A Finra news release yesterday reported the regulator fined David Lerner Associates $12 million for sales of Apple REIT 10. (Finra) The funds will go towards restitution for the Apple REIT 10 customers. The release quoted Brad Bennett, Executive Vice President and Chief of Enforcement:
David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers. Firms must conduct a thorough suitability analysis before selling products, and make accurate disclosures of risks and features at the point of sale, especially with alternative investments such as non-traded REITs.
Finra seems to be more focused on reasonable basis suitability these days, which ties in to the new Suitability Rule 2111.
The Order Accepting Offer of Settlement directly addressed the reasonable suitability issue (Order):
93. In addition to its customer-specific suitability obligation, DLA and its registered representatives have a duty to perform reasonable due diligence ot understand the potential risks and rewards associated with a security it recommends to customers, and to determine whether the recommendation is suitable for at least some investors based upon that understanding.
94. Based upon sales and account maintenace of all issued Apple REITs, DLA management was or should have been aware of red flags indicating that management of Apple REIT Ten may adopt improper valuation practices and may unreasonably leverage the REIT in order to continue to issue returns unsupported by the REITs performance.
95. Especially in light of these red flags, and DLA’s role as sole underwriter, DLA personnel did not conduct reasonable due diligence to understand the potential risks and rewards of Apple REIT Ten before recommending the security to customers. As a result, DLA was not in a position to determine whether Apple REIT Ten would be suitable for any investor prior to recommending it to customers.
96. By failing to conduct adequate due diligence to fulfill its reasonable-basis suitability obligation, which also violated its duty to observe high standards of commercial honor and just and equitable principals of trade, DLA violated NASD Rule 2310 and Finra Rules 2310(b) and 2010.
See our coverage of suitability here.
The May 27, 2011 Finra Complaint against DLA can be found here.
Finra also fined David Lerner personally $250,000 and suspended him for one year from the securities industry and for two years after that from acting as a principal.