Non-traded real estate investment trusts (REITs) are bringing more bad news for David Lerner Associates. Last week, the Financial Industry Regulatory Authority (FINRA) ordered the firm to pay $12 million in restitution to clients who bought shares of Apple REIT 10. In addition, FINRA fined Lerner more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.
David Lerner, the firm’s chief executive, was fined $250,000 and suspended from the securities industry for one year. Following the ban, he faces a two-year suspension from acting as a firm’s principal. Lerner’s head trader, William Mason, was fined $200,000 by FINRA and suspended from the securities industry 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 a statement about Lerner.
More than regulatory problems, however, David Lerner Associates faces a slew of investor arbitration complaints from clients who bought certain REITs from the company.
Lerner was the sole distributor of Apple REITs. According to FINRA, Lerner solicited thousands of customers and, specifically, targeted unsophisticated investors and the elderly without performing adequate due diligence to determine whether the REITs were suitable investments.
To sell the Apple REIT 10, FINRA says that Lerner used misleading marketing tactics that promised 7% to 8% annual returns. What the firm reportedly did not disclose was that income from the REIT was insufficient to keep paying out distributions without taking on significant amounts of debt.
Between January and December 2011, Lerner allegedly recommended and sold more than $442 million of Apple REIT 10 to investors.