Alternatives

Finra amends complaint against David Lerner

David Lerner has continued to improperly pitch nontraded REITs, according to an amended complaint filed last month by the self-regulator.

Despite a pending Finra complaint against his firm, David Lerner has continued to improperly pitch nontraded REITs, according to an amended complaint filed last month by the self-regulator.
In the amended filing, the Financial Industry Regulatory Authority Inc. went after Mr. Lerner personally and added more allegations to its original May 2011 complaint against his firm, David Lerner Associates Inc., over the company’s exclusive sales of Apple real estate investment trusts.
The company “continues to solicit thousands of customers to purchase Apple REIT Ten without performing adequate due diligence,” Finra said in its latest complaint.
“Between at least April 28, 2011, and Nov. 17, 2011, [the firm and Mr. Lerner] have made false, exaggerated and misleading claims regarding the investment returns, market values, performance and prospects of the closed Apple REITs to over 1,000 customers” during at least four investment seminars, Finra said.
In those seminars, the REITs were described as “investments that sophisticated investors such as ‘Warren Buffett’ would buy,” the complaint said.
“At the conclusion of [several of] Mr. Lerner’s presentations on Apple REIT Ten, [the firm] played the song ‘We’re in the Money’ over the sound system,” Finra said.
Among the allegedly misleading statements was a claim by Mr. Lerner that a past series of Apple REITs would be merged and go public at a price of as high as $20 — well above the original $11 offering price.
The firm and Mr. Lerner also failed to “disclose that income from those REITs was insufficient to support their 7% to 8% returns and that the distributions were partially funded by debt,” Finra said.
Since January 2011, the Syosset, N.Y.-based company, which is well-known for its “Take a tip from Poppy” advertisements, has recommended and sold more than $442 million of the Apple REIT Ten, Finra claims, and has earned $42 million in sales commissions.
Finra also alleges that in June and July of last year, in order to counter negative press from the original Finra complaint, Mr. Lerner “sent letters to over 50,000 [Lerner] customer households that contained exaggerated, false or misleading statements.”
The misleading seminars and letters “constituted a fraudulent or deceitful practice,” Finra said.
Finra claims that since 1992, Mr. Lerner’s firm has sold nearly $7 billion worth of Apple REITs. The firm gets 10% in fees and commissions, and has generated approximately $600 million in total revenue from the sales, which accounted for 60% to 70% of the firm’s business since 1996, Finra claims.
The regulator is seeking sanctions and disgorgement of “ill-gotten” gains.
“Mr. Lerner and the firm deny all allegations of violations and expect to vindicate themselves when the facts are heard in an impartial forum,” David Chauvin, a Lerner spokesman, said in a statement.
“For years, the Apple REIT products … have proven to be excellent investments backed by the bricks and mortar of properties run by nationally recognized hotel brands,” Mr. Chauvin said.
This month in a filing with the Securities and Exchange Commission, one of the Apple REITs said it had retained Citigroup Global Markets Inc. as a financial adviser to evaluate the possible combination of three other Apple REITs, which could be followed by an initial public offering.
“The company has not made a decision to pursue any particular transaction,” the filing said, nor could a transaction be assured.
“It seems like they don’t want him selling any new programs,” said Michael Stubben President of MTS Research Advisors, a REIT research firm.
The Apple REITs “are no different than other” nontraded REITs, Mr. Stubben said. Earlier offerings that raised money prior to the peak in real estate prices are doing well, he said, while later ones are struggling.
The Apple REITs invest in hotels, “which are a little more volatile that other investment sectors,” Mr. Stubben added, “but we’re now starting to move into an upswing of the hotel sector.”
Securities attorney Bill Singer wonders why Mr. Lerner wasn’t named in the original complaint.
“It suggests there was some negligence when [Finra] first brought the case” and failed to name Mr. Lerner, he said, adding that Finra could now be tying to exert more leverage on Mr. Lerner.
Finra spokeswoman Nancy Condon declined to comment.
The Lerner case has caused broker-dealers firms to take a hard look at their nontraded REIT offerings.
In October, Finra issued an investor alert about nontraded REITs in general, citing concerns about shaky dividends, illiquidity and valuation problems. And recently, Finra said nontraded REITs were one of several product areas that examiners would focus on this year.