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Finra Slams David Lerner Associates Over Sale of Apple REITs

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On Tuesday, the financial industry’s regulating body issued a complaint against the brokerage firm David Lerner Associates Inc., accusing the firm of misleading and marketing unsuitable products to investors.

The Financial Industry Regulatory Authority, known as Finra, claims Lerner misleadingly marketed a $2 billion real estate fund targeting unsophisticated and elderly customers. The fund known as Apple REIT Ten includes non-publically traded real estate investment trusts, or REITs, in extended-stay hotels, reported the New York Times.

Non-traded REITs pool in cash from investors to buy property and pay out rental income in the form of a regular dividend, explains the Wall Street Journal. Although non-traded REITs charge investors higher fees and do not sell easily as publically traded REITS, they remain popular among those seeking steady returns.

According to research firm Blue Vault Partners, non-traded REITs took in $8.3 billion in investments in 2010 which was a 28 percent increase from the previous year.

Since 1992, Lerner has sold nearly $6.8 billion in Apple REIT securities to roughly 122,600 customers, said Finra.

This year alone, investors bought more than $300 million shares of Apple REIT Ten. The firm makes 10 percent in fees on every non-traded REIT share it sells, reported the Wall Street Journal, generating more than $600 million which accounts for 60 to 70 percent of the firm’s business since 1996.

The focus of Finra’s complaint is how four Apple REITs generated returns while maintaining their shares at a constant price of $11, reported the Wall Street Journal.

The constant $11 price was a clear “red flag,” says Finra, and evidence the valuation was inaccurate considering the REITs did not “reprice during the financial crisis when the extended stay hotel market ‘suffered a significant, material downturn.’”

Lerner “failed to sufficiently investigate the valuation and distribution irregularities” of the products, said Finra.

According to the Wall Street Journal, the complaint also said Lerner “should have conducted more due diligence” on Glade Knight, “the company that manages its real-estate funds.” The real-estate investor Glade Knight was paying out greater returns than the amount of cash actually generated by funds, said Firna.

Despite the allegations, Lerner claims “the firm conducted thorough due diligence of Apple REIT Ten’s offering documents and audited financial statements.”

The firm made a statement, saying the Firna complaint is “baseless” and “rife with falsehoods,” reported the Wall Street Journal.

The complaint is the first step in a formal proceeding as it was not filed in court, explained the Times, and Lerner can request a hearing before a disciplinary panel.

In 2010, Lerner faced another accusation by Finra of overcharging customers on sales of municipal bonds and mortgage securities. Based on Finra’s records, the case is still pending, reported the Times.

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