David Lerner Associates Inc. isn't out of the legal woods despite the stiff sanctions leveled against it last week from securities regulators over the firm's sale of nontraded real estate investment trusts and municipal bonds.
The Financial Industry Regulatory Authority Inc. last Monday slammed the longtime purveyor of muni bonds and REITs for alleged unfair sales practices and excessive markups.
David Lerner Associates faces an unknown number of investor arbitration complaints from clients who bought certain REITs and muni securities from it, plaintiff's lawyers said.
And Finra's order, which includes sanctions against the firm's founder, David Lerner, could strengthen those claims, attorneys said.
FUEL ON THE FIRE
“Anytime Finra brings a regulatory action that is settled by the broker-dealer involving the REITs, it adds fuel to the position that these REITs were sold to people who were not suitable investors,” said Robert Uhl, partner at Aidikoff Uhl & Bakhtiari. “They could be older people who need liquidity and can't monitor how those investments are doing.”
Joseph C. Pickard, senior vice president and general counsel of David Lerner Associates, disagreed.
“Contrary to plaintiff's lawyers' self-serving statements, the firm's voluntary settlement with Finra was without an admission or denial of the allegations and therefore lacks any precedential or probative value in private litigations and arbitrations.”
Finra ordered the firm to pay $12 million in restitution to clients who bought shares of a nontraded REIT known as Apple REIT 10. Finra also fined the company more than $2.3 million for charging unfair prices on muni bonds and collateralized mortgage obligations.
The action is the largest single restitution payment for investors involving REIT sales, Finra spokeswoman Michelle Ong said.
“Our phone has been ringing off the hook” since Finra released its order against David Lerner Associates last week, said Andrew Stoltmann, a plaintiff's lawyer with 16 investor claims against the firm.
The clients' claims range between $25,000 and $1.4 million, and total about $5 million, he said.
“There's more to come,” Mr. Stoltmann said. “But how much can Lerner afford to pay out?”
Along with investor arbitration claims, a class action against the firm continues.
Mr. Lerner, who is also the firm's chief executive, was fined $250,000 and suspended from the securities industry for one year. After that ban, he faces a two-year suspension from acting as a firm's principal.
David Lerner Associates and Mr. Lerner neither admitted nor denied the charges around the sale of the products but consented to the entry of Finra's findings, the regulator said in a statement issued last Monday.
Finra also fined the firm's head trader, William Mason, $200,000 and suspended him from the securities industry for six months.
“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers,” Brad Bennett, Finra's chief of enforcement, said in the statement.
The company has long sold nontraded REITs, which don't trade on exchanges but rather are held by investors for a number of years and collect dividends over the investments' lifetime. Over the past 20 years, the firm, which is noted for its radio ads asking listeners to “take a tip from Poppy,” sold roughly $7 billion in Apple REITs.
The fine and restitution put to bed two long-running Finra investigations into the firm, which has 190 registered representatives and six branches in the New York tri-state area and Florida.
In a statement, David Lerner Associates said that Mr. Lerner for the time being will become more involved with other non-broker-dealer businesses associated with the firm, such as the Spirit of America mutual funds.
“I am proud of what has been accomplished at David Lerner Associates, our exceptional employees and of the fact that the firm has been able to help tens of thousands of people over the years ... and will continue to help today,” Mr. Lerner said in a statement.
“I am thankful for the tens of thousands of investors who have remained steadfast and loyal to David Lerner Associates,” he said. “Most of all, I am confident that the future remains bright.”
Mr. Lerner and his management team decided that it was time to settle with the regulators, said Joseph Pickard, the firm's general counsel.
“Contrary to Finra's suggestion in the press release, there were no charges, nor findings, that any of the investments were not, in fact, suitable for any of the individual investors,” he said.
The first action against the firm stemmed from a 2011 Finra complaint alleging that it engaged in improper sales practices in connection with the $2 billion Apple REIT 10.
Between January and December 2011, the company allegedly recommended and sold more than $442 million of Apple REIT 10 without performing adequate due diligence in violation of its suitability obligations. The firm has been the lone seller of the series of Apple REITs, which invest primarily in two national chains of extended-stay hotels.
“Earlier Apple REITs under the same management inappropriately valued the REITs' shares at a constant artificial price of $11 [a share], notwithstanding years of market fluctuations, performance declines, increased leverage and excessive return of capital to investors,” Finra said in its order.
In 2010, Finra alleged that David Lerner Associates charged excessive markups and/or otherwise failed to meet its obligation to provide a fair and reasonable price at the time of the transaction on thousands of muni bond transactions.
With its chief executive suspended, David Lerner Associates will operate under the day-to-day management of its executive teams, led by John Dempsey, a 33-year veteran of the firm.
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