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Category Archives: Apple REITs

FINRA: A Year in Review, Part 1

The Financial Industry Regulatory Authority (FINRA) has released its end-of-the-year report card on various regulatory achievements it made in 2012, along with progress highlights in detecting fraudulent activity, increasing transparency of securities markets and protecting investors.

Among FINRA’s key accomplishments in 2012:

  • Fines totaling $68 million were assessed.
  • A record $34 million in restitution to harmed customers was ordered.
  • 1,541 disciplinary actions (an increase of 53 from 2011) were brought against FINRA-registered individuals and firms.
  • 30 firms were expelled from the securities industry; 294 individuals were barred; and 549 brokers were suspended from association with FINRA-regulated firms.
  • 692 matters involving potential fraudulent conduct were referred by FINRA’s Office of Fraud Detection and Market Intelligence (OFDMI) to the Securities and Exchange Commission (SEC) and other federal or state law enforcement agencies, including 347      insider trading referrals and 260 fraud referrals.

Disciplinary actions levied by FINRA in 2012 entailed several high-profile cases involving complex financial products, including exchange-traded funds (ETFs), structured products and non-traded REITs, as well as research analyst conflicts, inadequate disclosure and mispricing.

Among the 2012 cases: David Lerner Associates. FINRA sanctioned David Lerner Associates, the firm’s founder, President and CEO, and the firm’s head trader in an action related to the non-traded Apple REITs involving suitability and supervision violations. The settlement also consolidated numerous matters, including a municipal and CMO markup case, a pending enforcement investigation of more recent municipal and CMO markups, and 10 pending market regulation matters involving municipal markups identified through surveillance reviews.

FINRA also sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse ETFs without reasonable supervision and for not having a reasonable basis for recommending the securities. Fines totaling more than $7.3 million were levied against the firms, which were required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases. Similar cases were brought by FINRA against Merrill Lynch and Scott & Stringfellow.

Finally, Merrill Lynch was fined $450,000 for supervisory failures relating to sales of structured products to retail clients. The firm relied upon automated exception-based reporting systems to flag transactions and/or accounts that met certain pre-defined criteria, but did not specifically monitor for potentially unsuitable concentration levels.

Check back for Part 2 of FINRA’s 2012 Year in Review and the various investor protection and transparency initiatives launched in 2012.

2012: A Year in Review, Part 1

Non-traded REITs. Elder fraud. LPL Financial. Medical Capital Holdings. Tim Durham. Provident Royalties. Tenant-in-Common investments. Those were just a few of the investment topics to dominate the financial headlines in 2012.

In January, elderly investors found themselves caught up in scams involving Provident Royalties and Medical Capital Holdings. Both firms had previously been the subject of fraud charges by Securities and Exchange Commission (SEC) for scamming investors, many of whom were senior citizens, out of millions of dollars through bogus private placement deals.

A number of broker/dealers that sold investments in either Provident or Medical Capital found themselves facing regulatory investigations, as well as arbitration claims by investors. In late January, the Financial Industry Regulatory Authority (FINRA) ordered CapWest Securities to pay $9.1 million in damages and legal fees stemming from sales of private investments in both Medical Capital and Provident Royalties. The $9.1 million award is thought to be one of the single largest arbitration awards based on sales of failed private placements.

In February, tenant-in-common (TIC) investments and DBSI were big news. A one-time leader in the TIC industry, DBSI was now the focus of a criminal probe. DBSI founder and CEO Doug Swenson also faced charges of tax evasion, money laundering, racketeering and securities fraud.

DBSI, which filed for bankruptcy protection in 2008, left many of its 10,000-plus investors minus their life savings, while others took devestating financial losses. James Zazzaili, the court-appointed examiner in DBSI’s bankruptcy, stated that DBSI executives ran “an elaborate shell game, one that included improper and fraudulent use of investor money to prop up the company, to spend on pet projects, and to enrich themselves.”

In March, investors in several non-traded real estate investment trusts (REITs) received an unwelcome wake-up call when their investments unexpectedly declined sharply in value. Pacific Cornerstone Core Properties REIT fell by than 70%; investors in the non-traded REIT learned of the news via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, were now worth $2.25.

Other REITs that followed down similar paths Cornerstone in 2012 included the Behringer Harvard Short-Term Opportunity Fund I LP and the Behringer Harvard Opportunity REIT I.

In April, shoddy private placements deals and the lawsuits that later ensued were behind the shuttering of yet another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with FINRA. Several days later, the company sought bankruptcy protection.

April also witnessed the less-than-desirable IPO of Inland Western REIT. The REIT, now called Retail Properties of America, went public at $8 a share on April 5. The $8 per share price fell well below the expected price of $10 to $12. But that $8 valuation was the result of a 10-to-1 reverse stock split and distribution plan that may have cost pre-IPO investors as much as 70% of their initial investment.

