The sale of proprietary investment funds to clients has led to The Financial Industry Regulatory Authority Inc. (FINRA) investigating Daniel T. Lerner in an effort to establish whether his investment recommendations were suitable. Daniel, a senior executive at David Lerner Associates Inc., is the son of David Lerner, the owner and founder of the eponymous firm David Lerner Associates.
According to his BrokerCheck profile, Daniel was first scrutinized by FINRA in July when they made a “preliminary determination to recommend that disciplinary action be brought against” him, alleging a violation of industry rules in recommending three energy funds that were proprietary.
Haselkorn & Thibaut is currently investigating the sales practices of David Lerner Asssociates. If you or someone you know invested with David Lerner Associates, please contact us for a free consultation at 1-800-856-3352.
Based on information on his BrokerCheck profile, allegations against Daniel Lerner stem from his recommendation to multiple customers of Energy 11 L.P. and Energy 12 L.P., two private placements, and Spirit of America Energy Fund, a mutual fund. It has been alleged by FINRA that the products were sold by him “without a reasonable basis to believe the investments were suitable for those customers based on their investment profiles.”
Three FINRA arbitration complaints, adding up to $875K being sought in damages by the complainants, against Daniel are pending.
A total settlement of $1.15 million has been reached in 4 other customer claims against him.
Three FINRA arbitration claims against him have been denied.
In another case, the client received an award of $24K.
Violating FINRA rules for the maintenance of accurate investment profiles of customers is another FINRA allegation being faced by Daniel. There has been no statement on it beyond what is available on BrokerCheck, from either Daniel or the company spokesperson.
In a spirited defense, Daniel Lerner wrote in response on BrokerCheck: “I vehemently disagree with Finra’s allegations. I take my regulatory responsibilities, and my responsibilities to my clients, with the utmost degree of seriousness. I have meritorious defenses which I intend to vigorously pursue, including that my recommendations were suitable and consistent with the firm’s compliance protocols.”
He also weaved in the Covid-19 impact that sometimes hampered distributions to customers as the pandemic “wreaked havoc” across industries.
David Lerner and David Lerner Associates
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This is not the first time David Lerner Associates is facing the prospect of settling with regulators for multimillion-dollar amounts in connection with sales of proprietary, one being Apple REITs, a nontraded real estate investment trust brand.
It may be recollected that around ten years back, David Lerner was penalized by the authorities in a case relating to the sale of in-house real estate investment trusts.
The firm had been ordered to pay $12 million to investors in Apple REIT 10 as restitution by FINRA in 2013. At the same time, David Lerner Associates had also been fined over $2.3 million for unfair pricing of collateralized mortgage obligations and municipal bonds. The settlement included a suspension for David for a year and a fine of $250K, followed by a two-year period during which he was barred from acting as the principal of the firm.
The website of David Lerner Associates claims they have $4.5 billion in client assets. The number of investment advisers and registered representatives working for the firm has not been specified.
Private placements
Private placement sales usually carry a higher commission for brokers as compared to mutual funds of exchange-traded funds (ETFs).
As they have been pushed by regulators to think and act more like the fiduciary investment advisers, they are supposed to be, and retail brokerages have gradually shied away from selling proprietary funds because of the fear of a conflict of interest case emerging from it.
The pursuit of the proprietary fund sale cases seems to have been initiated by FINRA only this summer, as the issue of millions of dollars in unpaid distributions, or dividends, came to light, seemingly from a settlement reached by FINRA with a veteran, barred broker at David Lerner Associates. The unpaid distributions mostly relate to the Energy 11 LP fund, which was sold to investors prior to the collapse of energy prices in 2020, as one of the fallouts of the pandemic.
David McKenney and Glade Knight, of the Apple REIT companies fame, had formed Energy 11 L.P. in 2013 along with Michael Mallick and Anthony Keating. It raised $374 million was raised in two years, beginning in 2015, from investors.
According to the company’s annual report published earlier in the year, unpaid distributions amounted to $45 million. This amounts to a debt of $2.36 per common unit, the private placement equivalent of a share. According to the most recent quarterly report, the fund had assets worth $360 million at the end of June.
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