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David Lerner & Associates faces investment sales complaint

David Lerner in his Syosset office of David

David Lerner in his Syosset office of David Lerner & Associates. (August 2004) Credit: Newsday / Kathy Kmonicek

A securities industry regulator has accused David Lerner & Associates Inc., a Syosset financial firm, of improperly selling $300 million in questionable investments to "unsophisticated and elderly" customers.

The accusation came in a formal disciplinary complaint filed by the Financial Industry Regulatory Authority, or FINRA.

The complaint is the first step in a FINRA investigation into sales practices at David Lerner & Associates. FINRA, while not a government agency, is the primary licensor of investment and securities professionals.

Since January, David Lerner & Associates has sold about $300 million in shares of the investment security, Apple REIT Ten, which it values overall at $2 billion.

The Apple REIT, or real estate investment trust, is made up of portfolios of extended stay hotels. Shares of Apple REIT Ten are non-traded – you can’t buy or sell them on a stock market.

FINRA said David Lerner “has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.”

The company also misled customers on its website, FINRA said.

In a statement Tuesday the company said it “vehemently denies FINRA's allegations.”

“The firm also categorically denies that it ‘targets unsophisticated and elderly customers’ and denies that it overlooked any alleged ‘valuation and distribution irregularities.’ "

FINRA drew attention to what it said was the “unreasonably valued” share price of $11 for the Apple REITs that remained constant in spite of sharp downturns in the investments’ underlying property values.

David Lerner Associates did not disclose to investors that the REITs were borrowing money to pay promised returns of 7 percent or more.

David Lerner has sold $6.8 billion in Apple REIT securities since the mid-1990s, placing them in 122,600 customer accounts, FINRA said. Of that amount, David Lerner & Associates has made about $600 million in fees – about 60 to 70 percent of David Lerner & Associates’ annual business since 1996.

Under FINRA rules, a company or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel, the agency said.

Possible penalties include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution, the agency said.

Photo, above, shows company founder David Lerner.

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