Financial watchdogs have caught another firm breaking the rules. FINRA, the group that polices brokers, recently took action against David Lerner Associates Inc. (DLA) and several of its representatives.
The firm pushed unsuitable energy-focused limited partnerships to retail investors between January 2015 and November 2019. We want to explain what happened and why it matters to you as an investor.
David Lerner Associates Limited Partnerships Fined came after the firm sold two risky investments: Energy 11, L.P. and Energy Resources 12, L.P. These partnerships raised $374 million and $219 million respectively.
Both promised 7% annual returns from oil and gas properties. The problem? Many customers weren’t told about the true risks. Some representatives even changed customer profiles to make it seem like clients could handle more risk than they actually could.
The penalties were steep. DLA must pay over $1 million in restitution to harmed investors. The firm faces a two-year ban on selling their own illiquid products. Three representatives received personal fines and suspensions: Martin Lerner ($10,000 fine, one-month suspension), Daniel Todd Lerner and Maxim Tulupnikoff (each $5,000 fine, two-month suspension).
This isn’t DLA’s first run-in with regulators. The firm has 40 disclosure events on record, including 21 regulatory actions totaling over $19 million in fines and penalties since its founding in Syosset, New York in 1970.
The pattern shows serious problems with how they supervise their 120 registered representatives across eight branch offices.
FINRA’s action reminds us why investor protection rules exist. The case shows what can go wrong when firms put profits ahead of clients. Keep reading to learn more about this case and how to protect yourself.
Key Takeaways
Table of Contents
- FINRA fined David Lerner Associates over $1 million for selling unsuitable energy partnerships to elderly clients with low risk tolerance.
- Energy 11 and Energy Resources 12 limited partnerships raised $593 million total, with one stopping distributions during COVID-19.
- Multiple representatives faced personal penalties, including Martin Lerner ($10,000 fine, one-month suspension) and two others who received $5,000 fines with two-month suspensions.
- The firm has faced over $19 million in total penalties throughout its history, severely damaging its reputation among investors.
- This case highlights the importance of matching investment recommendations to client needs and maintaining strong compliance systems to avoid regulatory action.
Details of FINRA’s Action Against the Representative
FINRA fined the representative $10,000 for selling unsuitable limited partnerships to elderly clients with low risk tolerance. The regulator also suspended the broker for six months after finding they misrepresented key facts about the investment risks.
Nature of the inappropriate limited partnerships
David Lerner Associates promoted two problematic limited partnerships to investors. Energy 11, L.P. and Energy Resources 12, L.P. focused on hydrocarbon-producing properties that were highly illiquid and speculative in nature.
These investments promised attractive 7% annual distributions to draw in clients. The financial industry regulatory authority found issues with how these securities were marketed and sold.
Energy 11 raised $374 million before ending its offering period in April 2017, while Energy Resources 12 collected $219 million until November 2019.
High-yield investments often come with hidden risks that aren’t fully disclosed to investors.
The combined sales for both partnerships reached an impressive $593 million, showing the scale of these investment advisor activities. One partnership stopped making distributions during the COVID-19 pandemic, only resuming partial payments in late 2021.
This disruption highlights the real risks investors faced with these real estate investment alternatives. The specific fines and penalties imposed by FINRA reflect the seriousness of these compliance failures.
Specific fines and penalties imposed
Now that we’ve examined the types of limited partnerships that raised concerns, let’s look at the exact penalties FINRA imposed on the representatives involved. These financial sanctions reflect the severity of the violations and serve as a warning to other financial professionals.
| Individual/Entity | Penalty Amount | Additional Sanctions |
|---|---|---|
| David Lerner Associates | $1,002,566.16 | Restitution order |
| Martin Lerner | $10,000 | One-month suspension |
| Daniel Todd Lerner | $5,000 | Two-month suspension |
| Maxim Tulupnikoff | $5,000 | Two-month suspension |
The fines shown above represent just part of DLA’s regulatory troubles. We should note that the firm has faced over $19 million in total penalties. These include various restitution orders, censures, and injunctions throughout its history. Such substantial penalties highlight FINRA’s commitment to enforcing compliance standards in the investment industry. Financial representatives must take these actions seriously as a reminder of their fiduciary duties to clients.
Implications for David Lerner Associates
This case has hurt David Lerner Associates’ standing with clients and may lead to more FINRA probes. We expect the firm will need to strengthen its training programs and sales practices to regain trust in the investment community.
Impact on the firm’s reputation and operations
David Lerner Associates Inc. faces serious reputation damage from its 40 disclosure events, including 21 regulatory actions from the Financial Industry Regulatory Authority Inc. These issues create a trust gap with investors who value stability and compliance.
We’ve seen how regulatory problems often lead clients to question a firm’s practices, especially regarding REITs and limited partnerships.
The firm’s eight branch offices and 120 registered representatives all feel the effects of these sanctions. Legal troubles drain resources that could otherwise support growth and client service.
Many investors now approach David Lerner Associates with caution after seeing these FINRA actions. The company’s long history since 1970 as a FINRA member makes these compliance failures even more concerning for its future operations in Syosset, New York and beyond.
Lessons for Financial Representatives and Firms
Financial professionals must follow strict rules to avoid FINRA penalties and protect their clients’ interests. Read more to learn how proper compliance can save your career and reputation.
Importance of compliance with FINRA regulations
Compliance with FINRA rules serves as a shield for both investors and financial advisors. We emphasize that FINRA’s suitability rule requires all recommendations to match clients’ specific needs and goals.
David Lerner Associates faced penalties because their supervisory system failed to ensure proper compliance with these rules. Firms that ignore these standards risk severe consequences, including fines, suspensions, and restrictions on selling certain investment products.
L. Klayman, a compliance expert, often indicates that education about regulations prevents violations before they occur. Our work shows that firms must maintain strong oversight systems to avoid receiving a Wells notice from regulators.
The requirement for DLA to hire an independent consultant highlights how seriously FINRA takes supervision failures. Good compliance practices protect not only clients but also preserve a firm’s reputation in the marketplace.
Smart financial representatives stay current on all rules to avoid costly mistakes that harm their careers and their clients’ trust.
Conclusion
The FINRA action against David Lerner Associates serves as a stark warning for all investment firms. We must recognize that selling unsuitable products to vulnerable investors carries serious consequences beyond just monetary penalties.
Financial representatives need proper training on suitability requirements and risk assessment protocols to avoid similar violations. Firms should implement stronger compliance systems to catch red flags like sudden changes in client risk profiles.
Investors deserve protection from speculative investments that don’t match their financial goals or risk tolerance. This case reminds us that putting client interests first isn’t just good ethics, it’s essential for regulatory compliance and long-term business success.
References
- https://www.financialadvisoriq.com/c/4124234/535553/finra_sanctions_broker_pitching_illiquid_investments_elderly_clients?referrer_module=issueHeadline
- https://fxnewsgroup.com/forex-news/regulatory/finra-orders-david-lerner-associates-to-pay-1m-in-restitution/
- https://www.iorioaltamirano.com/blog/david-lerner-associates-sanctioned-by-finra-for-unsuitable-sales-of-illiquid-energy-securities/
- https://whitesecuritieslaw.com/david-lerner-associates-complaints-regulatory-actions/
- https://www.secatty.com/firm-investigations/david-lerner-associates-complaints/
- https://www.finra.org/sites/default/files/2024-09/Disciplinary_Actions_September_2024.pdf
