by T. GormanPosted on Posted in SECActions

David Lerner Associates, a private investment company which claims to have $9 billion in assets under management, David Lerner, its founder, and William Mason, its head trader, were sanctioned by FINRA. The charges and sanctions relate to unfair sales practices in connection with the sale of shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust or REIT and excessive markups charged over a 30 month period on the sale of municipal bonds and collateralized mortgage obligations or CMOs.

DLA was the sole distributor of shares in Apple REIT Ten. The firm solicited thousands of customers, targeting unsophisticated investors and the elderly. The firm failed, according to FINRA, to conduct adequate due diligence prior to selling the securities. It also used marketing materials which failed to inform customers that the income from the REITs was not sufficient to support the distributions to unit owners.

Mr. Lerner, the founder and president of the firm, personally participated in the misleading sales campaign for the REIT. He made false claims about the returns, market values and performance and prospects of the securities, according to the regulator. In some seminars he told listeners that the product was a “cash cow” and a “gold mine.”

A second matter centered on charging unfair markups in connection with the sale of municipal securities and CMOs. Previously a FINRA hearing panel found the firm and Mr. Mason liable.

On both charges the firm was fined $2.3 million and will pay $12 million in restitution to customers involved. In addition, Mr. Learner was suspended from the securities industry followed by a two year suspension from acting as a principal. He was also directed to pay a fine of $250,000. Mr. Mason was suspended for six months from the securities industry and directed to pay a $200,000 fine.

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by T. GormanPosted on Posted in SECActions

The Commission brought an offering fraud action against two long time residential real estate businessmen, Thomas S. Mulholland and James C. Mulholland, Jr. The two defendants had been in the residential real estate business since the 1990s. By 2008 they had raised about $16 million from investors. Thomas and James Mulholland had about 300 properties and apartment building units.

Beginning in January 2009, and continuing over the next year, the defendants raised an additional $2 million for their real estate operations from over 75 investors in Michigan and Florida. Investors were induced to purchase promissory notes based on a series of representations including:

  • Claims that their real estate business was profitable;
  • That investors would earn 7% per year on their investment from the profits of the real estate business;
  • That the principle and interest was guaranteed; and
  • That investors could get their money back on 30 days notice.

These representations were false, according to the complaint. The real estate business was, in essence, tottering on the brink of failure. It had negative monthly cash flow; required new investors to pay its bills and prior investors; and could not refund payments to investors on 30 days notice if even a small number made such a request.

As their business deteriorated the two defendants continued to raise money from investors, never revealing the actual financial condition of their real estate business. By February 2010 the defendants filed for bankruptcy.

The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is in litigation. SEC v. Mulholland, Civil Action No. 1:12-cv-14663 (E.D. Mich. Filed Oct. 22, 2012). See also Lit. Rel. No. 22518 (Oct. 23, 2012).

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