The Financial Industry Regulatory Authority (FINRA) is calling out David Lerner Associates in a big way over alleged unfair sales practices and excessive markups concerning a non-traded real estate investment trust (REIT) known as Apple REIT 10. On Monday, the regulator ordered Lerner to pay $12 million in restitution to clients who bought shares of the non-traded REIT.
David Lerner Associates was the sole distributor of the Apple REITs. According to FINRA, the company solicited thousands of customers and, specifically, targeted unsophisticated investors and the elderly. FINRA says that as Lerner sold the illiquid REIT, it failed to perform adequate due diligence to determine whether the product was suitable for investors.
FINRA noted that in order to sell the Apple REIT 10, David Lerner Associates used misleading marketing materials in which performance information for the closed Apple REITs had been presented without also disclosing that income from those REITs was insufficient to support the distributions to unit owners.
In addition to the $12 million in restitution to clients, FINRA fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) that the company sold over a 30-month period.
The firm’s founder and chief executive, David Lerner, was fined $250,000 and suspended from the securities industry for one year, followed by a two-year suspension from acting as a firm’s principal. William Mason, the firm’s head trader, was ordered to pay $200,000 and suspended for six months.
“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers,” said Brad Bennett, FINRA’s chief of enforcement.
In concluding the settlement, David Lerner Associates and Lerner neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.