Finra Charges David Lerner & Associates With Soliciting Elderly, Unsophisticated Investors To Buy Apple Reit Ten
The Financial Industry Regulatory Authority (FINRA) has issues a press release announcing that David Lerner & Associates, Inc. (DLA) out of Syosset, New York has been charged with soliciting investors to buy shares in Apple REIT Ten, a non-traded $2 billion real estate investment trust (REIT). In the release FINRA alleged that the firm had failed to conduct a reasonable investigation to determine whether the investment was suitable for investors and also with providing investors with misleading information regarding returns on its website. Furthermore, the target group was unsophisticated and elderly customers who were buying the unsuitable, illiquid security.
David Lerner has been the sole underwriter for Apple REIT Ten since January 2011 and has sold over $300 million shares of the of the $2 billion offering. The firm has been the sole underwriter for all Apple REITs since 1992. Apple REIT Ten invests in the same extended stay hotel properties as other Apple REITs that are closed to investors and all are under common management. DLA gets 10% of all Apple REIT securities, in addition to other fees, generating some $600 million for DLA representing 60% to 70% of their business annually since 1996.
The FINRA complaint alleged that the closed Apple REITs had been unreasonably valued at $11 since 2004, notwithstanding the fluctuating market, declining performance and increased leverage, while maintaining outsized distributions of 7% to 8% by leveraging the REITs through borrowing and returning capital to investors. FINRA says DLA failed to question or make reasonable inquiry into the unchanging valuations despite the economic downturn for commercial real estate, as well as providing misleading distribution figures on their website that failed to disclose reduced distribution rates or that the distributions were funded by debt that further leveraged the REITs.
DLA now has the opportunity to respond to the complaint which will be heard by a FINRA disciplinary panel resulting in a fine, censure, suspension or bar from the industry or disgorgement of gains and restitution.