TEANECK, N.J. -- David Lerner Associates, with offices in Teaneck, has agreed to pay $650,000 to resolve an investigation into its sales of non-traded real estate investment trusts in New Jersey, authorities said Thursday.
In a consent order entered into with the state Bureau of Securities, the Syosset, Long Island-based company agreed to pay civil penalties and other costs to resolve the Bureau’s findings that agents of the firm sold non-traded REITs to unsuitable investors, that DLA supervisors approved those sales, and that the firm failed to make and keep adequate records for sales of non-traded REITs.
“This settlement with the Bureau of Securities holds DLA accountable for violating securities laws as well as its own supervisory procedures pertaining to the sale of these investments,” said Attorney General Christopher Porrino.
Under the terms of the Consent Order, DLA was assessed a $700,000 civil penalty, $100,000 in investigative costs and $50,000 to be placed in a fund for use for the bureau’s investor education program. The securities bureau suspended $200,000 of the civil penalty for DLA’s “substantial cooperation” with its investigation.
The bureau had received complaints from investors regarding DLA’s sale of three non-traded REITs – Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. – which raised an aggregate of $4 billion between March 2006 and December 2010 to purchase hotels, Porrino said.
Investigators from the bureau -- which falls under the state Division of Consumer Affairs -- contacted DLA regarding potential failures in the firm’s compliance system with regard to sales of the three REITs and DLA agreed to undertake a comprehensive review of its New Jersey sales, he said.
A review conducted by a third-party consultant revealed that DLA failed to follow its policies and procedures for the sale of non-traded REITs, the attoreny general said.
Specifically, he said, DLA sold non-traded REITs to investors who didn't meet prospectus suitability standards.
At the same time, there were no available books and records regarding the investor’s annual net worth, incomes and/or investment objective in at least 40 New Jersey accounts that held these three Apple REITs, Porrino said.
“Investors expect and deserve full compliance with the law when they entrust their money to an investment firm, especially in connection with alternative investment vehicles like REITs,” said Steve Lee, the DCA director.
Unlike publicly-traded REITs, non-traded REITs may contain higher fees and be riskier because they are generally illiquid -- with no public trading market. Non-traded REITs pay distributions from invested capital back to investors, or from debt, as opposed to providing distributions of earnings from real estate holdings.
Once the bureau’s investigation began, the three non-traded Apple REITs were merged and listed on the New York Stock Exchange (NYSE), which provided liquidity to the impacted New Jersey investors, Porrin said.
Handing the case for the bureau are Deputy Chief Amy Kopleton and Director of Examinations Stephen Bouchard.