Prospective Securities Class Action Lawsuit Accuses David Lerner Associates Inc. Accused of Recycling Investor Capital and Using a Credit Line to Meet Dividend Payout
According to Investment News, the amended complaint of a prospective securities class action case is claiming that the nontraded REITs sold by David Lerner Associates Inc. used investor distributions and borrowed from a credit line to fulfill the targeted dividend payout. The broker-dealer is accused by the Financial Industry Regulatory Authority of giving out performance figures for its APPLE REITs while implying that investments in the future would likely render similar result. FINRA is suing financial firm for securities fraud and marketing unsuitable products to investors. The investors filed their securities fraud complaints soon after. They are now waiting for their class action status to be approved.
Per the amended complaint, David Lerner brokers told clients that Apple REITs were low risk investments that would shield their savings from any stock market turbulence. Also, not only was the amount of distribution that investors were paid not equal the income earned from the Apple REITs, which had mostly invested in Hilton and Marriott hotels that offered extended stays, but also, clients were allegedly promised consistent yearly returns of 7-8%.
Although David Lerner had represented that cash flow would be the basis for distributions, offering documents said that distributions from other sources could only occur on occasion and in “certain circumstances.” The complaint accuses the broker-dealer and other defendants of issuing distributions without taking profitability into account while obtaining properties at prices that could not be justified considering the distributions that were being paid.
David Lerner Associates denies the plaintiffs’ allegations. The broker-dealer and its brokers earned $341.5 million in commissions and Apple REITs sales. They also earned a 2.5% marketing expense.
Investors had filed two class actions against David Lerner this summer. They had purchased $5.7 billion in Apple REIT offerings from the financial firm’s brokers. Plaintiffs are accusing the broker-dealer of targeting inexperienced and elderly investors, leaving out key information about how the trusts were run, misrepresenting the REITs value, and failing to reveal the risks involved.
Nontraded real-estate investment trusts gather cash from investors to purchase property. They pay the rental income as a regular dividend. Last year alone, they took in approximately $8.3 billion in investments.
Earlier this month, FINRA put out a warning to investors that they carefully consider the risks involved in investing in nontraded REITs. The SRO cautioned that some risks are not immediately obvious and may not properly explained by financial firms.
The Apple REITs were sold and written by David Lerner, which has opened and sold over 120,000 accounts involving these.
Read the Complaint (PDF)
Lerner resorted to tricks to plump up Apple distributions: Suit, Investment News, October 14, 2011
Apple REIT investors could trade bad for worse, MarketWatch, July 21, 2011
Finra Sues David Lerner Firm, The Wall Street Journal, June 1, 2011
Shepherd Smith Edwards & Kantas LTD LLP Investigates Claims Concerning David Lerner Associates' Sale of Apple REITs, Globnewswire, August 3, 2011
More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011
Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009
W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation, Stockbroker Fraud Blog, March 25, 2008