In May, non-traded REITs again reared their ugly head when a FINRA arbitration panel ruled in favor of an investor’s claim against David Lerner Associates and the company’s Apple REIT Nine. FINRA further stepped up its scrutiny of the non-traded REIT sector in May by launching inquiries into several broker/dealers and their sales of the products.

In June, the SEC put life insurers on notice by instructing them to improve their product disclosures, protect legacy variable annuity clients and ensure that swapped benefits were indeed suitable for certain clients.

Investment scams involving financial aid, health insurance and Ponzi schemes also saw significant increases across the country in June.

Check back for Part 2 of our 2012 Year in Review wrap-up!

Investor Claims Grow Over Non-Traded REIT

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.

FINRA Targets David Lerner Over Non-Traded REITs

Sometimes it takes awhile to learn a lesson. Just ask David Lerner. With his firm, David Lerner Associates, already facing a disciplinary complaint by the Financial Industry Regulatory Authority (FINRA) for misleading investors and selling shares in illiquid real estate investment trusts (REITs) to unsophisticated and elderly customers, owner David Lerner apparently continued to improperly pitch the products.

FINRA is now taking aim at Lerner personally. In an amended filing, the regulator added new allegations to the complaint it previously filed in May 2011 against Lerner’s firm. As reported on Jan. 30 by Reuters, FINRA’s latest complaint focuses on statements Lerner allegedly made to investors following the regulator’s actions against his company this past summer.

In the amended complaint, FINRA states that Lerner sent letters to more than 50,000 customers in July 2011 to “counter negative press” regarding FINRA’s action. That action concerned sales of Lerner’s Apple REITs and, specifically, the fact that Lerner’s firm reportedly mislead investors with information that failed to show distributions of the REITs exceeded income and were financed by debt.

In the letter that Lerner later issued to customers, FINRA says he also discussed a possible opportunity for Apple REIT shareholders to participate in a sale or listing on a national exchange as a way to dispose of their shares at a reasonable price.

FINRA says Lerner further made misleading, exaggerated statements to investors during a seminar that his brokerage firm hosted, including statements suggesting that closed REITs were a potential “gold mine.”

The case against Lerner and his Apple REITs has put non-traded REITs in general on shaky ground with broker/dealers throughout the country.  In October 2011, FINRA issued an investor alert about non-traded REIT investments, calling attention to the inconsistent dividends, illiquidity and inaccurate valuations associated with the products.

Did You Experience Losses in Apple REITs?

Non-traded real estate investment trusts (REITs) known as Apple REITs are facing a mountain of legal complaints by investors and regulators alike. In June, the Financial Industry Regulatory Authority (FINRA) filed a disciplinary action against broker/dealer David Lerner Associates in connection to the investments.

For months, clients of Lerner have been receiving account statements showing the value of several Apple REITs as $11 each. Unfortunately, those account statements failed to reveal the true problems behind the investments.

As reported June 2 by the New York Times, Apple REIT No. 8 had to make mortgage payments on four hotels it owns, and may have to surrender the properties to the lenders. Yet, it had not written down the values of those hotels on its financial statements.

In its disciplinary action against Lerner, FINRA accuses the company of misleading investors in selling the current Apple REIT, No. 10. It said Lerner was “targeting unsophisticated and elderly customers with unsuitable sales of this illiquid security” and misled them regarding the record of earlier Apple REITs. FINRA further stated that shares were sold to customers for whom such risky investments were unsuitable; it also claims there was deception in the way the shares were marketed.

In 2009, FINRA issued a notice to broker/dealers on non-traded REITs and the fact that they were being listed at original value long after the values should have been changed. As a result, amendments were made requiring the investments to be valued based on information no more than 18 months old.

One day following FINRA’s most recent action against Lerner, an investment management company announced a tender offer to buy up to 5% of the outstanding Apple No. 8 shares. The offer wasn’t for $11, however. It was for $3.

Non-traded REITs are registered with the Securities and Exchange Commission (SEC), but they are not publicly traded. The Apple REITs will repurchase a small number of shares each year, but most investors must wait five years or more to get their money back. That happens when the REIT either liquidates or begins to trade publicly.

In 2010, sales of non-traded REIT shares by sponsors raised $8.3 billion from investors, according to figures compiled by Blue Vault Partners, a research firm.

Shares of non-traded REITs are sold by broker/dealers like Lerner, which gets big commissions from the sales. In the case of the Apple REITs, 10% of the purchase price went to Lerner, according to the New York Times story. Meanwhile, Glade M. Knight, chief executive of the Apple REITs, collected a 2% commission for every hotel purchased by the REIT. That’s on top of the advisory fees he was paid. He can collect another 2% when the hotels are sold.

