[ by Howard Haykin ]

David Lerner - founder and President of David Lerner Associates - likes to promote his firm in radio advertisements with the catchphrase: "Take a tip from Poppy."   Well, Poppy recommended and sold over $442 million of a non-traded Real estate Investment Trust, or REIT, without having performed adequate due diligence.  In particular, Mr. Lerner and DLA targeted thousands unsophisticated investors and elderly customers.

The firm continued to sell the REITS throughout 2011, valuing the securities at a constant artificial price of $11 a share, notwithstanding years of market fluctuations, performance declines, increased leverage and excessive return of capital to investors.  On 12/13/11, FINRA filed an amended complaint against Mr. Lerner and DLA, charging the firm and its top executive with failing to perform adequate due diligence on shares of the illiquid $2 billion Apple REIT Ten to determine whether it was suitable for investors.

Background on Respondents. David Lerner Associates (DLA) has been a FINRA member since 1976 and is a privately-held broker-dealer that operates a total of 6 branches in the New York tri-state area and Florida.  DLA employs about 190 RRs.  In early April 2012, a FINRA hearing panel found  in another disciplinary proceeding that DLA had willfully charged excessive muni bond markups on certain transactions and that DLA had charged excessive markups in the sale of collateralized mortgage obligations, or CMOs. 

David Lerner, age 76, founded DLA and is, and at all relevant times has been, the firm's President, CEO and majority shareholder.  He's registered as a General Securities Representative, General Securities Principal, and FinOp.  

FINRA Findings and Allegations. Between January 2011 and at least December 2011, DLA sold Apple REIT Ten based mostly upon the strength of the Apple REIT programs' shared management team and the prior performance, steady distribution rates, unchanging valuations and prospects of the closed Apple REITs.  The website misleadingly and inaccurately characterized the source of distributions as "net income and return of capital, primarily in the form of depreciation" when the return of capital was not primarily from depreciation.   To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners.

Lerner went so far as to call the REIT a "fabulous cash cow."

In June and July 2011, to counter negative press regarding DLA and the Apple REITs in the wake of the original FINRA complaint, Lerner signed and sent letters to over 50,000 DLA customer households - those letters contained exaggerated, false or misleading statements that omitted material information regarding the valuations, performance, prospects, risks, liquidity and practices of the Apple REIT programs.

FINRA Sanctions. DLA agreed to approximately $12 million in restitution to affected customers, and to customers who were charged excessive markups.  DLA agreed to fines in excess of $2.3 million for having charged unfair prices on municipal bonds and CMOs that it had sold over a 30-month period, and for related supervisory violations. 
 
David Lerner agreed to a $250K fine and a 1-year suspension from the industry, followed by a 2-year suspension from acting as a principal.
 
DLA's Head Trader, William Mason, also agreed to a $200K fine and a 6-month suspension from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.
 
Finally, FINRA also ordered DLA to retain independent consultants to review and propose changes to its supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and municipal bonds.  DLA further agreed to revise its advertising procedures, including videotaping sales seminars attended by 50 or more people for 3 years, and is required for 1 year to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use.

For further details, go to:  [FINRA News Release, 10/22/12] and [FINRA AWC 2009020741901].