David Lerner Associates Inc., once known for its radio ads selling municipal bonds, reported in a
recent regulatory filing that its financial condition had deteriorated in 2018.
The filing with the Securities and Exchange Commission, an annual audited financial statement known in the industry as a Focus report, indicated the firm's
negative net worth had grown to $17 million from
$9.2 million at the end of 2017.
The firm said it had a net loss of $6.3 million on revenue of $53.5 million in 2017. No comparable figures were available for 2018.
The phrase "negative net worth" in a broker-dealer's Focus report means that its "liabilities are greater than the assets," said Terry Lister, a legal and compliance consultant and former Waddell & Reed chief regulatory officer. "The question is what are the firm's actual liabilities."
Another brokerage executive, who asked not to be named, noted that the firm has been borrowing money from founder David Lerner, the firm's sole stockholder, and now has subordinated debt of $21 million.
"This is the shareholder lending money to himself and therefore converting equity to debt," said the executive. "He's subsidizing the broker-dealer through these loans. They're running at a loss but still have $2 million in excess net capital."
In a statement, David Lerner Associates said it received a clean report from its auditor for 2018 and that its deficit in its financial statement is "offset by subordinated loans, which qualify as regulatory capital."
Because client accounts are held at its clearing firm, RBC Correspondent Services, client investments "are in no way impacted by David Lerner Associates' financial position," according to the company.
David Lerner Associates' "ownership is committed to maintaining the financial viability of the firm," according to the company.
David Lerner Associates was once well known in the New York area for radio ads that asked prospective investors to "Take a tip from Poppy," referring to Mr. Lerner, who promoted municipal bonds.
According to its website, the firm has $4.5 billion in client assets and six branches in the Northeast and Florida.
A decade ago, David Lerner Associates relied on proprietary, in-house products for the majority of its sales. In addition to trading and selling municipal bonds, the firm offered an exclusive line of nontraded real estate investment trusts called the Apple REITs, and also offered proprietary mutual funds under the Spirit of America brand.
Last year,
an executive from David Lerner Associates told
InvestmentNews that the sales of proprietary products had declined dramatically at the firm, to 38% of revenue for the 12 months ended April 2018, from 92% in calendar year 2011.
Meanwhile, the firm has been the subject of regulatory action.
In 2012, the Financial Industry Regulatory Authority Inc. ordered the firm to pay more than $3.7 million in fines and restitution for overcharging retail customers on sales of more than 1,500 municipal bonds and 1,700 collateralized mortgage obligation transactions.
Later that year, Finra ordered the firm to pay $12 million in restitution to clients who had purchased shares of a nontraded REIT called Apple REIT 10. Finra also fined Lerner more than $2.3 million for charging unfair prices on municipal bonds and CMOs.
