In December 2011, the Financial Industry Regulatory Authority (FINRA) amended their complaint against the company David Lerner Associates, Inc. and added David Lerner, individually. That amended complaint contains information that should be of interest to anyone who owns any of the Lerner Apple REITs, and especially those owning Apple REIT Ten. The amended complaint can be accessed here.
Since the complaint is 58 pages long I will break this analysis into several separate posts. Here are highlights of the FINRA allegations that you should be aware of. Annotations are to the page number of the amended complaint:
- Lerner continues to solicit thousands of customers to purchase Apple REIT Ten without performing adequate due diligence that there is reasonable basis to recommend the security to any customer......and has sold the illiquid investment to unsophisticated and elderly customers. (Pages 1 & 2)
- Through June 2011, Lerner marketed Apple Ten by using misleading results from Apple REITs Six, Seven, Eight & Nine, by misrepresenting the rate of return and the misleading investors into believing distributions are income by using slide presentations that omit material information and present statements and claims that are misleading and exaggerated. (Pages 2&3)
- Lerner , to counter negative press following the filing of the original FINRA complaint, sent out letters and conducted seminars regarding the performance , prospects, risks, a potential merger and the liquidity of the Apple REIT programs that are exaggerated and misleading. (Pages 3&4)
- The Apple REITs are illiquid and concentrated in one sub sector, extended stay hotels, however, many Lerner investors own two or more of the Apple REITs. Many of the investors are elderly and/or unsophisticated and were solicited by internet, radio, cold calls, mailings and seminars at senior centers, restaurants and country clubs. Nearly all of Lerner's sales are solicited. (Pages 7& 8)
- The $11 share valuation for Apple REIT shares is currently inaccurate and has been inaccurate in the past. The valuation is incorrect due to market conditions , performance declines and debt incurred by the REITs to fund distributions. Lerner did not take any of this economic reality into consideration and continued misleading investors by publishing the $11 a share value. (Pages 8-12)
- Distributions from the Apple REITs have exceeded the REIT's Net Income by hundreds of millions per quarter. These distributions were funded by incurring debt and by returning some of the investors capital. While investors believed they were receiving income they were actually being handed back some of their own money, while the investment fell in value. (Pages 12-15)
- Until June 2011, Lerner's web advertising provided misleading figures for the performance of Apple REIT Six through Nine. (page 17) Did you rely on this misinformation when purchasing Apple REIT Ten?
- Since Mid-2011 sales of Apple REIT Ten have plummeted while investor requests to redeem shares have skyrocketed. In January 2011, Apple 10 sales were about 100,000,000. By October 2011, they had dropped to about $14 million. Redemption requests for Apple Six, Seven, Eight and Nine for the the fourth quarter of 2010 were just over three million shares. By the third quarter of 2011, requests for redemption were nearly 50 million shares. Since there is a limit on the number of shares Lerner is obligated to redeem, only a small percentage of each series were actually redeemed. (Page 20)
In a future post I will cover the highlights of the rest of the FINRA amended complaint against Lerner and his company.
Brokers have a duty to make suitable recommendations to investors and to provide accurate and complete information related to the risks and rewards of a particular investment. Many purchasers of Lerner Apple REITs were led to believe the investment would provide a safe haven for their nest eggs while generating regular and dependable income. If you have questions about the purchase of Lerner Apple REITs, or any other issue with your brokerage account, we may be able to help.
Call 561 391 1900 for a free consultation or contact us online.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.