FINRA has filed an enforcement complaint against David Lerner, the operator of a brokerage aimed at retail investors.
The independent regulator said Lerner misled investors when he tried to quell customer concern about an action taken against his firm for its marketing of real estate securities.
Lerner allegedly misled investors about risks and values in the marketing of a $2 billion non-traded real estate investment trust, Reuters reported.
FINRA, the retail brokerage industry's self-watchdog, disclosed the allegations on Lerner's personal BrokerCheck report, a public regulatory filing, on Jan 13. The complaint was dated Dec. 13.
The regulator's allegations against Lerner and his firm relate to a non-traded REIT known as Apple REIT Ten, according to Reuters.
David Lerner Associates is the sole distributor of Apple REITs, according to regulatory documents.
A spokesman for Lerner, David Chauvin, said FINRA's allegations against Lerner "lack any focus." The Apple REIT programs, including several offerings that are already closed, have returned about $3 billion to their investors, he said in a statement emailed to Reuters.
In June, the regulator of investment brokers said Lerner Associates, founded by a former Bayside High School history and economics teacher in Queens, solicited “investors to purchase shares in Apple REIT Ten … without conducting a reasonable investigation to determine whether it was suitable for investors.”
The company targeted “unsophisticated and elderly customers with unsuitable sales of the illiquid security,” FINRA said.
The Lerner firm, in a prepared statement, said it “vehemently denies FINRA's allegations.
“FINRA's complaint is baseless and so rife with falsehoods, distortions, and misleading statements that if it were judged by the securities industry's standard of SEC Rule 10b-5, FINRA itself would be in violation,’’ the firm said, in a release sent from Zimmerman/Edelson Inc., a public relations firm in Great Neck, N.Y. “What is obvious is that DLA and other small firms have become the scapegoats for FINRA's utter failure to address Madoff's fraudulent scheme."
DLA has been the sole underwriter for Apple REITs since 1992, selling nearly $6.8 billion of the securities. The company takes in 10% of all offerings of Apple REIT securities as well as other fees. Apple REIT sales have generated $600 million in revenue for the firm, the regulator said.
The complaint against DLA alleges that:
-- Since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7% to 8% by leveraging the REITs through borrowings and returning capital to investors. As sole distributor, DLA did not question the Apple REITs' unchanging valuations despite the economic downturn for commercial real estate.
-- Rather than conduct due diligence into those valuations and distribution irregularities to determine that they were reasonable and that the Apple REITs were suitable, DLA accepted the valuations and continued to record them on customer account statements.
-- On its website, the company published distribution rates for all previous Apple REITs. But they did not disclose recent distribution rate reductions or that distributions “far exceeded income from operations and were funded by debt that further leveraged the REITs,’’ FINRA said.
Specifically, David Lerner Associates said it:
-- Conducted thorough due diligence of Apple REIT Ten's offering documents and audited financial statements. DLA takes comfort in noting that the US Securities and Exchange Commission thoroughly reviewed Apple REIT Ten's registration statement for compliance with registration and disclosure requirements and declared the offering effective. DLA also takes comfort in noting that FINRA conducted a thorough review of the Apple REIT Ten offering and specifically approved DLA's role as underwriter and its compensation for such services.
-- The firm does not solicit Apple REIT Ten on its website and all disclosures concerning prior Apple programs were materially accurate; complied with regulatory requirements; and are typically submitted for review and approval by FINRA's Advertising Department. -- DLA also categorically denies that it "targets unsophisticated and elderly customers" and denies that it overlooked any alleged "valuation and distribution irregularities."
-- Regardless of age, in the main, Apple REIT investors seek attractive current returns and an alternative to experiencing stock market fluctuations.
DLA said it “will vigorously defend these claims.” Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel.
David Lerner is also known for his “Take a Tip from Poppy” radio segments, broadcast in the metropolitan New York area.
Tom Steinert-Threlkeld writes for Securities Technology Monitor.