Finra hammers David Lerner Associates, suspends ‘Poppy’

Securities regulators on Monday slammed David Lerner Associates Inc., the longtime Long Island purveyor of municipal bonds and REITs, for alleged unfair sales practices and excessive markups.
The Financial Industry Regulatory Authority Inc. said it ordered the firm to pay $12 million in restitution to clients who bought shares of a nontraded real estate investment trust known as Apple REIT 10. Finra also fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.
The action is the largest single restitution payment for investors involving REIT sales, Finra spokeswoman Michelle Ong said.
In addition, the Syosset, N.Y.-based firm’s founder and chief executive, David Lerner, was fined $250,000 and suspended from the securities industry for one year, followed by 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 Monday morning.
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 a statement.
David Lerner Associates has been a longtime seller of nontraded REITs, which do not 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 sold roughly $7 billion of Apple REITs.
The fine and restitution put to bed two long-running Finra investigations into the firm, which has 190 registered reps and six branches in the New York tri-state area and Florida. The brokerage is noted for its radio ads which ask listeners to “Take a tip from Poppy.”
In a statement, David Lerner Associates said that Mr. Lerner will for the time being 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 the statement. “I am thankful for the tens of thousands of investors who have remained steadfast and loyal to David Lerner Associates. Most of all, I am confident that the future remains bright.”
David Lerner and the management of David Lerner Associates have decided it is time to move the company past these distractions and 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,” Mr. Pickard said.
The first action against the firm stemmed from a 2011 Finra complaint. Finra alleged that the firm engaged in improper sales practices of the $2 billion Apple REIT 10. Between January and December 2011, David Lerner Associates 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 (per 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 Lerner 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 municipal bond transactions.
With its CEO now 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.