Our Law Firm is investigating the sales practices of David Lerner Associates (“DLA”) who solicited many of its customers to invest in illiquid real estate investment trusts (“REITs”) called Apple REITs. In May of 2011, the Financial Industry Regulatory Authority (“FINRA”) announced that it filed a complaint against DLA, charging the firm with soliciting investors to purchase shares in Apple REIT Ten without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its website regarding Apple REIT Ten distributions. FINRA added that DLA has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.
Since January 2011, as sole underwriter for Apple REIT Ten, DLA has sold over $300 million of an open $2 billion offering of the REIT’s shares. Apple REIT Ten invests in the same extended stay hotel properties as a series of other Apple REITs closed to investors. Apple REIT Ten and the closed Apple REITs were founded by the same individual, and are all under common management. DLA has been the sole underwriter for Apple REITs since 1992, selling nearly $6.8 billion of the securities into approximately 122,600 DLA customer accounts. DLA earns 10 percent of all offerings of Apple REIT securities as well as other fees. Apple REIT sales have generated $600 million for DLA, accounting for 60 to 70 percent of DLA’s business annually since 1996.
FINRA’s complaint against DLA alleges that since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7 to 8 percent by leveraging the REITs through borrowings and returning capital to investors. As sole distributor, DLA did not question the Apple REITs’ unchanging valuations despite the economic downturn for commercial real estate.
FINRA alleges that DLA failed to sufficiently investigate the valuation and distribution irregularities of the closed Apple REITs prior to selling Apple REIT Ten. As the sole underwriter of all of the Apple REITs, DLA was aware of the Apple REITs’ valuation and distribution practices. Rather than conduct due diligence into those valuations and distribution irregularities to determine that they were reasonable and that the Apple REITs were suitable, DLA accepted the valuations and continued to record them on customer account statements.
In its solicitation of customers to purchase Apple REIT Ten, DLA’s website provided distribution rates for all of the previous Apple REITs. These distribution figures were misleading and omitted material information because they did not disclose recent distribution rate reductions or that distributions far exceeded income from operations and were funded by debt that further leveraged the REITs.
On June 14, 2011, Apple REIT Eight disclosed in an SEC filing that its book value was $7.57 per share at the end of March 2011. However, prior to that time, DLA client statements had continued to show the value of Apple REIT Eight at $11 per share, and representatives of DLA had continued to advise clients that the Apple REITs have maintained their value. However, contrary to these assertions, Apple REIT Eight’s June 14, 2011 SEC filing and revaluation tends to support FINRA’s allegations in its Complaint. This is the first sign that the allegations that Apple REIT has been using improper valuation procedures may have merit. Ironically, one of the board members of Apple REIT Ten resigned in early June, following the filing of the FINRA Complaint.
Some investors want to request a full redemption of their principal invested in Apple REITs. However, they have been asked to sign Redemption Acknowledgement Forms which contain language and acknowledgements which may affect their legal rights. Our law firm urges Apple REIT investors to explore their legal rights and options before signing any forms or acknowledgements provided by DLA.
Accordingly, we are investigating potential claims on behalf of DLA customers who were solicited to purchase Apple REITs from the firm, including Apple REIT Ten. Our law firm has significant experience in handling claims regarding REITs, and have represented customers of DLA who have complained about Apple REITs and the misrepresentations made to them concerning these illiquid products.