Press Release

NEWARK – Attorney General Christopher S. Porrino and the Division of Consumer Affairs today announced that David Lerner Associates, Inc. (DLA), a New York firm with offices in Princeton and Teaneck, has agreed to pay $650,000 to resolve a Bureau of Securities investigation into its sales of non-traded real estate investment trusts (REITs) in New Jersey.

In a Consent Order with the Bureau, the Syosset NY-based DLA, agreed to pay civil penalties and other costs to resolve the Bureau's findings that agents of the firm sold non-traded REITs to unsuitable investors, that DLA supervisors approved those sales, and that the firm failed to make and keep adequate records for sales of non-traded REITs.

"This settlement with the Bureau of Securities holds DLA accountable for violating securities laws as well as its own supervisory procedures pertaining to the sale of these investments," said Attorney General Porrino. "This enforcement action puts the securities industry on notice that the Bureau will take action when firms expose clients to increased financial risks by skirting the laws and regulations in place to protect them."

The Bureau received complaints from investors regarding DLA's sale of three non-traded REITs – Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. – which raised an aggregate of $4 billion between March 2006 and December 2010 to purchase hotels. The Bureau contacted DLA regarding potential failures in the firm's compliance system with regard to sales of the three REITs and DLA agreed to undertake a comprehensive review of its NJ sales.

According to the Bureau's findings, the review, conducted by a third-party consultant, revealed that DLA failed to follow its policies and procedures for the sale of non-traded REITs. Specifically, DLA sold non-traded REITs to investors who did not meet prospectus suitability standards. Additionally, there were no available books and records regarding the investor's annual net worth, incomes and/or investment objective in at least 40 New Jersey accounts that held these three Apple REITs.

"Investors expect and deserve full compliance with the law when they entrust their money to an investment firm, especially in connection with alternative investment vehicles like REITs," said Steve Lee, Director of the Division of Consumer Affairs. "The Bureau of Securities will continue to protect investors' interests through its diligent oversight of the securities market to ensure compliance."

Unlike publicly-traded REITs, non-traded REITs may contain higher fees, and may be riskier because they are generally illiquid as they have no public trading market. Non-traded REITs pay distributions from invested capital back to investors, or from debt, as opposed to providing distributions of earnings from real estate holdings.

"Because of their illiquidity and risks, non-traded REITs and other alternative products are not suitable for all investors. Broker-dealers have an obligation to carefully screen prospective investors to make sure these securities meet their clients' investment objectives," said Bureau Chief Christopher W. Gerold. "The Bureau will hold those broker-dealers that sell unsuitable products to their clients responsible for their actions."

After the Bureau's investigation began, the three non-traded Apple REITs were merged and listed on the New York Stock Exchange (NYSE), which provided liquidity to the impacted New Jersey investors.

Under the terms of the Consent Order, DLA was assessed a $700,000 civil penalty, $100,000 in investigative costs, and $50,000 to be placed in a fund for use for the Bureau's investor education program. The Bureau suspended $200,000 of the civil penalty for DLA's "substantial cooperation" with the Bureau's investigation.

The Bureau's action was handled by Deputy Chief Amy Kopleton and Director of Examinations Stephen Bouchard, of the Bureau of Securities, within the Division of Consumer Affairs.

The Bureau thanks Assistant Attorney General Brian F. McDonough, Section Chief Victoria Manning, Assistant Section Chief Joshua Sherman, and Deputy Attorney General Isabella Stempler of the Securities Fraud Prosecution Section of the Division of Law for their assistance in this matter.

The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contracting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau's website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.

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