By Peter Mougey

November 6th, 2012  12:00pm

Financial Industry Regulatory Authority (FINRA) Department of Enforcement fined David Lerner and Associates (DLA) more than $14 Million dollars.  After a several month investigation, FINRA concluded that DLA had not performed adequate investigation to fulfill its suitability obligations. DLA targeted elderly and unsophisticated investors to buy the illiquid securities that used leverage to further increase the risk.  FINRA found that DLA made false, exaggerated, and misleading claims regarding investment returns, performance and prospects to over a thousand customers. Furthermore, DLA mischaracterized the risks to its own customers despite the fact that FINRA had previously warned the firm that its marketing materials were misleading.  Investors of the firm have lost millions of dollars by putting their hard-earned money into Apple REIT (Real Estate Investment Trust) Ten Investments and Collateral Mortgage Obligations (CMO) that were under-supported based on the misleading

FINRA alleged that DLA had not done its due diligence in recruiting investors for this specific type of security, nor hand they properly researched the Extended-Stay Hotel financing instrument itself. DLA is said to have targeted elderly, and unsophisticated investors who would not realize what due diligence was owned and the corresponding risks. FINRA focused on the firm’s recruiting practices and the unsupported language like, “fabulous cash cow,” and ‘“quality’ investments that sophisticated investors such as ‘Warren Buffett’ would buy.”

In addition to DLA, Lerner himself was suspended from the securities industry for one year and from being a principal for two years.  William Mason, the firm’s head trader, was fined $200,000 because he assisted in charging excessive municipal bond and CMO markups. While the firm has neither confirmed nor denied the allegations by FINRA, they have agreed to the fines and to having independent consultants audit and provide suggested revisions for the management, and training operations. DLA has long been known for its aggressive radio advertising named “Take a Tip from Poppy.” Due to DLA’s misleading and aggressive advertising campaigns, the firm has also been required to pre-file all advertisements for the next year, and record any well-attended seminars for the next three years.

According to Erica Reed, an associate attorney at the Pensacola law firm of Levin Papantonio, “the $14 million in fines is a drop in the bucket to adequately compensate victims of the REIT losses.” “While the Disciplinary Proceeding does pave the way for individual claims, investors will likely see only pennies on the dollar for their losses from this settlement.” Instead, according to Erica Reed, “investors will need to file their cases on an individual basis and the Disciplinary Proceeding has exposed some of the wrongdoing making individual claims easier.”

Peter J. Mougey is recognized as one of Florida’s top 100 trial lawyers, a Florida Super Lawyer in securities litigation, and the outgoing President of the national securities bar association PIABA (“Public Investors Arbitration Bar Association”). He is a shareholder with the Pensacola, Florida, law firm of Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor and is head of the Business Torts Department.

More information on financial fraud.

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