The Securities Litigation Expert Blog

Videotaping of Sales to Senior Investors

Posted by Jack Duval

Feb 14, 2013 4:20:14 AM

This is the first of a series of blog posts examining the protection of senior investors.

Videotaping of sales meetings with senior investors is emerging as a best practice in securities and insurance products sales.  A LifeHealthPro article addressed this issue (LHP):

Said Marc Silverman, head of Silverman Financial, “You’d be amazed by how many non-lawsuits there are when you record sessions.”

Burke Christensen, a business and insurance law professor at Eastern Kentucky University, also supported the idea of videotaping client meetings. “The question of competency arises [only] after the client is incompetent. The jury sees the ailing person and assumes they were that way when transaction took place,” he said.

Furthermore, the regulators are mandating some videotaping. In the recent AWC with David Lerner Associates (DLA), Finra required the following:
I. DLA must adopt procedures for the supervision and internal approval by an appropriately qualified registered principal of all seminars. Such procedures must include, but are not limited to, a requirement, effective for three years from the date on which this Offer is accepted, that the firm make and retain (a) an audio record of any seminar with expected attendance of more than 25 individuals; and (b) an audiovisual record of any seminar with expected attendance of more than 50 individuals.

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Topics: FINRA, David Lerner Associates, Investment Advisors, litigation, Senior Investors, investments, videotaping, SEC, Compliance, regulation.

Finra Sanctions David Lerner Associates $12 million for Apple REIT Ten Sales

Posted by Jack Duval

Oct 23, 2012 3:49:36 AM

A Finra news release yesterday reported the regulator fined David Lerner Associates $12 million for sales of Apple REIT 10.  (Finra)  The funds will go towards restitution for the Apple REIT 10 customers.  The release quoted Brad Bennett, Executive Vice President and Chief of Enforcement:

David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers.  Firms must conduct a thorough suitability analysis before selling products, and make accurate disclosures of risks and features at the point of sale, especially with alternative investments such as non-traded REITs.

Finra seems to be more focused on reasonable basis suitability these days, which ties in to the new Suitability Rule 2111.

The Order Accepting Offer of Settlement directly addressed the reasonable suitability issue (Order):

93. In addition to its customer-specific suitability obligation, DLA and its registered representatives have a duty to perform reasonable due diligence ot understand the potential risks and rewards associated with a security it recommends to customers, and to determine whether the recommendation is suitable for at least some investors based upon that understanding.

94.  Based upon sales and account maintenace of all issued Apple REITs, DLA management was or should have been aware of red flags indicating that management of Apple REIT Ten may adopt improper valuation practices and may unreasonably leverage the REIT in order to continue to issue returns unsupported by the REITs performance.

95.  Especially in light of these red flags, and DLA's role as sole underwriter, DLA personnel did not conduct reasonable due diligence to understand the potential risks and rewards of Apple REIT Ten before recommending the security to customers.  As a result, DLA was not in a position to determine whether Apple REIT Ten would be suitable for any investor prior to recommending it to customers.

96.  By failing to conduct adequate due diligence to fulfill its reasonable-basis suitability obligation, which also violated its duty to observe high standards of commercial honor and just and equitable principals of trade, DLA violated NASD Rule 2310 and Finra Rules 2310(b) and 2010.

See our coverage of suitability here.

The May 27, 2011 Finra Complaint against DLA can be found here.

Finra also fined David Lerner personally $250,000 and suspended him for one year from the securities industry and for two years after that from acting as a principal.




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Topics: reasonable basis suitability, FINRA, Brad Bennett, David Lerner Associates, Apple REIT 10, investments, DLA, Compliance, regulation.

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