Wall Street Investment Fraud Lawyer Blog

Last week, FINRA's complaint filed against David Lerner & Associates triggered a storm of media attention scrutinizing the brokerage firm's alleged sales practices violations related to its distribution of Apple REITs investments. The FINRA complaint also exposed that the $11 price per share of all Apple REITs offered are overvalued and that each REIT has been borrowing money to pay dividends. To view the FINRA complaint, click here.

Since 1992, David Lerner has served as best efforts underwriter and sole distributor of a series of ten REITs that have issued nearly $6.8 billion in securities to date. A REIT is a company that owns and usually operates income-producing real estate. To qualify as a REIT, a company must have most of its assets and income tied to a real estate investment and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Several of the earlier Apple REITs have been acquired by other companies. However, Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine continue to operate but are closed to new investors. Apple REIT Ten opened in January 2011 and is still open to new investors.

Since the complaint was filed, we have received multiple calls from aggrieved investors who want to withdraw their investments from Apple REIT Six through Ten but are concerned that the REITs will not honor their redemption requests. So the question is whether investors will be able to get their money back from the Apple REITs?

First of all, the Apple REITs are illiquid investments because there is no market to sell them to third parties. From a suitability standpoint, these investments are not appropriate for investors who may need access to cash in the short-term (e.g. retirees). Unfortunately, however, the FINRA complaint alleges that David Lerner targeted retirees to sell them Apple REITs. Obviously the risks associated with illiquidity are magnified as more of the investment is purchased. Since there is no market to sell Apple REITs on the open market, investors generally must rely on Apple REIT to honor redemption requests.

Each of the Apple REITs Six through Ten has rules described in the product prospectus regarding whether units of the REITs can be redeemed. The applicable Apple REIT program is referred to in the prospectus as the "Unit Redemption Program" and the language describing how the program works is very difficult to follow.

The language in each of prospectuses does state, however, that the company will not consider any redemption requests made within the first 12 months of purchase. Therefore, since the Apple REIT Ten did not open until January 2011, investors in Apple REIT Ten currently are not eligible to receive any of their money back. To view orginal Apple REIT prospectus, click here.

With regard to Apple REIT Six, Seven, Eight and Nine, it appears that those investors may be eligible to receive redemptions. Approved redemptions are paid quarterly and are considered on a first come, first serve basis. Therefore, if you have already decided that you want to make a redemption request, you have to get in line. Given the negative publicity surrounding these REITs, all of this increases the risk that redemptions will be limited and/or suspended altogether in the coming months. To go to the Apple REIT companies website and view additional information regarding each of these REITs, click here.

Another fact that increases the risks that redemption requests will be denied in whole or part is that the fact that the Unit Redemption Program limits 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. Also, the prospectuses state that the company has complete authority to deny redemption requests and to unilaterally change the rules on redemptions at any time. For example, the FINRA complaint alleges that in May 2011, after redemption requests exceeded the 3 percent limit in the first quarter of 2011, Apple REIT Eight raised the redemption percentage to 5 percent but lowered the redemption payout on non-reinvested shares to 92% of the purchase price. In other words, the company unilaterally imposed an 8% redemption charge on the Apple Eight REIT.

Continue reading "Will FINRA's Complaint Against David Lerner Cause Apple REIT To Deny Redemption Requests By Investors?" »

The New York headquartered brokerage firm David Lerner & Associates has marketed Apple REIT's to its customers as investments that provide safe income. Since 1992, David Lerner has sold more than $6 billion of Apple REITs into over a hundred thousand of its customer accounts. More specifically, since January 2011, David Lerner has sold over $300 million of Apple REIT Ten and since 1996, the firm has received $600 million from sales. This comprises of 60-70% of David Lerner's business during that time period. The firm has branch offices in New York, Connecticut, New Jersey and Florida.

Based on our preliminary investigation, David Lerner conducts investment seminars to entice investors to open accounts and purchase these investments. This week, FINRA, the entity responsible for regulating the brokerage industry, filed an action against the firm for allegedly failing to satisfy its due diligence and suitability obligations in connection with the sale of Apple REITs.

According to an article in today's New York Times entitled, Statements Skip Over REIT's Woes, for many years the price per share of Apple REITs listed on David Lerner's customer monthly statements has remained constant- $11 per share. The problem is that the market for the commercial real estate investments held inside of Apple REITs, extended stay hotels, has not been consistent. After all, the commercial real estate market has suffered historic losses in recent years. So, how can the price per share legitimately remain the same? It can't.

