A federal judge has dismissed a class-action lawsuit against Syosset-based financial adviser David Lerner Associates and several real estate investment trusts.
U.S. District Judge Kiyo Matsumoto this week ruled that investors had received sufficient disclosure to understand the risks of investing in the trusts. Six investors who bought the securities -- and unexpectedly found themselves unable to cash in their shares -- alleged that they had been misled by the adviser about the risks and had suffered financial harm. The Brooklyn judge rejected those arguments.
The ruling was a victory for the financial adviser, who still faces dozens of related arbitration proceedings and was sanctioned last year by a regulator.
A real estate investment trust, or REIT, is a company established to own a real estate portfolio. Shareholders receive regular income from their investments, typically a distribution of profits. Shares of many REITs are publicly traded, but those involved in this case -- five REITS formed by Richmond, Va.-based Apple REIT Companies Inc. -- were not.
"David Lerner Associates Inc. is pleased that the federal court's decision completely dismisses all of the class action's federal securities law claims," spokesman David Chauvin said in a statement. Chauvin said the ruling appeared to confirm that the Apple REITs are currently functioning as anticipated.
Andrew Stoltmann, a Chicago attorney who is representing more than 20 investors in arbitration cases against Lerner and the REITs, said he was surprised by the ruling but that it didn't affect his cases.
"It's not over by a long shot," Stoltmann said. "All the arbitrations aren't impacted in the least."
Stoltmann is arguing that the investments weren't suitable for his clients, who tend to be retired or near retirement age -- a claim that echoes a regulatory sanction against the company.
The class-action case arose after the Financial Industry Regulatory Authority filed a complaint against the adviser and its chief executive, David Lerner, in 2011 in connection with its marketing of the Apple REITs. That complaint prompted many investors to seek to exercise an option to redeem their shares, but the REITs only honored a small percentage of those requests.
Last year FINRA ordered the company to pay $12 million in restitution to investors who purchased shares of Apple REIT Ten. FINRA said that Lerner and his firm "targeted unsophisticated and elderly customers," misled investors and failed to accurately disclose the risks in investing in the securities.
Lerner was suspended from the securities industry for one year and fined $250,000, and the firm agreed to change its marketing practices. Neither Lerner nor the firm admitted to wrongdoing.