Investors in Apple REIT Ten sold by David Lerner & Associates, Inc. (“DLA) have reason to consider their legal options. FINRA recently filed a complaint against DLA, the underwriter of Apple REIT Ten which invests in extended stay hotels. FINRA alleges that DLA sold this investment to elderly and unsophisticated clients despite having failed to perform appropriate due diligence on the investment and determine that it was suitable for any of its clients. Moreover, FINRA contends that DLA ignored red flags when passing along valuation and distribution numbers to customers, when it should have known the numbers were incorrect.
The hotels purchased by Apple REIT Ten are primarily part of two national chains. Since these same chains were the main investment in earlier Apple REITs sold by DLA, FINRA charges that DLA should have been aware that performance and pricing information cited to customers needed a closer look. According to the FINRA complaint, the earlier Apple trusts valued their shares at a constant price of $11 even as commercial real estate was in the midst of a downturn. Two trusts in particular suffered substantial declines in 2008 and 2009. Operational cash flow for Apple REIT Six, for example, dropped from $88,747,000 in 2008 to 66,029,000 the following year.
FINRA also alleges that while the REITs maintained distributions of 7 to 8 percent, those numbers failed to tell the real story. What investors didn’t know was that distributions being paid to them far exceeded the income from operations the REITs were earning. Part of the distributions was in fact coming from debt, which leveraged the trusts even more.
According to FINRA, DLA failed to take advantage of all the investigative tools at its disposal. Through an agreement with each of the REITs, for example, DLA had the right to ask for certain non-public financial information. Instead, according to the complaint, DLA only reviewed public filings, met briefly with REIT managers and performed “inadequate” analyses.
Sales of Apple REITs have meant about $600 million in revenue for DLA which got ten percent of the funds raised through the offerings in addition to other account fees. DLA has sold more than $300 million in Apple REIT Ten shares since January of this year. Since 1992 DLA has sold almost $6.8 billion of Apple REIT securities to about 122,600 of its customers. The sales of Apple REITs have been vital for Lerner, making up more than half its business since the mid nineties. Although Apple REITs aren’t liquid and are concentrated in a single type of business, a substantial number of DLA clients have ended up owning more than one of these deals. For some clients this may well have resulted in an unsuitable concentration of Apple REITs in their investment portfolio.
If you believe you have suffered losses in Apple REITs, please contact Smiley Bishop & Porter LLP to discuss your rights at 770-829-3850 or toll-free (800) 697-4514. Smiley Bishop & Porter LLP represents individual and institutional investors in securities arbitration. The firm focuses on cases involving defrauded investors, suitability claims, and mismarketeted investment products. Smiley Bishop & Porter LLP is available for a free initial consultation. Please visit us at www.sbpllplaw.com to obtain additional information.