The Financial Industry Regulatory Authority Inc. is investigating Daniel T. Lerner, a senior executive at David Lerner Associates Inc., over the sale of proprietary investment funds to clients and whether his investment recommendations were suitable.
David Lerner, who's executive vice president of investor services at the firm, is the son of the broker-dealer's founder and owner, David Lerner, who was penalized by regulators a decade ago over the sale of in-house real estate investment trusts.
Over the past two decades, the retail brokerage industry has, to some extent, moved away from selling proprietary funds because of the fear of actual or perceived conflicts of interest in an era when regulators are pushing brokers to look and act more like fiduciary investment advisers.
According to his BrokerCheck profile, Daniel Lerner came under Finra's scrutiny in July. At that time, Finra made a "preliminary determination to recommend that disciplinary action be brought against" Daniel Lerner, with the regulator alleging he violated industry rules in his recommendation of three proprietary energy funds.
The alleged violations involved Daniel Lerner's recommendation of two private placements, Energy 11 L.P. and Energy 12 L.P., and a mutual fund, Spirit of America Energy Fund, to multiple customers. Finra alleges he sold the products "without a reasonable basis to believe the investments were suitable for those customers based on their investment profiles," according to the BrokerCheck profile.
In his response on BrokerCheck, Daniel Lerner wrote: "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 wrote, adding that the Covid-19 pandemic "wreaked havoc" across industries and hampered distributions to investors in certain cases.
Daniel Lerner also faces Finra allegations of violating industry rules for maintaining accurate information about customer investment profiles. A company spokesperson on Monday morning added nothing beyond what was stated on BrokerCheck.
Lawrence L. Klayman, a plaintiff's attorney, said Daniel Lerner "misrepresented" products to his client, an elderly woman, who believed she was buying municipal bonds. "She was completely exploited," Klayman said Monday.
Daniel Lerner has three pending Finra arbitration complaints, according to BrokerCheck, with clients seeking $875,000 in damages. Four recent investor claims have been settled for $1.15 million, while three recent Finra arbitration claims have been denied. In one case, the client received an award of almost $24,000.
Over the summer, Finra's interest in sales of the proprietary funds by David Lerner brokers started to surface. In August, a settlement between a barred veteran broker at David Lerner Associates and Finra highlighted the millions of dollars of unpaid distributions — think dividends — owed to investors who bought one proprietary energy fund, Energy 11 L.P., before energy prices collapsed in 2020 amid the Covid-19 pandemic.
Energy 11 L.P. faces the hurdle of $45 million of unpaid distributions, according to its annual report from earlier this year, or $2.39 per common unit, which is private placement nomenclature for share. At the end of June, the private fund had close to $360 million in total assets, according to its most recent quarterly report.
David Lerner Associates has faced multimillion-dollar settlements with regulators in the past over the sales of proprietary investments, including a brand of nontraded real estate investment trust known as Apple REITs. In 2013, Finra ordered the firm to pay $12 million in restitution to clients who had purchased shares of Apple REIT 10. At the time, Finra also fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.
As part of that settlement with Finra, David Lerner was fined $250,000 and suspended from the securities industry for one year, followed by a two-year suspension from acting as a firm’s principal.
According to its website, David Lerner Associates has $4.5 billion in client assets; it doesn’t list the number of registered reps or investment advisers working with the firm.
Energy 11 L.P. was formed in 2013 by Glade Knight and David McKenney of the Apple REIT companies, along with Anthony Keating and Michael Mallick, according to the company. It raised $374 million from investors over two years starting in 2015.
Brokers are typically paid higher commissions to sell private placements than they are paid to sell or recommend mutual funds or exchange-traded funds.
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