[BREAKING NEWS- Can David Lerner Associates keep their doors open much longer? Be sure to visit our latest post.] The Apple Real Estate Investment Trust is a group of three nontraded REITs and is one of the largest REIT families in the nation. Together they hold billions of dollars of income producing properties such as hotels. Because they are non-traded, it is difficult to establish a value for their shares. Although publicly registered, they are not publicly traded meaning there is no ready market for shares. Once you invest, you are in for the long haul unless the trust has a liquidity event or you can find someone to purchase your shares.
We have written many articles about the brokers who sell nontraded REITs. Although they may be perfectly suitable for certain investors, some unscrupulous brokers market them to elderly investors and other who need ready access to their cash. With some REITs, it could take a decade to get back your money.
Last week’s enforcement action by the Securities and Exchange Commission against Apple REIT 6, 7, 8 and 9 and their advisors and certain key managers points out the hidden dangers in the REITs themselves. Because nontraded REITs are difficult to value, they can be quite risky and easy for the operators to hide excessive fees.
On Thursday, the SEC fined four of the Apple REITs and certain advisors and managers $1,500,000for failing to provide accurate share values, for failing to disclose certain insider transactions and not divulging management compensation. The REITs settled the charges on the day they were announced.
Apple REITs are sold through an exclusive selling agent, David Lerner & Associates. Although named in prior complaints, the SEC’s settlement last week does not claim that David Lerner was responsible for the current allegations.
The SEC charged that three of the REITs made “material misrepresentations and omissions concerning the valuation of their units” in registration statements given to the government and provided to investors. David Lerner & Associates initially marketed the shares at an arbitrarily established offering price of $11.00 per unit. After the close of the initial offerings, each of the Apple REITs instituted a dividend reinvestment plan where unitholders could reinvest their distributions in lieu of receiving cash. The Internal Revenue Service requires that REITs sell their dividend reinvestment units at a “reasonably accurate fair market value.”
That’s where things went awry according the government. The company elected to keep the $11.00 share price although the SEC says that wasn’t an accurate estimate of value. Over a three year period, the government says that the three REITs sold over 25 million additional shares through the dividend program, all at $11.00 a share and all overvalued.
We don’t believe Apple REITs are the only nontraded REITs with valuation issues. Unfortunately, it is a problem common with many illiquid investments.
The SEC was also unhappy with transfers of cash between the different REITs. Each entity had its own board of directors and was legally separate and distinct from the others yet the managers frequently moved money back and forth between them, sometimes as much as $20 million at a time.
Finally, the SEC claimed that the advisors were paying themselves more than what was disclosed to unitholders.
By settling the case, the Apple defendants admitted no wrongdoing. Notwithstanding the serious allegations against them, the Apple REIT website claims: “We exemplify the highest standards of personal and professional ethics in all aspects of our business. We believe in being open, honest and trustworthy, and in taking responsibility for our actions… We comply fully with the letter and spirit of the laws, rules and practices that govern Apple REIT Companies.”
David Lerner Associates – Largest Apple REIT Sellers
Update: In May, 2017, David Lerner paid a $650,000 fine to the New Jersey Bureau of Securities. The state claimed David Lerner’s company sold nontraded REITs to unsuitable investors. The firm settled without any admission of wrongdoing.
In October 2012 the FINRA ordered David Lerner Associates to pay $12 million in restitution and fined the company an additional $2.3 million for REIT marketing violations. The company’s founder, David Lerner, was fined $250,000 and suspended from the industry for 1 year.
According to a FINRA release,
As the sole distributor of the Apple REITs, DLA [David Lerner Associates] solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors. 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.
David Lerner Associates is still in business today. The company claims it no longer sells nontraded REITs. While that is a positive sign, one former investment counselor at DLA said late in 2018,
“I’m a former “Investment Counselor” at David Lerner Associates. I can’t belive the company is able to get away with, and still remain in business. They only train new staff to sell one product, and that is the horrible SOAEX Energy fund. This fund has cost DLA’s clients untold amounts of money, but David and management call it a “cash cow”. They only allow new hires to sell Spirit of America products, and if you don’t, manangment will bully you until you do, or they fire you. David and his team are a bunch of crooks and scam artists! Save your money and invest anywhere but here!!!”
That comment was made by @ZombieWood17. We have no way of verifying if that person actually worked at DLA.
Are You the Victim of a Bad REIT Investment? We Can Help
Investors in non-traded REITs have to worry both about unscrupulous and money hungry stockbrokers as well as the REIT companies themselves. The latter are often opaque in their transactions, valuations and dealings with shareholders. If you suffered a REIT loss caused by either the REIT itself or the stockbroker recommending the REIT, you are not alone.
Thousands of people suffer from REIT fraud each year. If you purchased from a stockbroker, it may be possible to get back your money and recover any other losses you may have suffered. Most losses can be pursued through binding arbitration before the Financial Industry Regulatory Authority (FINRA).
The stockbroker fraud lawyers at Mahany Law help victims of REIT fraud get back their hard earned money. If you are seeking information about REIT claims, contact attorney Brian Mahany online, by email or by phone at (202) 800-9791.