FINRA Orders David Lerner Associates to Pay $14 Million

The Financial Industry Regulatory Authority (FINRA) ordered David Lerner Associates, Inc. (DLA) of Syosset, NY, to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT) DLA sold, and to customers who were charged excessive markups.

DLA was represented by Kevin J. Harnisch of Fried Frank in Washington, D.C.

As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors.

To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners.

FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations.

FINRA fined David Lerner, DLA’s founder, President and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal.

David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers.

To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a “fabulous cash cow” or a “gold mine,” and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a “windfall” to investors.

FINRA also sanctioned DLA’s Head Trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups.

The sanctions resolve a May 2011 complaint as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.

“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT Ten to thousands of customers,” said FINRA enforcement chief Brad Bennett. “Firms must conduct a thorough suitability analysis before selling products, and make accurate disclosure of risks and features at the point of sale, especially with alternative investments such as non-traded REITs.”

DLA and David Lerner neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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