FINRA has charged David Lerner & Associates, Inc. of Syosset, NY, with misleading investors that it solicited to purchase shares in Apple REIT Ten, a non-traded $2 billion real estate investment trust.  FINRA alleges that the firm did so without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its Website regarding the REIT's distributions.  David Lerner has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.

Scope of the Offering.  Apple REIT Ten invests in the same extended stay hotel properties as a series of other Apple REITs closed to investors.  Apple REIT Ten and the closed Apple REITs were founded by the same individual, and are all under common management.  Since January 2011, David Lerner & Associates has been the sole underwriter for this REIT, and sold over $300 million of an open $2 billion offering of the REIT's shares.  In fact, David Lerner has served as the sole underwriter for Apple REITs since 1992, and has placed (i.e., sold) nearly $6.8 billion of the securities into more than 122,000 of its customer accounts. 

The venture is very profitable for David Lerner, which earns 10% of all offerings of Apple REIT securities, as well as other fees.  Apple REIT sales have generated $600 million for the broker-dealer, accounting for 60-70% of David Lerner & Associates' business annually since 1996.

FINRA Allegations in its Complaint.   It's alleged that since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7-8% by leveraging the REITs through borrowings and returning capital to investors.  Yet, as sole distributor, David Lerner didn't question the Apple REITs' unchanging valuations despite the economic downturn for commercial real estate.  FINRA alleges that:

• David Lerner failed to sufficiently investigate the valuation and distribution irregularities of the closed Apple REITs prior to selling Apple REIT Ten. 

• As sole underwriter of all of the Apple REITs, David Lerner was aware of the Apple REITs' valuation and distribution practices.  Yet, rather than conduct due diligence into those valuations and distribution irregularities to determine that they were reasonable and that the Apple REITs were suitable, David Lerner accepted the valuations and continued to record them on customer account statements.

• In its solicitation of customers to purchase Apple REIT Ten, David Lerner's website provided distribution rates for all of the previous Apple REITs.  These distribution figures were misleading and omitted material information because they did not disclose recent distribution rate reductions or that distributions far exceeded income from operations and were funded by debt that further leveraged the REITs.

What the Disciplinary Complaint Represents.  The issuance of a complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint.  David Lerner & Associates, and any individuals who may be named, can file a response and request a hearing before a FINRA disciplinary panel.  Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution.  

For further details, go to:   [FINRA News Release, 5/31/11]   and   [FINRA Disciplinary Proceeding 2009020741901, 5/27/11]