Industries Banking/Finance

Broker’s sales of Apple REIT shares prompts disciplinary complaint

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An independent financial industry regulatory group has accused a New York investment broker of “targeting unsophisticated and elderly customers with unsuitable sales” of shares in a Richmond-based real estate investment trust.

The complaint filed by the Financial Industry Regulatory Authority (known as FINRA) says Syosset, N.Y.-based David Lerner & Associates solicited investors to buy shares in the $2 billion Apple REIT Ten without investigating to see if the unlisted REIT was a suitable investment for them. FINRA also accuses the broker of providing misleading information on its website regarding Apple REIT Ten distributions.

Apple REIT Ten is managed by Richmond-based Apple REIT Cos. Its REITs primarily invest in extended-stay hotel properties.

The New York Times first reported the disciplinary action against David Lerner & Associates on Thursday in a story raising questions about the value of unlisted REIT shares, which are registered with the Securities and Exchange Commission but are not publicly traded.

According to FINRA, David Lerner & Associates has been the sole underwriter for Apple REITs since 1992, selling nearly $6.8 billion in securities to about 122,600 customers. The broker earns a commission of 10 percent of all offerings of Apple REIT securities plus other fees. In the past 15 years, Apple REIT sales have generated $600 million for the broker, accounting for 60 to 70 percent of its business, FINRA said.

The complaint against David Lerner & Associates alleges that “since at least 2004, [previous Apple REITs] have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7 to 8 percent by leveraging the REITs through borrowings and returning capital to investors,” FINRA said in statement. “As sole distributor, DLA did not question the Apple REITs’ unchanging valuations despite the economic downturn for commercial real estate.”

In soliciting customers for Apple REIT Ten, David Lerner’s website provided distribution rates for previous Apple REITs, the regulatory group said. “These distribution figures were misleading and omitted material information because they did not disclose recent distribution rate reductions or that distributions far exceeded income from operations and were funded by debt that further leveraged the REITs,” the FINRA said.

The Times reported that an investment firm, MacKenzie Patterson Fuller LP, has begun a tender offer for up to 5 percent of the shares of another REIT, Apple REIT Eight, at only $3 a share. Apple REIT Cos., however, has bought back and sold some shares of the REIT at $11 a share. David Lerner & Associates told the newspaper that FINRA is using it as a scapegoat because of its failure to uncover the fraudulent investment schemes of Bernie Madoff.

The disciplinary complaint represents the beginning of a formal proceeding by FINRA and doesn’t indicate a decision on the allegations. A firm named in a complaint can file a response and request a hearing before a disciplinary panel. Possible remedies include a fine, censure, suspension or expulsion from the securities industry, disgorgement of gains associated with the violations and payment of restitution.


Financial Industry Regulatory Authority statement


http://www.finra.org/Newsroom/NewsReleases/2011/P123738

New York Times article

http://www.nytimes.com/2011/06/03/business/03norris.html


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