Did David Lerner Associates Violate The Law By Failing To Re-Price Apple REIT Investments?

June 8, 2011

Apparently since David Lerner began selling Apple REIT investments to moms and pops across the country ($6.8 billion), it has consistently listed the price per share of the various Apple REIT investments as $11. The accuracy of this $11 per share amount is undermined, however, by the fact that the values and profitability of the hotels held in these Apple REITs has been hit in recent years with historic market downturns. Many reputable sources including FINRA, the organization in charge of regulating David Lerner, has charged the company with misleading its customers by publishing an over-inflated $11 per share price in Apple REITs Six, Seven, Eight, Nine and Ten.

The questions, therefore, are as follows:
1. Why did David Lerner not change the price per share of the Apple REITs?
2. Was David Lerner required to change the price per share of these REITs?
3. What is the true value of Apple REITs Six, Seven, Eight, Nine and Ten?

1. Why did David Lerner not change the price per share of the Apple REITs?

Only discovery obtained in lawsuits filed against the company will uncover the true extent behind the reasons that the company failed to reflect the true value. Our experience in representing investors, however, points to conflicts of interest as being the culprit. According to the FINRA complaint recently filed against David Lerner, 60-70 percent of the company's annual business was generated from selling Apple REITs. David Lerner has earned over $30 million in commissions and marketing allowances since January 2011 alone. Why bite the hand that feeds you?

Also, it seems reasonable to think that investors might make a run on the REITs to liquidate their positions if they noticed a drastic downturn in share values. If David Lerner does not re-price, however, investors won't know the true value of their REIT shares. If they don't know the true value of their REIT shares, they probably won't liquidate as long as the shares are paying the same dividends. This is important because the Unit Redemption Program discussed in the prospectuses of these investments limit the total amount of redemptions to three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. If a large number of investors now make a run on the Apple REIT investments and seek to liquidate their positions, many will not be able to get their money back and lawsuits will likely begin.

2. Was David Lerner required to change the price per share of these REITs?

With regard to Apple REITs Six, Seven, Eight and Nine, the answer is yes.

In 2009, FINRA issued Notice to Members 09-09 reminding David Lerner and other FINRA members selling unlisted REITs (e.g. Apple REITs) that the firms selling the investments are prohibited from using information that is more than 18 months old to estimate the value of a nontraded REIT. Apple REITs Six through Nine are no longer open to new customers and were offered more than 18 months ago. A review of the 10k reports issued by these Apple REIT entities shows that performance has been down over the last couple of years and that the entities have resorted to borrowing money to pay the investor dividends. Surely, the value of these investments have dropped below $11 per share.

With regard to Apple REIT Ten, it appears that David Lerner is permitted to reflect the $11 per share price on the monthly statements because the investment is still in the offering phase and has not been available for 18 months. This fact should not be construed to suggest that recommendation to invest in Apple REIT Ten were suitable for you. These are illiquid investments and are not suitable for investors who may need to liquidate the funds on short notice (i.e. retirees fall into this category). Furthermore, if you own more than one of these Apple REITs, you may be over-concentrated and being exposed to too much risk in your portfolio. David Lerner has a fiduciary duty to recommend suitable investments to all of its customers. If they fail to satisfy these duties, the firm can held liable for damages related to the breach.

3. What is the true value of Apple REITs Six, Seven, Eight, NIne and Ten?

Stay tuned to this issue because it will be interesting to see how David Lerner reacts to the recently filed FINRA complaint. I think it is safe to say that the true values of these REITs are worth far less than $11 per share. How much less? We do not know and will not know until Apple REIT and David Lerner come clean or experts hired by plaintiffs in lawsuits filed against David Lerner uncover the truth.

If you have purchased shares of Apple REITs, feel free to contact us for a free legal consultation.