FINRA has accused David Lerner Associates of misleading investors by selling shares in illiquid real estate investment trusts, or REITs, to unsophisticated and elderly customers. According to FINRA, in soliciting customers for one investment known as Apple REIT Ten, Lerner provided misleading information that failed to show that distributions far exceeded income and were financed by debt.
The Apple REIT’s valuations did not change despite the downturn for commercial real estate, and Lerner “failed to sufficiently investigate the valuation and distribution irregularities” of the products.
Investors bought more than $300 million of shares in the $2 billion Apple REIT Ten offering this year, FINRA said in a disciplinary complaint. Lerner has sold almost $6.8 billion of Apple REIT shares to more than 122,000 customers since 1992, according to FINRA. Those sales have generated more than $600 million, accounting for 60 percent to 70 percent of the firm’s business since 1996. David Lerner Associates earned 10 percent on all the offerings of Apple REIT securities, as well as other fees.
The complaint is the first step in a formal proceeding, FINRA said. The firm can request a hearing before a disciplinary panel. In September, Lerner paid a $255,000 fine for failing to provide required information in connection with the replacement of variable life insurance policies and annuity contracts from November 1998 through February 2004, according to the New York State Insurance Department. A year ago, Lerner was accused by FINRA of overcharging customers on sales of municipal bonds and mortgage securities. That case is still pending, according to FINRA’s records.