Unfortunately, Apple REITs appear to be the on the verge of collapsing despite its $11 per share price stated on the monthly statements issued to customers of David Lerner. The New York Times article states for example, that Apple REIT Eight has significant problems. It has failed to make mortgage payments on four hotels it owns. Furthermore, a day after FINRA filed its lawsuit, an investment management company began a tender offer for up to 5% of the outstanding Apple Eight shares. The offering price was only $3, not $11.

More bad news may be on the way for investors in these REITs and David Lerner will likely be right in the middle of the legal storm. After all, David Lerner was the underwriter on these investment and had a duty to conduct due diligence analysis on the viability of these investments. It was also the primary distributor of the investments to the public and marketed them as safe and conservative products.

Our firm represents investors who suffer investment losses and is investigating into this matter. If you purchased Apple REITs, feel free to contact us for a free consultation.

The Wall Street Journal reports that FINRA filed suit against David Lerner Associates, Inc. for allegedly failing to satisfy its due diligence and suitability obligations in connection with the sale of Apple REITs. Since 1992 David Lerner has sold more than $6 billion in Apple REITs to its investors.

The FINRA complaint alleges that the Apple REITs are illiquid and heavily concentrated in extended stay hotels and that a substantial number of its customers were invested in more than one Apple REIT. This fact raises concerns about whether such recommendations were suitable for David Lerner's customers especially since FINRA alleges that the firm targeted its elderly unsophisticated clients for these income producing investments.

Even more concerning is the fact that several of these Apple REITs have maintained an $11 price per share even though the commercial real estate market (i.e. the sector invested in by the REITs) has declined considerably over the last few years. Furthermore, the FINRA complaint states that a substantial portion of the distributions paid by all Apple REITs comes from loan proceeds. In other words, the investments do not appear to be generating sufficient income to sustain the 7%-8% distributions, which suggests that the $11 per share price is over-inflated.

If you have been sold any Apple REIT by David Lerner Associates, Inc., you may have legal rights that could entitle you to recover your losses. Please feel free to contact us for a free consultation.

Investment News reports that Richard Ketcham, FINRA's chairman and chief executive last week warned an audience of more than 900 industry professionals at the regulator's annual meeting in Washington that the regulator is focusing on broker-dealers that sell structured products such a reverse convertible notes.

This news comes on the heels of our blog post last week that the Massachusetts' state regulators is also targeting firms who are selling these products to retail investors. As we reported, structured products like reverse convertible notes are very complex investments that are rarely suitable for the average investor.

In this low interest environment, however, reverse convertibles are attractive to retirees seeking income because they provide above-average yields and resemble corporate bonds given that they are often linked to well known companies (e.g. AT&T, Verizon, Apple, etc.) What investors often do not know is that reverse convertibles involve complex and risky options trades which is often not adequately disclosed during the sales process. In general, when the stock price falls below a pre-determined price during the term of the note, upon maturity, investors receive shares of stock at a depressed price instead of their principal investment. To make matters worse, the products pay above-average commissions to a sales force who by in large are only knowledgeable about the sales points, not the intricate risks.

According to the article, more than 8,000 different structured products are currently offered and last year's sales hit a record of $55 billion, up 61% from $34 billion in 2009. This shocking sales data and the historically volatile stock market spell danger and losses for investors. Regulators do need to be watching carefully this developing story.

The Doss Firm, LLC is pleased to announce that on March 18, 2011, the Atlanta Business Chronicle published an article co-authored by Jason Doss entitled Securities arbitration rules should be revised. The article discusses recent developments in legislation that may ultimately permit retail investors the opportunity to opt out of arbitration in disputes with financial advisors and their firms. Currently, investors with investment accounts at brokerage firms such as Merrill Lynch are required to resolve all disputes in FINRA arbitration. FINRA is the entity that regulates much of the financial services industry. The reason that investors are forced into arbitration is that brokerage firms bury arbitration clauses in the stacks of documents signed by investors when an account is opened. In addition, even if investors realize that their contracts contain an arbitration clause, brokerage firms typically will not accept the consumer as a client.

Critics of the arbitration forum have long argued that it is biased in favor of the securities industry. Recent federal legislation empowers the Securities Exchange Commission to examine whether forced arbitration harms the investing public. If it does, the agency has the power to prohibit the practice.

The Atlanta Business Chronicle article advocates that investors should be able to choose whether to resolve their disputes in the arbitration forum or proceed in court. After all, if arbitration is so great everyone would choose it.

The Doss Firm, LLC is pleased to announce that the Georgia Bar Journal published an article co-authored by Jason Doss in the February 2011 edition. The article is entitled Holmes v. Grubman: The Supreme Court of Georgia Balances Financial Advisor Common Law Liability and Investor Protection.