David Lerner Associates gets the majority of its income from selling the Apple REITs.

If you are an investor in the Apple REITs through David Lerner Associates, please contact us to tell your story.

Apple REITs Face Growing Scrutiny, Lawsuits

An Apple REIT a day is keeping investors at bay. With apologies to the childhood saying, investors who own shares in Apple Real Estate Investment Trusts are finding out their investments may be worth far less than they ever imagined.

A disciplinary complaint was filed last month by the Financial Industry Regulatory Authority (FINRA) against David Lerner Associates, the sole brokerage that sells Apple REIT shares. In its complaint, FINRA says that Lerner failed to comply with the industry’s stringent due-diligence standards when it sold shares in the $2 billion Apple REIT 10, which launched in January.

FINRA goes on to say that Lerner targeted unsophisticated and elderly customers to buy Apple 10 shares. Moreover, FINRA says Lerner cited the distributions of previous Apple REIT companies on its Web site but failed to reveal that many of the distribution rates had dropped and distributions had exceeded funds from operations at Apple REITs 6 through 9.

As reported July 20 by the Virginia Business Journal, those distributions totaled $118.1 million in 2010 at Apple REIT Nine, while its funds from operations totaled only $60.2 million.

FINRA also stated in its complaint against Lerner that shares in Apple REITs 6 through 9 had been valued at $11 a share since their initial offerings. However, after a California firm made a tender offer of $3 a share for shares of Apple REITs 7 and 8 in June, the Apple REITs revised the $11 figure – stating in a filing that the shares had a book value of $7.57 each.

Glade M. Knight is the founder, chairman, and CEO of Apple REIT Cos. His company has issued nearly $6.8 billion in securities to about 122,600 customers, according FINRA. Both Knight and Apple REIT Cos. have been named in at least two class action lawsuits filed in June 2011 against David Lerner Associates.

If you are an investor in the Apple REITs through David Lerner Associates, please contact us to tell your story.

David Lerner Clients Get Somber News Over ‘Not Priced’ Apple REITs

Clients of David Lerner Associates who own shares in non-traded REITs created by Apple REIT Cos. are not happy campers these days. When their account statements arrived in the mail last month, the value of their Apple REIT shares was designated as “not priced.”

The wording comes as a shock because for years shares of the non-traded REIT were listed at $11. As reported July 17 by Investment News, David Lerner continued to list the same price even after the Financial Industry Regulatory Authority (FINRA) instructed broker/dealers in 2009 to adjust prices on the investments more frequently.

Moreover, FINRA prohibited broker/dealers from using information more than 18 months old to estimate the value of a non-traded REIT.

FINRA filed a complaint against David Lerner in May, alleging that the firm has misled investors, as well as marketed unsuitable investment products to them.

In total, David Lerner has recommended and sold nearly $6.8 billion in Apple REIT shares since 1992, according to FINRA’s records.

A broker/dealer that switches a security’s value to “not priced” isn’t unheard of, but it is far from the norm, attorneys say.

“The price of $11 per share is most likely a misrepresentation of its true value, which is almost impossible to ascertain and price,” said Phil Aidikoff, a plaintiff’s attorney who has been following the David Lerner case but has no investors with the firm as clients in the Investment News article.

“Issues of pricing have been going on for a long time in the securities business,” Aidikoff said.

FINRAs complaint against David Lerner has sparked new concerns among broker/dealers about the sales of illiquid investments such as non-traded REITs and private placements.

What’s the Real Value of Apple REITs?

Scrutiny is growing for Apple REITs – securities sold exclusively through David Lerner Associates. The products and Lerner have been in the hot seat for more than a month, after the Financial Industry Regulatory Authority (FINRA) filed a complaint stating that shares in Apple REITS had not been re-priced in years.

Meanwhile, Apple REIT investors have been under the impression that their shares were valued at the $11/share purchase price listed on their account statements. As it turns out, Lerner is now telling a different story. In a recent notice to Apple 7 and Apple 8 REIT investors, the value of the shares was $7.83 and $7.57 per share, respectively.

As reported June 15 by Investment News, FINRA stated in its complaint in May that it was misleading to investors not to reflect the updated value of the REITs on the David Lerner Associates Web site, especially in cases where the REITs pay dividends with principal and borrowed funds instead of operating income.

Accurate pricing of shares of illiquid, long-term non-traded REITs has been a bone of contention for nearly two years. Previously, the common practice in the brokerage industry was to list the share price on client account statements at par value, or the amount at which the broker/dealer sold it, with the product typically priced at $10 or $11 a share.

If you are concerned about your investment in Apple REITs, please contact us to tell your story.


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