Complaint Review: Eccleston Zamansky Gibbs MacKenzie Patterson Fuller Lp - Moraga California

There is nothing more tragic than a defrauded investor continuing to be defrauded or equally possible here, a David Lerner crony pretending to be a happy Apple REIT investor.

Whichever the case, his or her post requires a reply.  Preliminarily, Eccleston Law has no relationship with the Zamansky firm of the MacKenzie firm.  Eccleston Law does have a co-counsel relationship with Stoltmann Law.

Now to the important questions.

First, what is David Lerner Associates? It is a firm that is in trouble now with the securities regulators (FINRA and the SEC) and has been in trouble in the past. Consider:

In 2004, David Lerner Associates agreed to a Cease and Desist Order with the SEC involving the sale of unsuitable REITs to 4 customers of the firm. Regarding one of Lerners employees, the SEC Order reads that the employee made investment recommendations "that his customers purchase illiquid REIT securities on margin collateralized by the customers' bond holdings were contrary to the objectives of his customers who desired highly-liquid bond or tax-free bond issues. The margin purchases of illiquid REIT securities using the customers' liquid bonds as collateral effectively rendered the customers' holdings illiquid. The customers could not obtain cash by selling the REIT securities, which were illiquid, or by selling bonds, which collateralized the REIT securities." 

Ultimately, three customers "sustained losses arising from the illiquid REIT securities that Merl purchased for their accounts, as follows: (1) an 86-year old customer lost $103,281; (2) a 75-year old customer lost $37,778; and (3) a 55-year old customer lost $34,420".

Regarding another one of Lerners employees, the SEC Order states that the employee's "recommendation and offer of securities that were unsuitable for his customer violated Section 17(a) of the Securities Act. [The employee's] investment recommendations were contrary to the objectives of his customer, a married, middle-aged man with two children residing in his home. The customer wanted a diversified investment for the approximately $30,000 in his IRA account. This IRA account constituted nearly all of the customer's savings and was the customer's financial safety net. [The employee's] concentrated the customer's IRA account in an illiquid REIT security and did not provide the diversification that the customer desired. [The] customer sustained a loss of $6,518 arising from the illiquid REIT securities [the employee] purchased for his IRA account."
 
Second, what am I receiving monthly? You are not receiving dividends or interest but instead a return of capital (your own money) or the proceeds of a loan. Consider:

FINRA has identified several particular problems that apply not just to Apple REIT 10 but also to Apple REIT 6 through 9.  For example, David Lerner Associates, Inc. has represented to investors that they would receive a 7-8% annualized return, distributed each month.  However, under harsh market conditions, the REITs have not met the performance expectations outlined in the sales pitches. While Apple REITs were profitable until 2004, they since have failed to remain profitable.

With no profits, how could the firm pay monthly distributions?  According to the FINRA complaint, the firm decided to continue to pay the unsustainably high monthly distributions instead of taking the prudent and conservative course of reducing distributions.  To do so, however, the firm was forced to take out loans, which needed to be repaid by the Apple REITs, as well as return the investors own capital.  Unfortunately for investors, this allowed the Apple REITs to maintain their appearance of success. 

To further the deception, David Lerner Associates, Inc. even misleadingly cited the distributions as a yield on monthly statements.  This created an illusion of profitability, and helped sell future issues of Apple REITs.  To date, the firm continues to saddle the Apple REIT partnerships with debt.  As recently as April 19, Apple REIT 8 secured a $20 million dollar loan to help cover distribution costs. 

To put the problem in perspective, profitable, income-producing healthy REITs have distribution payout ratios between 90-100%.  By comparison, Apple REIT 8s on the respirator payout ratio swelled from 210% in 2008 to 387% in 2011!
 
Third, is my investment secure? No, real estate investing, particularly in hotels, is extremely risky and volatile, and David Lerner Associates is incorrectly valuing your Apple REIT shares at $11 per share  Consider:

These are the facts:
1)    Apple REIT 6 cannot find a buyer;
2)    Apple REIT 7 and 8 have had no cash for 2 years;
3)    Apple REIT 8 is in default on 4 of its properties; and
4)    Apple REIT 9 invested in oil and gas property and has been paying investors monthly distributions entirely with their own money yet calling it yield.

The FINRA complaint has identified relates to the valuation of Apple REIT shares.  Since the 2004 inception of Apple REIT 6, David Lerner Associates, Inc. has represented the value of Apple REIT 6-9 shares to be a constant, $11 per share.  This is a fairy tale.  FINRA notes, The $11 per share valuation Apple REITs Six through Nine adopted is currently inaccurate and has been inaccurate in the past. 

