Regions Central Virginia

Federal judge dismisses class action lawsuits against Apple REIT Cos.

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Print this page By Paula C. Squires

A federal judge has dismissed securities litigation against Richmond-based Apple REIT Cos., a real estate investment trust that invests primarily in hotels.

U.S. District Judge Kiyo Matsumoto of the Eastern District of New York upheld a motion to dismiss a consolidated class action complaint against Apple REIT Cos. and several of its funds in a court order issued on April 3. She ruled that investors had received sufficient disclosure to understand the risks of investing in the nontraded public companies. Matsumoto said in her order that Apple’s investment objectives “did not constitute actionable misrepresentations or omissions.”

The judgment was in favor of Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine, Apple REIT Ten, the company’s board of directors and certain officers and advisory companies, including David Lerner Associates Inc.

The motion to dismiss was granted with “prejudice,” meaning plaintiffs cannot refile the case. News about the court’s decision was publicized in a press release distributed on Business Wire.

Kelly Clarke, director of investor services for Apple REIT Cos., said in an email Wednesday, “We do not have any comments outside of the press release at this time.“

The lawsuit was filed in 2011 by six investors who claimed they had been misled about the risks of the investment. It built upon allegations in a complaint filed that same year by the Financial Industry Regulatory Authority (FINRA) against David Lerner Associates Inc. (DLA), based in Syosset, N.Y. — the firm that exclusively sold Apple REITs shares to investors around the country.

FINRA’s complaint focused on the marketing of the Apple REITS. In October 2012, FINRA sanctioned Lerner and his company, ordering it to pay $12 million in restitution to affected customers who purchased shares in Apple REIT 10, a non-traded $2 billion real estate investment trust.

As the sole distributor of the Apple REITs, FINRA's statement said DLA "solicited thousands of customers, targeting unsophisticated investors and the elderly and selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors." The authority said that to sell Apple REIT Ten DLA used "misleading marketing materials that presented performance results for the REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners."

In addition, FINRA fined David Lerner, DLA's founder, president and CEO, $250,000 and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. FINRA said in a statement on the case that Lerner “personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers.”

In another matter Wednesday, unrelated to the dismissal of the lawsuit, Apple REIT Ten Inc., issued a press release saying it had been notified of an unsolicited tender offer by a group of entities affiliated with MacKenzie Capital Management LP (MCM) to purchase up to 3.5 million shares of common stock and the associated shares of Series A preferred stock of Apple Ten at a price of $5.25 per unit. The offer represents about 5 percent of Apple Ten’s outstanding units. The board of directors of Apple Ten said it evaluated the terms of MCM’s offer and unanimously recommends that stockholders reject the offer, saying it represented an “opportunistic attempt” by MCM to buy shares at an unreasonably low price.

The per-unit book value of the shares as of Dec. 31 was $8.92 per unit, the release said, or $3.67 more than the tender offer price.

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