David Lerner & Associate’s reputation was built on its municipal bond business. Many will recall the ubiquitous commercials, with David Lerner himself as the spokesman, urging the public to “take a tip from Poppi and buy [safe] bonds.”  What could be wrong with that?

In June 2008, FINRA filed a huge sales practices complaint against David Lerner. With the big firms constantly getting off despite their bad behavior, I thought – why are they picking on Poppi?

Well, it seems that David Lerner Associates has been acting as underwriter and exclusive sales agent for a series of hospitality REITs called Apple since 1993. These Real Estate Investment Trusts own extended stay hotels and “other full service and select service hotels.” Lerner claims on its web site that its clients have invested, to date, $6.3 billion in these vehicles.

According to FINRA, much of what is advertised by David Lerner & Associates is an illusion. The nice dividends to Apple investors are being subsidized by borrowings. The prices Lerner prints on its clients’ monthly statements – pegged at the purchase price of $11 – do not reflect the fact that real estate valuations are way down. There are, according to FINRA, numerous sales to elderly and retired individuals, and to unsophisticated investors, sometimes in high concentration.

To read the full story – “WHY ARE THEY PICKING ON POPPI?” [click here]

Recent News About Deutsch & Lipner's Victories Over UBS

April 11, 2011

Today, after two years of supposed investigation, FINRA announced a settlement with UBS regarding their sale to the public of $1 billion in Lehman Structured Products. The settlement and restitution fund, which together total about $10 million, is 1% of that figure. 1%.

This settlement is a complete whitewash of UBS' practices. The evidence we have amassed show clear violations of the securities laws going back to the beginning of UBS' sales of Lehman products in 2007. The settlement announced today ignores crucial evidence of wrongdoing. It rewards UBS' common practice of mis-coding accounts as "moderate" when the investor was in fact "conservative." It separates the 100% Principal Protected Notes from the others, even though the sales were equally flawed.

Anyone who bought these products, whether 100% Principal Protected or the partially-protected version deserves full restitution. This settlement proves that FINRA is totally incompetent, that it does not protect investors, and that it is business as usual on Wall Street. Unlike the so-called regulators, we will continue to battle with UBS to obtain a just result for aggrieved investors.

UBS Having Hard Time With Lehman Structured Products Arbitration, April 26, 2010

UBS Loses FINRA Arbitration Case Over Lehman Notes

WHEN WILL FINRA STOP THE STRUCTURED PRODUCTS INSANITY?

By: Seth E, Lipner

Just this week – in the Year 2011 – Richard Ketchum, head of FINRA, announced at that regulator’s annual conference, that Structured Product sales to retail investors are “an area of concern.” While predicting future enforcement actions “with respect to particularly egregious examples,” he admonished individual brokers that they must “truly understand the products they sell.” Mr. Ketchum even felt the need to warn brokers about relying on their firm’s approval as a surrogate for a thorough suitability analysis.

Good morning, Mr. Ketchum! How long have you been asleep? Your own organization warned its member firms twice in 2005 about the way they were selling structured products. In one Notice to Members from 2005, back when FINRA was still called the NASD, they noted that “[a]s a result of a recent review of members that sell structured products, NASD Staff is concerned that members may not be fulfilling their sales practice obligations. . . .”

Then, in 2008, when the markets fell as a result of the fallout from Wall Street’s sub-prime orgy, investors really got burned. Folks who had bought Lehman-issued Structured Products from UBS learned, to their almost-universal surprise, that their supposedly “Principal-Protected” structured products were not protected. Despite the fancy and alluring name, it was all just unsecured debt. Investors at other firms like Merrill, Morgan Stanley and Smith Barney learned that their “convertible notes,” bought to earn income, had overnight been “converted” into depreciated stocks. Investor losses were huge.

These catastrophes for investors occurred because of the confluence several problems all related to the same issue – Structured Products are just too complicated for ordinary investors to understand and evaluate. They are, in reality, exotic derivatives, a fact FINRA has repeatedly – though apparently to little avail – emphasized to its member firms.

These products travel under a variety of aliases, but in the end, they are really complex option combinations disguised as something else. Indeed, back in 2005, FINRA warned its members that they should treat these sales the same way they treat other option transactions – requiring that investors have a higher-than-normal understanding of investments, and requiring a higher level of supervision and disclosure by the firm. The firms ignored these FINRA warnings. Sales were too good.

But it wasn’t just the investors who didn’t fully understand the products. Many brokers apparently didn’t understand them either, probably because, as Mr. Ketchum’s recent epiphany shows, the brokers were relying on their firms to explain it all correctly. And the firms didn’t do that. Indeed, many brokers, who now find their CRD records marred by numerous investor complaints, are suing their firms, seeking “expungement” for this very reason.

Late in 2009 and again early in 2010, FINRA issued a set of new Notices, once again warning its member firms that they “must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and [that they have] a duty to ensure that their registered representatives understand the risks, terms and costs

associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.” I guess the prior message had not gotten through.

Then in April 2011, FINRA finally struck. Well, sort of. They sanctioned UBS for a series of improper sales techniques regarding their sale of Lehman structured products. The FINRA findings show that UBS had totally ignored all of FINRA’s prior warnings. So FINRA fined them $2.5 million. Yup, $2.5 million. That will certainly put a crimp in the UBS budget for paper clips! (It probably helped UBS that its lead attorney was, until 2006, the head of enforcement at FINRA.)

UBS’ customers had been sold nearly $1 billion of Lehman Structured Products. It is still not clear whether FINRA considers that level of loss to fall within Richard Ketchum’s definition of “egregious.” But I think most folks who were sold these Lehman Structured Products think the minuscule fine is most egregious.

When will FINRA stop this insanity? Isn’t it clear by now that these newfangled financial products exist just to enrich Wall Street at the expense of naive investors? Isn’t it enough already? Wall Street is still selling tons of this stuff – nearly $50 billion last year, according to Bloomberg.

True to form, FINRA, the so-called “regulator,” is still issuing flaccid warnings, imposing meaningless fines, and threatening to go after any “particularly egregious examples.”

Great country, America.

_______________________________

Seth Lipner is Pofessor of Lw at the Zicklin School of Business, Baruch College, CUNY. He is also a member of Deutsch & Lipner, a law firm in Garden City, N.Y. that represents investors in arbitration.