The well-known financial services firm David Lerner Associates was ordered this week to pay approximately $12 million to customers who had been charged undue markups after buying into a $2 billion real estate investment trust.
In addition to that massive fine, the Financial Industry Regulatory Authority (FINRA) – the United States retail brokerage industry’s self-monitoring group – levied a charge on the Long Island, New York-based company in excess of $2.3 million for charging its clients inequitable prices on municipal bonds and collateralized mortgage obligations. Moreover, FINRA fined the business’ namesake – founder and chief executive David Lerner – $250,000, and suspended him from the securities industry for one year, to be followed by a two-year suspension from acting as a principal. David Lerner Associates as a financial services firm will continue to remain in operation under the leadership of John Dempsey, who has been with the outfit for 33 years.
The agreement culminates a lengthy dispute between Lerner and FINRA, which filed a succession of regulatory complaints against the firm as a whole and Lerner individually, beginning in 2010. According to industry attorneys, FINRA’s sanctions against Mr. Lerner as an individual are an unusual example of a regulator acting against the head of a brokerage.
“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,” stated Brad Bennett, FINRA’s chief of enforcement. Commenting separately, Susan Axelrod, the head of FINRA’s member regulation unit, said, “The case sends a message to supervisors and people who hold positions of authority at firms.”
A legal representative of the scandalized firm commented that it is “time to move the company past” the regulatory issues it has been “forced to deal with” over the past several years. FINRA’s actions “have been very costly to defend and very distracting to the firm’s efforts for its clients,” said Joseph Pickard, the firm’s senior vice president and general counsel.
According to FINRA, David Lerner Associates marketed Apple REIT Ten – a $2 billion non-traded real estate investment trust – to customers without sufficiently determining whether the securities were appropriate for them, and by misrepresenting performance results.
REITs invest in commercial real estate, such as hotels and shopping malls, granting customers an opportunity to earn a profit from increases in property values. In contrast, non-traded REITs such as Apple Ten do not trade on securities exchanges, as they can be illiquid or problematic to sell in secondary markets. Non-traded REITs are also prone to having higher fees for investors than publicly traded REITs.
Lerner was known to have described the REIT as a “fabulous cash cow” and a “gold mine,” and he made unfounded projections regarding a merger and public listing of other closed Apple REITs, which he improperly asserted would bring a “windfall” to investors, in FINRA’s determination.
While Lerner and the company never confirmed nor countered the charges, they agreed to the official entry of FINRA’s findings as part of a settlement. David Lerner Associates additionally assented to revamp its advertising procedures, which includes an agreement to videotape sales seminars that are attended by at least 50 people for three years, and the firm is obligated for a period of one year to pre-file all advertisements and sales literature with FINRA at least 10 days before their implementation.
The brokerage continues to deny publicly that it sold any investments that may have been inappropriate for its customers. “Contrary to FINRA’s suggestion…there were no charges, nor findings, that any of the investments were not in fact suitable for any of the investors,” asserted Pickard.
But the settlement firmly declared that David Lerner Associates “was not in a position” to determine the appropriateness of the investments because it did not carry out sufficient due diligence on the REITs to assess potential risks and rewards to investors.
This past April, a FINRA hearing panel imposed a $2.3 million fine on David Lerner Associates for selling municipal bonds and collateralized mortgage obligation transactions to its retail customers at unfairly high prices, a practice which is said to have resulted in investors receiving lower yields than they would have under normal circumstances. However, this fine did not go into effect at that time because the financial services firm appealed the ruling, according to regulatory documents. David Lerner Associates has now agreed to withdraw its appeal, thus making the $2.3 million penalty final. The firm’s chief trader William Mason was individually fined $200,000 and he was suspended from the securities industry for six months.
While the settlement takes care of all pending regulatory actions against Lerner and his brokerage, numerous investors are still attempting to regain money through securities arbitration claims and class action lawsuits. The settlement is “great news” for those investors, noted Andrew Stoltmann, an attorney who represents investors in fifteen arbitration cases against David Lerner Associates. “It’s going to be exhibit one in every case going forward,” Stoltmann said.
David Lerner Associates is a privately-held investment company, with clients’ assets under management of over $9 billion. “We are extremely proud of what we do,” Lerner has stated in the past. The firm’s catchy “Take a Tip from Poppy” radio advertisements are well known in the metropolitan New York area.
David Lerner Associates regularly holds free investment seminars that have taught investors about investment opportunities available to them. These seminars attract thousands of people every year and are held throughout the tri-state New York area and in Florida.
The company’s CEO grew up in the Bronx and spent 12 years teaching history and economics at Bayside High School in Queens. He sold life insurance and mutual funds on the side to supplement his daily earnings. While engaged in this work, Lerner came to realize that many people did not fully understand the investment opportunities available to them. He therefore decided to take the investment knowledge he had gained, combine it with his teaching experience and create a firm dedicated to educating clients about different investments. In 1976, he founded David Lerner Associates in the basement of his Long Island home.