My first encounter with David Lerner Associates came in July 2011. That month I spoke with a pleasant woman who had invested heavily with a David Lerner Associates broker in an Apple REIT (real estate investment trust). She was calling for advice on whether she accept their offer to buy back her REIT investment.
“At what price?” I asked. She said, “market value”.
But what is “market value”? To some, it may simply be what David Lerner decides to pay.
That year David Lerner Associates faced regulatory enforcement action from the Financial Industry Regulatory Authority (FINRA). Regulators say that Lerner’s stockbrokers failed to tell clients that their REIT investments were very illiquid, meaning they are hard to sell.
Apple REIT severely limits the amount of its securities that can be redeemed each year. This means an investor needing to redeem in a hurry might just be out-of-luck. (Many REITs limit redemption and even allow them to declare a moratorium on redemptions.) That’s all well and good IF clients were told of the restrictions.
Judging from the calls I have received, the age of many of their investors and the FINRA investigation, Lerner didn’t do a good job of following Know Your Customer and suitability rules. Many Apple REIT investors are older and more dependent on their investments in their retirement years. These are the people usually not well suited for illiquid investments and non-traded securities.
Know Your Customer and Suitability Rules
The Know Your Customer or “KYC” rule is pretty simple. When brokers make investment recommendations to customers, they have to really know that clients needs and financial situation.
- What is their risk tolerance?
- Are they looking for growth, principal preservation or income?
- Do they need immediate access to their money?
- What is their financial sophistication?
- Is the money being investment their life savings or a small amount of discretionary cash?
The Suitability rule works with the Know Your Customer rule. Once you fully understand your customer’s needs, you must only make recommendations suitable for his or her particular needs. For example, a retired senior citizen living on a meager fixed income with no risk tolerance shouldn’t be speculating in risky stock funds.
Back to David Lerner Associates and its high reliance on REIT investments.
Adding to their problem was yet another wrinkle. Lerner decided to not value the security on monthly statements. It’s like getting a bank statement that acknowledges you have money on deposit but doesn’t tell you how much. Are these REIT shares still worth the $11.00 per share issue price? Who knows?
The combination of limited redemptions, no ready secondary market and now, no values meant that investors were completely in the dark.
Is this legal? Making unsuitable investment recommendations to clients and failing to disclose some of the salient risk factors certainly isn’t legal. Listing the security’s value on customer statements as “not priced” may be legal, however.
The 2011 investigation didn’t end well for David Lerner. In 2012 the company agreed to a $14 million to settle charges about how it handles REIT investments. FINRA said the brokerage firm sold over $442 million of a $2 billion REIT “without performing adequate due diligence… even in light of red flags.” Regulators also say the company’s brokers made “misleading statements” about these products.
That same year Lerner paid another large fine for charging excessive markups on municipal bonds.
Overall, the company had 21 regulatory findings since opening its doors in the 1970’s.
Lerner, of course, claims that it has not misled investors and is complying with the law. For historical reference, David Lerner brokers sold almost $7 billion worth of Apple REITs in recent years.
David Lerner isn’t the only brokerage firm with problems caused by illiquid or non-traded REITs.
According to Investment News, several other REITs are trouble meaning the stockbrokers who sold them could also be in trouble if proper due diligence or disclosures was not done. Desert Capital REIT recently filed for bankruptcy, according to the publication.
David Lerner Associates Current Problems
In 2017, David Lerner Associates was sanctioned and fined by the New Jersey Bureau of Securities for how it sold REITs. The firm was fined $700,000, although $200,000 of the fine was “permanently suspended” because of the company’s cooperation with the state’s investigation.
According to state regulators, “[Lerner] did not follow its own compliance requirements for the sale of non-traded REITs. DLA agents sold the three Apple REITs in violation of prospectus suitability standards.” In other words, selling illiquid products to mostly senior investors who need ready access to their money.
The firm said in response to the New Jersey investigation that it made investors whole for any losses.
If the big multi-million fines were in 2012, one would think that the company should be back on its feet by now. It isn’t.
In January of 2019, InvestmentNews says the company reported in an SEC filing that it had negative net worth of $17 million in 2018. That is a fancy way of saying the company owes more money than it has. In other words, it is insolvent.
When a brokerage firm becomes insolvent, it must close its door or raise capital. David Lerner Associates has apparently borrowed $21 million from founder David Lerner. But how long can that last? The company lost millions in 2017 as well.
Despite the negative net worth, the company does meet the minimum capital requirements to keep its doors open. They claim to have $2 million excess net capital available to settle any claims.
In their 2018 SEC filing, however, the company acknowledged it had quite a few pending claims.
The Company has been named as a defendant in several claims and/or lawsuits, including various
arbitrations, arising primarily from its securities business. Management believes they have
adequate reserves related to those legal actions for which an adverse outcome is probable and the
amount of loss can be reasonably estimated.
Several of these actions relate to the sale of Puerto Rico bonds which include claims for
compensatory and/or punitive damages or claims for indeterminate amounts of damages which are
not yet probable and cannot be reasonably estimated at this time.
The Company is also . involved in other reviews and examinations by regulatory and tax agencies,
currently informal, regardingt he Company’s business activities, certain of which might eventually
result in adverse judgments, settlements, fines or other penalties. For those matters for which an
adverse outcome is probable, the Company has recorded reserves that it believes to be adequate.
Nothing in that statement inspires confidence nor does knowing that the company continues to lose money and have a negative net worth.
We think many of the claims center on the funds being hawked by David Lerner Associates’ brokers. David Lerner (the person) coincidentally owns the funds we think the company is peddling. The name of the fund company is Spirit of America. And our research shows they charge huge commissions.
Is that a conflict of interest? We certainly think so.
What does the company say about all this? According to their website, “David Lerner Associates maintains the highest standards when it comes to the people we employ.” They also say, “We believe we have an obligation to guide our investors in directions we feel will help them achieve their financial objectives.”
“Actions speak louder than words” is what my dearly loved grandmother would say were she still alive.
Can I Sue David Lerner Associates for My Losses?
Let’s take off the gloves. If someone sold you an illiquid investment or failed to explain the risks of investing in non traded REITs, you may have a claim. If a David Lerner investment advisor overcharged you for markups or commissions, you may have a claim. Ditto if your broker recommended investments not suitable for you.
Stockbrokers and the broker dealers have a duty to fully explain the risks of investments they recommend to you and must insure that their recommendations are suitable for you. They also have a duty to perform due diligence on the investments they recommend. If they fail in any of these, they could be liable for your losses.
Our major concern is how much longer is David Lerner the man going to be willing to pump millions of dollars into his sinking company? Can he turn the company around? We have our doubts.
We know many customers who hang on year after year hoping their investment will turn around. Sometimes they do so based on phony promises of their broker. No one likes to admit they were scammed. But the longer you wait, the more difficult it can be to collect your money.
Time isn’t on your side and the next big market turn could put David Lerner Associates out of business.
If you feel like you have a claim, call us. Our stockbroker fraud and securities lawyers can help you get your money back, usually with no out-of-pocket fees from you. Contact attorney Brian Mahany at (202) 800-9791 or by email at With lawyers around the nation, we provide services everywhere.
*We have a second David Lerner Associates blog post regarding Apple REITs.