Bloomberg News

David Lerner Wins Dismissal of Investors’ REIT Sale Suit

April 04, 2013

David Lerner Associates Inc. won the dismissal of a lawsuit by investors who accused the brokerage of misrepresenting the value and returns of more than $6.8 billion worth of holdings in real estate investment trusts.

Investors in the so-called Apple REITs couldn’t establish that they had suffered a loss because the holdings are still performing, U.S. District Judge Kiyo A. Matsumoto said in an opinion filed yesterday in federal court in Brooklyn, New York. The possibility of changes in value, which occurred when the real estate market slumped, was disclosed to investors, the judge found.

“Plaintiffs’ belabored complaint appears only to confirm that the Apple REITs are currently functioning in exactly the manner that was anticipated and disclosed in the REITs’ prospectuses and other offering documents,” the judge said in the ruling.

Apple REITs investors sued in 2011 alleging that the broker, known for its founder’s “Take a tip from Poppy” advertising slogan, misrepresented the holdings as appropriate for conservative investors.

Shares of the REITs, which focused on hotels and other real estate, were sold to retail investors and retirees for $11 each, according to the complaint. The Syosset, New York-based firm has collected more than $600 million in fees and commissions while five Apple REITs have made more than $6 billion in proceeds, according to the complaint.

‘Appellate Options’

“We’re evaluating the decision and we’ll consult with our clients in regard to their appellate options,” Daniel Girard, a lawyer for the plaintiffs, said in a phone interview.

A spokesman for David Lerner Associates, David Chauvin of Zimmerman/Edelson Inc., said in a statement that the brokerage is pleased with the decision.

“The court rejected each of the plaintiffs’ arguments that there were misrepresentations in the offering materials for the Apple REITs,” Chauvin said. He said the broker “will continue its focus on serving its customers and the investing public.”

The investors claimed the brokerage never disclosed that the REITs failed to generate enough income from their operations and that investors were being paid “with their own money.”

October Settlement

In October, the firm was ordered to pay $14.3 million in fines and restitution to settle an investigation by the Financial Industry Regulatory Authority into alleged overcharging of investors in Apple REITs, municipal bonds and collateralized mortgage obligations.

The company’s founder, David Lerner, was ordered to pay $250,000 and was suspended for one year from the securities industry over allegations that he personally misled investors about the prospects for the REITs. He was also suspended for two additional years from acting as a securities firm principal.

“As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly,” Finra representatives said in an Oct. 22 announcement. At investment seminars and in letters to customers, Lerner described the REITs as a “fabulous cash cow” or a “gold mine” and made unfounded predictions, according to Finra.

The brokerage and Lerner neither admitted nor denied the allegations under the settlement.

The case is In re Apple REITs Litigation, 1:11-cv-02919, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Christie Smythe in Brooklyn at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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