Brokerage Sued In Two Class Actions Involving Troubled REITS
By Suzanne Barlyn
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–Two class action suits have been filed against brokerage David Lerner & Associates over its sales of Apple REITs, a family of real estate-based securities that has been questioned by regulators.
A suit filed Monday in a New Jersey federal court says the Syosset, N.Y.-based firm is “engaged in an ongoing scheme to sell more than $6 billion of shares” of the securities to many elderly, retired and unsophisticated investors.
The lead plaintiffs are Stanley and Debra Kronberg of Mahwah, N.J., who invested in a series of Apple REIT offerings that are now closed to investors, known as Apple REIT Six through Apple REIT Nine. Now being offered by Lerner is Apple REIT Ten.
The Financial Industry Regulatory Authority, Wall Street’s self-watchdog, filed a regulatory complaint against Lerner on May 31, saying the firm is misleading some customers about Apple REIT Ten. The regulator also suggested that Apple REIT Ten shares may be overpriced at $11 each. Lerner has denied the allegations, saying it is a scapegoat for regulators’ failures to detect investor fraud by Bernard Madoff.
Lerner has been the sole underwriter of Apple REITs since 1992, according to Finra, selling nearly $6.8 billion of the securities into some 122,600 customer accounts.
The Kronbergs, in their federal court suit, allege that offering documents from Lerner misstated the REITs’ basic business model, omitting important details about how they operate and failing to disclose some risks. It says Lerner also misrepresented the value of Apple REIT shares and investors’ returns, and asks for financial compensation, among other things.
Another class action suit, filed in a Manhattan federal court on Friday, focus on Apple REITs Nine and Ten. The lead plaintiff, Nancy Kowalski of Palm Beach, Fla., bought 1,818 shares in Apple REIT Nine, according to the complaint. Kowalski is seeking monetary damages and has asked the court to rescind the purchase of her REIT, among other things.
The suit alleges that the REIT’s profits don’t cover its 8% annual distribution, which is funded “in the manner of a Ponzi scheme” by returning some investor capital and by borrowing. This tactic has “seriously impaired the value” of the REITs, the suit says. Also, investors “were never informed about the dismal financial performance of and significant loss of value” of earlier Apple REITs, the complaint says.
Both cases list numerous defendants in addition to David Lerner & Associates, including Glade Knight, chairman and chief executive of the Richmond, Va.-based Apple REIT Companies, Inc. and other Apple REIT management.
A lawyer for David Lerner & Associates called the class action suits “frivolous.”
“The allegations are baseless and rife with falsehoods, distortions, and misleading statements and we look forward to the opportunity to be vindicated in a court of law,” said Joseph C. Pickard, the brokerage firm’s senior vice president and general counsel, in a statement.
A spokeswoman for the Apple REIT Companies, Inc. didn’t immediately return a call requesting comment.