs. Many of the investors are elderly and/or unsophisticated and were solicited by internet, radio, cold calls, mailings and seminars at senior centers, restaurants and country clubs. Nearly all of Lerner’s sales are solicited. (Pages 7& 8)
- The $11 share valuation for Apple REIT shares is currently inaccurate and has been inaccurate in the past. The valuation is incorrect due to market conditions , performance declines and debt incurred by the REITs to fund distributions. Lerner did not take any of this economic reality into consideration and continued misleading investors by publishing the $11 a share value. (Pages 8-12)
- Distributions from the Apple REITs have exceeded the REIT’s Net Income by hundreds of millions per quarter. These distributions were funded by incurring debt and by returning some of the investors capital. While investors believed they were receiving income they were actually being handed back some of their own money, while the investment fell in value. (Pages 12-15)
- Until June 2011, Lerner’s web advertising provided misleading figures for the performance of Apple REIT Six through Nine. (page 17) Did you rely on this misinformation when purchasing Apple REIT Ten?
- Since Mid-2011 sales of Apple REIT Ten have plummeted while investor requests to redeem shares have skyrocketed. In January 2011, Apple 10 sales were about 100,000,000. By October 2011, they had dropped to about $14 million. Redemption requests for Apple Six, Seven, Eight and Nine for the the fourth quarter of 2010 were just over three million shares. By the third quarter of 2011, requests for redemption were nearly 50 million shares. Since there is a limit on the number of shares Lerner is obligated to redeem, only a small percentage of each series were actually redeemed. (Page 20)
In a future post I will cover the highlights of the rest of the FINRA amended complaint against Lerner and his company.
Brokers have a duty to make suitable recommendations to investors and to provide accurate and complete information related to the risks and rewards of a particular investment. Many purchasers of Lerner Apple REITs were led to believe the investment would provide a safe haven for their nest eggs while generating regular and dependable income. If you have questions about the purchase of Lerner Apple REITs, or any other issue with your brokerage account, we may be able to help.
Call 561 391 1900 for a free consultation or contact us online.
Rex Securities Law
The first of what may be potentially hundreds of arbitration cases relating to the sale of Apple REITs by David Lerner & Associates Inc. was recently decided in favor of the claimants. A single FINRA arbitrator ordered Lerner Associates to give the customers their money back in exchange for their Apple REIT nine shares.
As we have previously reported here, here and here, David Lerner and his company have been in the regulatory spotlight for the past year in connection with the sale of almost $7 billion worth of the Apple REITs. According to industry sources, Lerner’s company has collected $600 million in commissions for the sales which comprise over half of the firm’s business.
In June 2011, class action suits were filed against David Lerner & Associates over misrepresentations in connection with sales of Apple REITs. Later during the year FINRA filed actions against Lerner’s company , then against Lerner himself for misleading investors about the Apple REITs.
If you purchased Apple REITs and have suffered losses, you may be able to recover those losses. Brokers have a duty to make suitable recommendations to investors. Please do not hesitate to contact us to discuss your legal rights.
561 391 1900
Rex Securities Law