Industries Commercial Real Estate

Lawsuit targets Apple REIT funds, its founder and the brokerage house selling the funds

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Print this page By Paula C. Squires and Tim Loughran

A lawsuit filed in the federal district court of New Jersey targets several more Richmond-based Apple REIT funds as plaintiffs broaden the net in a class-action suit against Richmond-based Apple REIT Cos., a real estate investment trust that invests primarily in extended-stay hotel properties.

In the amended suit, filed June 21, plaintiffs and Apple REIT investors Stanley and Debra Kronberg of Mahwah, N.J., added owners of Apple REIT Six, Seven, and Eight to the original complaint filed a day earlier against Apple REITS Nine and Ten, the company’s founder Glade M. Knight, several of Apple REIT’s directors and David Lerner Associates Inc. (DLA), the New York brokerage firm that sells Apple REITs exclusively to investors around the nation. 

So far, just five of Apple REIT’s estimated 122,600 account holders have agreed to lend their names to the lawsuit, which is seeking class-action status, said Jacob Zamansky, a New York securities law and financial services attorney whose firm is one of five which filed on behalf of the Kronbergs and other plaintiffs. “Our complaint alleges that David Lerner & Associates, Glade Knight and the Apple REIT Companies have misled investors,” Zamansky said in a telephone interview with Virginia Business. “They are all equally responsible.”

Executives at Apple REIT and David Lerner & Associates have not yet responded to repeated requests from Virginia Business for comment.

The federal suit builds upon allegations contained in a complaint filed May 31 by the Financial Industry Regulatory Authority (FINRA) against David Lerner.

The amended suit did not rename members of Apple REIT Cos.’ board of directors, but was expanded to include several executives, besides Lerner, at the brokerage. It also challenges the business model of Apple REIT securities.

Like the FINRA complaint, the suit says that the defendants sold shares to “elderly, retired and/or unsophisticated investors, by misstating the fundamental business model of the Apple REITs, omitting material information about how the Apple REITs were intended to operate, and misrepresenting both the value of the Apple REIT shares and the returns investors would receive on their investments.”

The suit also says that DLA brokers made personal home visits to customers where they aggressively sold the Apple REITs. Another allegation is that each of the Apple REITs borrowed money “and used borrowed money, along with capital raised from investors, to pay investors back their own money in the form of distributions.”

Meanwhile, the suits say that the defendants falsely represented to DLA customers that the 8 percent returns customers could expect to receive from their investment in shares of Apple REIT funds would be generated exclusively from the profitable business operations of the hotel properties themselves. 

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