The Financial Industry Regulatory Authority said on Monday it had sanctioned David Lerner Associates Inc to pay about $12 million to customers that bought into a $2 billion real estate investment trust (REIT) and to those who were charged excessive markups.
FINRA, the U.S. retail brokerage industry's self-watchdog, also said it had fined the Syosset, New York-based firm more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.
In addition, the firm's founder and chief executive, David Lerner, was fined $250,000 and suspended for one year from the securities industry, followed by a two-year suspension from acting as a principal, FINRA said.
The firm remains in business.
"It's a pretty significant action, especially for those of us who have claims pending against Lerner," said Chicago-based attorney Andrew Stoltmann, whose firm has represented investors filing arbitration claims against the firm. "Actions like this provide a real clear road map to lawyers...who are pursuing these claims."
Stoltmann said that the ruling could also spur other customers who have been reluctant to come forward to pursue their claims.
The settlement marks the end of a long battle between Lerner and FINRA, which filed a series of regulatory complaints against the firm and ultimately Lerner personally, beginning in 2010. FINRA's sanctions against Lerner individually also mark an unusual instance of a regulator taking action against the head of a brokerage, industry lawyers say.
FINRA alleges that David Lerner and his firm targeted unsophisticated and elderly customers and "grossly" failed to comply with basic suitability standards in selling Apple REIT Ten to thousands of customers.
"The case sends a message to supervisors and people who hold positions of authority at firms," said Susan Axelrod, head of FINRA's member regulation unit.
The sanctions against Lerner personally are unusual and "a different message than the firm being on the hook," Axelrod told Reuters Monday while on the sidelines of a compliance conference in Washington. "David Lerner, in a lot of ways, is the firm," Axelrod said.
A lawyer for David Lerner Associates said it is "time to move the company past" the regulatory distractions that the firm has been "forced to deal with" during the past few years. The actions by FINRA "have been very costly to defend and very distracting to the firm's efforts for its clients," said Joseph Pickard, the firm's senior vice president and general counsel, in a statement.
Lerner's firm will continue to do business during his absence under the leadership of John Dempsey, a 33-year veteran of the firm, he said.
Lerner, who is stepping aside temporarily, will turn to other non-broker-dealer business enterprises that have been developed over the years, Pickard said, including the Spirit of America Mutual funds.
A process will be established for returning funds to individual investors, but on Monday the timing of when that will happen was unclear. Lerner must retain a consultant to determine how the funds will be distributed to investors, but FINRA will oversee and have a say in that process.
Apple REIT Ten is the $2 billion non-traded real estate investment trust that Lerner's firm marketed to investors without adequately establishing whether the securities were suitable for the investors and by misrepresenting performance results, according to FINRA.
REITs invest in commercial real estate, such as hotels and strip malls, offering a way to profit from rises in property values. Non-traded REITs, such as Apple Ten, however, do not trade on securities exchanges. They can be illiquid or difficult to sell in secondary markets. Non-traded REITs also often have higher fees for investors than publicly traded REITs.
Lerner himself called the REIT a "fabulous cash cow" and a "gold mine," and made unfounded predictions regarding a merger and public listing of other closed Apple REITs, which he inappropriately claimed would result in a "windfall" to investors, FINRA said.
Lerner was widely known for his "Take a tip from Poppy" radio commercials, which promoted the firm to the masses. The "Poppy" reference stemmed from the nickname Lerner's granddaughters gave to him.
Lerner and his firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings as part of a settlement, the regulator said. The firm has also agreed to revise its advertising procedures, including videotaping sales seminars attended by 50 or more people for three years, and is required, for one year, to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use, FINRA added.
The brokerage continues to deny publicly that investments it sold were inappropriate for its customers. "Contrary to FINRA's suggestion...there were no charges nor findings that any of the investments were not in fact suitable for any of the individual investors," said Pickard in a statement.
Lerner's firm, however, "was not in a position" to determine whether the investments were suitable because it did not conduct adequate due diligence on the REITs to determine potential risks and rewards to investors, according to the settlement.
In April, David Lerner Associates was also fined $2.3 million by a FINRA hearing panel for selling municipal bonds and collateralized mortgage obligation transactions to its retail customers at unfairly high prices, allegedly causing investors to receive lower yields than they would have otherwise received.
That sanction, however, did not become final then because Lerner's firm appealed, according to regulatory documents. The brokerage, as part of the settlement announced Monday, agreed to withdraw the appeal, making the $2.3 million penalty final.
David Lerner's head trader William Mason was also fined $200,000 and suspended from the securities industry for six months.
While the settlement resolves pending regulatory actions against Lerner and his firm, dozens of investors are still trying to recoup money through securities arbitration claims and class action lawsuits.
(Reporting by Greg Roumeliotis and Suzanne Barlyn; Additional reporting by Ashley Lau; Editing by Ted Kerr, Andrea Ricci, Jennifer Merritt and M.D. Golan)