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Investor Alerts Recent News About Deutsch & Lipner's Victories Over UBS
When
Will FINRA Stop The Structured Products Insanity?
WHY ARE THEY PICKING ON
POPPI? When I saw that FINRA has brought sales practice charges against David Lerner & Associates, the Long Island municipal bond house, I wasn’t surprised. FINRA too often seems to offer the big guys either a blind eye or sweetheart deal (See Lipner, “Will FINRA Stop The Structured Products Insanity?,” Forbes.com, June 16, 2011), so when they go after the small fry, I’m never surprised. FINRA had, after all, targeted Lerner before. In 2004, FINRA fined them for offering sales contests that FINRA had recently prohibited. In 2005, they were fined for misleading advertisements that asserted that Lerner had achieved 10% annual returns for thousands of people, a claim which FINRA said was an unjustified exaggeration. Then in 2006, FINRA suspended the firm for 30 days for improper flipping of variable annuities. These are all serious violations, to be sure, but they are the kind of stuff going on at all the Wall Street firms at the time, and it always bothered me that some big firms skated while the little guys were the targets. So when I read that FINRA had leveled unsuitability and other charges against Lerner for the sale of certain REITs, I was skeptical. I figured FINRA was at it again, going after the less-powerful firms. 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? Sure, Lerner’s FINRA history showed an occasional penchant, like everyone else on Wall Street, for enriching itself at its clients’ expense, but I know only a few folks who have lost money on municipal bonds. So, I thought, why are they again picking on Poppi? I knew Lerner had, in the 90s, branched out from municipal bonds because these bonds’ tax-free status makes them inappropriate for IRAs, Keoughs and SEPs. I had seen them selling some mutual funds, and I knew about the annuities. But Lerner’s commercials derided the brokerage houses whose clients were hurt in the tech-wreck. And I had heard David himself on the radio, talking about the “middle ground” of investing. I never gave much thought as to what that was, but I figured David Lerner was still mostly a bond house. Was I wrong! 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. Lerner’s web site claims wonderful results. The site touts dividends of 7-8%, and it boasts that two versions of the REITs were bought out at handsome prices (during the boom years, of course). It also names several other iterations of the funds, saying they are “no longer open to new investors.” That is scary marketing-speak in the post-Madoff era. 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. The FINRA complaint paints an ugly picture. David Lerner has been earning huge fees selling this stuff. It explains that David Lerner & Associates earns 10 percent of the amount of all the offerings of Apple REITs, as well as other fees. It explains that Apple REIT sales have generated $600 million for Lerner, and that, incredibly, they account for 60% to 70% of the firm’s business annually since 1996. I guess municipal bonds aren’t a good enough product line anymore. The business Apple is in – hospitality – is notoriously cyclical and risky. These Apple REITs remind me of the Prudential Limited Partnerships of the 1980s, where slick brochures and misleading materials were used to sell a variety of real estate investments, including hotels and time shares. Prudential reaped huge fees, and kept up the sales effort during a flagging economy by doing exactly what Apple and Lerner are charged with – using borrowings to keep up dividends, and hiding the effect of market fluctuations by pricing the investments at “par” on monthly statements. A lot of folks got hurt. If what FINRA charges is true, this was an invidious fraud. The liquidity of these REITs is in serious doubt, the dividends will have to be cut, and folks will soon find out that they lost a lot of money. That’s why they are picking on Poppi. He may very well deserve it. ===================== Seth Lipner is a member of Deutsch & Lipner, a law firm in Garden City, N.Y., that represents investors in arbitration. We offer a free consultation to any purchaser of David Lerner’s REIT sales. Recent News About Deutsch & Lipner's Victories Over UBSApril 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.
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