The Financial Industry Regulatory Authority and David Lerner Associates brokerage firm of Syosset, New York reached a settlement, the terms of which specify that the firm will pay $12 million in restitution to customers adversely affected by what FINRA deems was inadequate due diligence and excessive markups in connection with the sales of collateralized mortgage obligations and real estate investment trusts (REITs). FINRA also fined David Lerner Associates additional $2.3 million.
The proceeding states that throughout 2011, David Lerner Associates recommended and sold $442 million of a REIT titled Apple without first fulfilling its responsibility of performing adequate due diligence on the Apple REIT. The findings state that the firm misleadingly marketed the 2011 Apple REIT Ten by using statistics compiled using performance results from previous versions of the trust which were no longer in operation (Apple REIT Six, Apple REIT Seven, etc.) and whose results were accordingly inaccurate when applied to Apple REIT Ten.
FINRA also discovered that additional firm practices, such as slide show presentations and advertisements, violated various industry rules and regulations. For instance, the slide presentations were found by FINRA to have omitted material information. After FINRA alerted David Lerner Associates to the problem, FINRA charges that the firm continued to use the slides without addressing the Authority's concerns.
FINRA found that on multiple occasions, Lerner and his firm made false, exaggerated or misleading statements concerning the Apple REIT program, including inaccurate communications through signed letters sent to over 50,000 firm customers and the propagation of unsubstantiated claims at seminars and other events.
For instance, the firm allegedly assured customers of an impending "windfall" if they would agree to hold onto closed Apple REIT shares with Lerner stating the shares constituted a potential "gold mine" with earnings that could be "highly profitable." According to FINRA, these claims were unsubstantiated, exaggerated and misleading.
Instead, FINRA pointed to several red flags it believes the firm should have identified and responded to by conducting further due diligence before recommending the Apple REIT Ten, such as the artificial valuation of the Apple REIT Ten share at $11. Because of these red flags and a lack of adequate due diligence, FINRA alleges that David Lerner Associates lacked a reasonable basis with which to recommend the Apple REIT Ten, resulting in a series of unsuitable transactions.
During its investigation, FINRA found that a majority of the firm's revenue (60 to 70 percent) had derived from the sales of Apple REITs, while the firm had earned over $42 million in commissions and marketing allowances from the Apple REIT Ten alone.
The Authority also charged David Lerner Associates with intentional or reckless misrepresentations and omissions constituting device, scheme or artifice to defraud, claiming that the firm's actions were tantamount to "fraudulent or deceitful practice[s]," in which customers were charged an unfair and unreasonable price for a number of financial instruments, including municipal bonds and CMOs.
David Lerner was personally fined $250,000 and suspended for one year. A two year suspension from acting as principal shall follow the year-long securities industry suspension. Trader William Mason, also a firm associate, was fined $200,000 and suspended for six months.
If you invested with David Lerner Associates or with another broker or firm who you suspect has not performed sufficient research concerning a product; made unsuitable recommendations; or charged you an unfair price, commission or markup; and such activity has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.