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Category Archives: Stockbroker Investigation

Former JPMorgan Chase Broker Oppenheim, Charged in $20 Million Fraud

Our firm will be looking into investor complaints against former JPMorgan Chase broker, Michael J. Oppenheim, as a result of the federal authority’s accusations of embezzlement from his clients over the past four years. Checkout the latest on this breaking story below.



Tim Durham Objects to Proposed 225-Year Sentence

Convicted Ponzi schemer Tim Durham is crying foul over a presentencing report that recommends the disgraced Indianapolis businessman spend 225 years in prison and pay more than $200 million in restitution to victims of Fair Finance Company.

The presentencing report is not available to the public. However, Durham’s attorney, John Tompkins, revealed contents of the report in a 38-page filing on Oct. 31, calling the proposed sentence “absurd.”

Durham’s fate, along with co-defendants Jim Cochran and Rick Snow, will be decided on Nov. 30 by Judge Jane Magnus-Stinson. In June, a federal jury found Durham guilty on all 12 felony charges stemming from the collapse of Akron, Ohio-based Fair Finance.

Prosecutors in the case allege that after Durham and Cochran bought Fair Finance in 2002, they used it as their own personal piggy bank to fund their lavish lifestyles and to cover financial losses at various businesses they owned.

Prosecutors say that the huge withdrawals allegedly made by Durham were recorded as “loans,” and ultimately left Fair Finance unable to repay 5,000 Ohio residents who purchased more than $200 million of the company’s unsecured investment certificates.

FBI agents raided and shut Fair Finance down in November 2009.


FINRA Sanctions Firm $14M Over Non-Traded REIT

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.

BrokerCheck a Good Line of Defense for Investors

Failed deals involving private placements, non-traded REITs and high-risk investments like inverse and leveraged exchange-traded funds (ETFs) shed new light on why investors need to be as informed as possible about their financial investments. And the Financial Industry Regulatory Authority’s BrokerCheck database is a good place to start.

BrokerCheck is designed to help investors quickly and easily search the professional backgrounds of brokers and investment firms. This month – partly in response to address recommendations made in a January 2011 study by the Securities and Exchange Commission (SEC) – FINRA announced the addition of several new features to its BrokerCheck system.

With the latest improvements, investors and others now have:

  • Access to more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm. In addition, new Help icons are designed to clarify commonly referenced terms throughout the system and within BrokerCheck reports.
  • Centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment adviser representatives and investment adviser firms.
  • The ability to search for and locate a financial services professional based on main office and branch locations, as well as the ability to conduct ZIP code radius searches in increments of five, 15 or 25 miles.

In 2011, individuals used BrokerCheck to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck here.


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.

Insider Trading Harms Everyone

Insider trading, in which trades are made based on certain “inside” knowledge or information about a major corporate happening, is a crime – and one that cheats everyone. A Sept. 25 article in Investment News describes what happens when insider trading occurs and why the perpetrators involved should be punished to the fullest extent of the law.

“Every owner of shares manipulated by insider trading is a victim,” the article says. “In addition to direct investors, the victims of insider trading are the thousands, if not millions, of 401(k) plan participants, mutual fund shareholders and bank trust customers who received lower prices for their shares because a few cheaters had inside information.”

Several individuals accused of insider trading are gearing up to face their sentences. One of them is hedge-fund titan Raj Rajaratnam. Rajaratnam, co-founder of Galleon Group LLC, was convicted on May 14 of conducting the world’s biggest insider-trading scheme. His sentencing is set for Oct. 13. The government, hoping to send an loud and clear message that illegal insider trading will not be tolerated, is asking the judge in the case to sentence Rajaratnam to 20 to 24 years in jail.

Last week, the Securities and Exchange Commission (SEC) issued subpoenas to hedge funds and other financial firms as it investigates possible insider trading prior to the downgrading of the U.S. government’s credit rating by Standard & Poor’s.

Insider trading allows people like Rajaratnam to profit from non-public information. In making their profits, insider traders are slowly but surely undermining the faith and trust that investors place in the financial markets. And that harms all of us.

Chasing Returns With Risky Investments That Promise Big Payoffs

Lured by false promises of big yields and high returns, investors often make the mistake of putting their money into one investment basket – one that contains risky and obscure financial products that fail to live up to their hype.

On July 25, the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert on this very subject. In the alert, FINRA offers insight on why more investors are “chasing returns,” meaning they are putting their assets into more and more riskier investments.

Many investors do not realize they could be taking on more risk if they invest in products with higher returns, FINRA says. Those investments include non-traded real estate investment trust (REITs), high-yield bonds, structured products and floating-rate loan funds.

Before investors consider moving their assets to another investment, FINRA suggests that they ask themselves the following questions:

  • Does the higher return from the investment come with increased risk? In most cases, the answer is “yes,” FINRA says.
  • Do you thoroughly understand how the investment operates? A number of investments come with an unwanted surprise, such illiquidity, exit fees, loss of principal or the return of the investment in a form other than cash.
  • Are there costs and fees associated with the new investment? Not only is the promise of higher return associated with greater risk, but some of these investments have higher costs, as well.
  • Is the product callable? A callable investment means that after a period of time, the issuer can redeem the investment prior to the investment reaching maturity.
  • Could the new investment be fraudulent? Legitimate investments that promise returns of 30, 50 or even 100% annually without any risk to your principal exist only in fantasy land. To confirm the status of an individual broker or firm, use FINRA’s BrokerCheck. To check the status of an investment adviser or firm, use the Investment Adviser Public Disclosure database.

The bottom line: It’s important to read and understand the fine print about an investment before deciding to put your money into it. In almost every instance, a product that promises high yields and returns also comes with considerably more risk – and a greater potential for financial loss.

To learn more about various investments that investors are turning to as a way to “chase returns,” go to tiny.cc/z6kty.

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.

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