The article summarizes the Georgia Supreme Court's opinion and discusses how Georgia law acknowledges that the relationship between financial advisors and their customers are fiduciary in nature. The article also discusses the ramifications of the Court's holding that the fiduciary duty also extends to non-discretionary client accounts.

The Georgia Bar Journal is delivered to over 35,000 attorneys licensed to practice law in the State of Georgia. For a copy of the article, please click here.

The Doss Firm, LLC is pleased to announce that on February 11, 2011, Jason Doss was a featured speaker at the ABA Mid-Year meeting in Atlanta. The CLE course was entitled Securities Arbitration Practice & Procedure In The Wake of the Dodd-Frank Act of 2010.

Jason Doss is also currently under contract with the American Bar Association to write a book for practitioners tentatively titled, Securities Arbitration Practice & Procedure. It is scheduled to be released later this year.

The Doss Firm is proud to announce that the Fort Worth Star Telegram listed The Retirement Challenge: Will You Sink Or Swim?, as a good book to help guide consumers through retirement planning. Jason R. Doss, an attorney with the firm, co-authored the book with Frank Armstrong, a best selling writer and well respected investment advisor.

The book provides great tips on investing as well as tips on how to avoid becoming a victim of investment abuse.

If you believe that you are a victim of bad financial advice or worse, financial fraud, please contact us for a free consultation.

On Friday, October 15th, the Fulton County Daily Report published an article co-authored by Jason R. Doss entitled "Wall Street wants to keep consumers in the dark."

The article discusses the fact that the Dodd-Frank Act requires the Securities Exchange Commission (SEC) to complete a study by January 2011 to determine whether all individuals who provide personalized investment advice should be held to one uniform fiduciary standard. This uniform fiduciary standard would require all financial professionals to put their clients' interests first.

One of the points made in the article was that the vast majority of investors do not know that there is any difference between financial advisors and already assume that those professionals are acting in their best interest.

The article also points out that stockbrokers who work for the big Wall Street firms are not in favor of a uniform fiduciary standard and prefer to keep the status quo which only requires investment recommendations to be suitable.

If you believe that you are a victim of investment fraud, please feel free to contact us for a free consultation.

The Doss Firm, LLC is proud to announce that attorneys Joy and Jason Doss accepted an invitation to join the Logan Bleckley Inn of Court chapter of the American Inns of Court. The Logan Bleckley Inn of Court is an organization of Atlanta area trial lawyers and judges dedicated to the promotion of ethics and professionalism in trial practice. Established in 1990, membership to the Inn is limited and by invitation only. It is an honor to be a part of such a great organization.

The Doss Firm is pleased to announce a favorable decision issued by the Georgia Supreme Court in a pending case against Georgia Natural Gas. Our firm, along with the firm of Strickland Brockington & Lewis, represent Charles Ellison and Susan Bresler who filed a class action lawsuit against Southstar Energy Services, LLC d/b/a Georgia Natural Gas seeking to recover overpayments and other damages arising from their violations of Georgia's Natural Gas Act. In summary, Plaintiffs allege that Georgia Natural Gas has overcharged customers for both natural gas and for customer service charges.

Georgia Natural Gas filed a motion to dismiss with the trial court, arguing that the claims were barred by the voluntary payment doctrine. The voluntary payment doctrine provides that "Payments of claims made through ignorance of the law or where all the facts are known and there is no misplaced confidence and no artifice, deception, or fraudulent practice used by the other party are deemed voluntary and cannot be recovered unless made under an urgent and immediate necessity therefor or to release person or property from detention or to prevent an immediate seizure of person or property." O.C.G.A. 13-1-13. In sum, the voluntary payment doctrine prevents individuals who have made an overpayment from recovering monies overpaid, unless they show an exception as outlined above.

The trial court dismissed the complaint pursuant to the voluntary payment doctrine. However, the Court of Appeals reversed the trial court's ruling. Georgia Natural Gas appealed again arguing that the plaintiffs are precluded from recovery of overcharges, pursuant to the voluntary payment doctrine, as a result of "voluntary" payment of their bills.

The Georgia Supreme Court has affirmed the Court of Appeals decision, concluding that the Georgia Natural Gas Act, which has the clear purpose of protecting natural gas consumers, provides a private right of action for damages, thus removing the voluntary payment doctrine as a defense. Therefore, our clients may proceed with their lawsuit against Georgia Natural Gas for overcharging customers for both natural gas and customer service charges.