Translation: investors have lost money!  Moreover, David Lerner Associates, Inc. has continued to embrace this share overvaluation despite what the FINRA complaint lists as years of market fluctuations, performance declines, increased leverage and excessive return of capital to investors.  The valuation was false and misleading, and FINRA contends that it should have been a red flag for David Lerner Associates, Inc.  FINRA argues that the firm should have investigated previous Apple REITs before selling Apple REIT 10 due to this artificial valuation.  FINRA has rejected the firms argument that since current Apple shareholders were still buying at $11 a share, the price was valid. 

Fourth, what is the real value of my shares? Consider:

Here are the current estimates:
1.  Glade Knight, promoter of Apple REITs, statement to the New York Times: Who knows what the value is?  http://www.nytimes.com/2011/06/03/business/03norris.html.
2.  Securities regulator FINRA, disciplinary complaint against David Lerner Associates: $11 share price is constant and artificial. $11 per share value for Apple REITs 6 through 9 is currently inaccurate and has been inaccurate in the past. (http://disciplinaryactions.finra.org/viewdocument.aspx?DocNB=17059). 
3. MacKenzie Patterson Fuller, L.P., tender offer for Apple REIT 7 and 8: $3 per share. http://www.sec.gov/Archives/edgar/data/1102946/000110294611000018/applereitsevenltr611.htm  and http://www.sec.gov/Archives/edgar/data/1102946/000110294611000017/applereiteightltr611.htm
4. Apple REIT 7 and Apple REIT 8, own SEC filings: $7.83 and $7.57 per share, respectively.
5. David Lerner: Displayed a picture of the Mona Lisa, and asked, What is it worth? He attempted to answer, No one knows until it ultimately is sold.

Unfortunately with losses as high as 70%  (Answer #3), Apple REIT answers no longer can believe the David Lerner Associates fantasy value of a constant $11 per share.  Investors should act now to protect whatever value they have in Apple REITs, by seeking counsel as to their available rights of rescission (voiding investment and returning money) and damages.
 
Fifth, David Lerner Gives Me Steak Dinners and Makes Funny Jokes; Why Would He Sell Me Something Bad?

Represented to be secure, safer than the stock market, and generating a high annual return, David Lerner Associates, Inc. has sold its non-traded REITs to unsophisticated and elderly customers, according to the FINRA complaint, and now may suffer the consequences.  The firm has had great success in its sales.  Since 1992, the firm has sold $6.8 billion of non-traded REITs to approximately 122,600 customers by way of direct marketing through dinner and luncheon seminars.  Apple 10 currently seeks to raise $2 billion, mostly invested in extended stay hotels of two national chains, for which David Lerner Associates, Inc. stands to reap about $200 million in commissions and fees.

Of course, David Lerner Associates, Inc. had every reason to prop up the incredibly lucrative non-traded REIT sales machine.  FINRAs complaint notes that Apple REIT sales had accounted for 60-70% of David Lerner Associates, Inc. business since 1996. In order to attract more investors and capital, the firm published the distribution data for Apple REITs 6-9 on its website.  This data misled investors into believing that Apple REIT 10 would be profitable.  The data also failed to acknowledge the recent reduction in distribution rates and that income from the prior Apple REITs was insufficient to support the 7-8% returns.  
 
Fourth, what are my rights?  You can and should retain counsel to explore arbitration and class action options to exit Apple REITs, recover your losses and seek other relief.

Rather than await the outcome of FINRAs enforcement action and any such relief, investors immediately should seek counsel from competent securities law attorneys in order to explore all of their options and remedies currently available.  For the reasons stated above, the problems are not confined to Apple REIT 10 which FINRA alleges to be a rotten apple but also relate to Apple REITs 6 through 9!

Fifth, why trust the SEC and FINRA or Eccleston Law and Stoltmann Law?  They all are reputable.
FINRA and the SEC are investor protection advocates.  See www.sec.gov and www.finra.org.
Eccleston Law attorneys adhere to nothing but the highest ethical standards, including honesty and integrity.  In fact, numerous independent attorney rating agencies have evaluated the firm and its attorneys and have given them their highest ratings.  For example, the prestigious Martindale-Hubble has bestowed upon James Eccleston the coveted AV Peer Review Rating (which is the highest possible rating for both integrity and ethics). James Eccleston has been named an Illinois Super Lawyer every year since its inception in 2005.

Likewise, Andrew Stoltmann has been named an Illinois Super Lawyer Rising Star and enjoys an excellent reputation nationwide.  The Stoltmann firm has represented elderly, the disableled, wealthy, charitable foundations, professional athletes and others across the U.S. and have recovered millions for victims of securities fraud.  Its clients and their cases have been profiled in the Wall Street Journal, New York Times, Business Week, Forbes, Fortune and dozens of other publications.