The Apple REIT lawsuits produced mixed results for investors: the main consolidated class action was dismissed in 2013, but FINRA and the SEC pursued their own cases and extracted roughly $14 million in fines and restitution from David Lerner Associates, additional penalties from Apple REIT executives, and many individual investors later recovered money through FINRA arbitration claims against the brokerage that sold the shares.
What Investors Were Fighting About
The Apple REITs were a family of non-traded real estate investment trusts, Apple REIT Six through Ten, founded by Virginia businessman Glade M. Knight. Their shares were sold exclusively through David Lerner Associates at a fixed price of $11.00 per unit that stayed constant for years regardless of what happened in the real estate market or to the underlying hotel properties.1SEC. In the Matter of Apple REIT Six, Inc., et al., Admin. Proc. File No. 3-15750
Regulators later found that $11.00 figure had been “arbitrarily established” and was not supported by any appraisal or recognized valuation methodology. Internal strategic models and third-party bank analyses indicated the shares were worth less, especially after the 2008 downturn, yet the REITs kept the $11.00 price in their public filings.1SEC. In the Matter of Apple REIT Six, Inc., et al., Admin. Proc. File No. 3-15750 The seven to eight percent annual distributions that made the funds look attractive were not fully covered by operating income. They were funded partly by borrowing and by returning investors’ own capital, which some plaintiffs characterized as a “Ponzi-like” structure.2CCH. In Re Apple REITs Litigation
David Lerner Associates was the sole distributor. Apple REIT sales made up sixty to seventy percent of the firm’s annual business and generated more than $600 million in fees and commissions.3Zamansky LLC. Kronberg v. David Lerner Associates Inc., et al., Complaint Marketing materials called the REITs a “goldmine” and “cash cow” and pitched them as safe, conservative investments suitable for retirees.4Securities Lslawyers. Investor Alert: REIT Default Fraud
FINRA’s Case Against David Lerner Associates
FINRA filed a complaint against David Lerner Associates in May 2011, alleging the firm misled customers about Apple REIT Ten’s performance, failed to disclose that distributions were funded by borrowing rather than profits, and had no reasonable basis for recommending the REITs as suitable.3Zamansky LLC. Kronberg v. David Lerner Associates Inc., et al., Complaint FINRA’s chief of enforcement said the firm “targeted unsophisticated and elderly customers” and failed to comply with “basic standards of suitability.”5The New York Times. David Lerner Associates Ordered to Pay $14 Million
The matter settled in October 2012. The firm was ordered to pay about $12 million in restitution to customers who purchased Apple REIT Ten shares, and more than $2.3 million in separate fines for charging unfair prices on municipal bonds and collateralized mortgage obligations. David Lerner personally was fined $250,000, suspended from the securities industry for one year, and barred from acting as a principal of a securities firm for two additional years.5The New York Times. David Lerner Associates Ordered to Pay $14 Million6SLCG. David Lerner Associates Fined by FINRA
The SEC’s Case Against the REITs and Their Executives
In February 2014, the SEC issued a cease-and-desist order against Apple REIT Six, Seven, Eight, and Nine, their advisory companies, CEO Glade M. Knight, and CFO Bryan F. Peery.1SEC. In the Matter of Apple REIT Six, Inc., et al., Admin. Proc. File No. 3-15750
The Commission found the REITs had made material misrepresentations by maintaining the $11.00 per-unit price in registration statements and annual reports despite internal and external analyses showing lower values. Between 2008 and 2011, the REITs had also engaged in roughly 25 undisclosed short-term cash transfers between the separate entities, ranging from $25,000 to $20 million, to fund acquisitions, redemptions, and distributions. Knight had personally guaranteed several commercial loans used for shareholder redemptions without disclosing those guarantees, and the REIT advisors had paid undisclosed supplemental compensation to executive officers.1SEC. In the Matter of Apple REIT Six, Inc., et al., Admin. Proc. File No. 3-15750
The respondents settled without admitting or denying the findings. The four fund management entities paid $1.68 million collectively.7Law360. Apple REIT Pays $1.5M to End SEC Investigation Knight paid a $125,000 civil penalty, and Peery paid $50,000.8InvestmentNews. Bad Apple: REITs Fined $15 Million for Disclosure Violations
What Happened to the Class Actions
Multiple class actions were filed against the Apple REIT entities, David Lerner Associates, and their officers beginning in 2011, and were consolidated as In re Apple REITs Litigation, Case No. 11-cv-02919, in the U.S. District Court for the Eastern District of New York. The complaints alleged breach of fiduciary duty, unjust enrichment, negligence, breach of contract, and state and federal securities violations, and described a multi-year scheme to sell over $6 billion in REIT shares by misrepresenting them as safe investments with stable values.9Courthouse News Service. Brokers Accused of Targeting the Elderly3Zamansky LLC. Kronberg v. David Lerner Associates Inc., et al., Complaint
On April 3, 2013, Judge Kiyo A. Matsumoto granted the defendants’ motions to dismiss the consolidated complaint in full and with prejudice. The court found that the REITs were “currently functioning in exactly the manner that was anticipated and disclosed in the REITs’ prospectuses and other offering documents,” that the plaintiffs had not sufficiently alleged damages resulting from the purported misrepresentations, and that value fluctuations tied to the real estate downturn had been disclosed to investors.10Apple Hospitality REIT. Class Action Lawsuits Against Apple REIT Nine Dismissed With Prejudice11Forbes. David Lerner and Apple REITs Defendants in Stunning Class Action Victory
Plaintiffs appealed. In April 2014, the Second Circuit affirmed the dismissal of the federal and state securities claims and the unjust enrichment claims but vacated the dismissal of state-law claims for breach of fiduciary duty, aiding and abetting, and negligence, sending those back to the district court.12SEC. Apple REIT Ten SEC Filing, Legal Proceedings
A separate shareholder class action, Moses v. Apple Hospitality REIT, Inc., was filed in May 2014 in the Eastern District of New York and proceeded from 2016 to 2018 before Judge Ramon E. Reyes Jr., resulting in a $5.5 million recovery for the plaintiff class.13Investor Lawyers. Case Results14Law360. Moses v. Apple Hospitality REIT, Inc. et al. Two other cases were narrower in scope: a challenge to Apple Hospitality’s dividend reinvestment plan pricing, Wenzel v. Knight, was dismissed in June 2015 with Judge John A. Gibney Jr. ruling that the program “functioned as intended,”15Richmond BizSense. REIT Shakes Class Action Suit and a derivative challenge to the $1.3 billion Apple Hospitality-Apple REIT Ten merger, Quinn v. Knight, was allowed to proceed in November 2016.16Bloomberg Law. Apple REIT Ten Can’t Dodge Claims Over $1.3B Merger
Individual Investor Arbitration Claims
After the consolidated class action was dismissed in 2013, securities attorneys encouraged Apple REIT investors to pursue individual FINRA arbitration claims, which could focus on the specific suitability violations relevant to each investor’s financial situation rather than the broader legal theories that had failed in court.17InvestmentNews. First Apple REIT Case Goes Against Lerner
The first reported win came in mid-2012, when a FINRA arbitrator ordered David Lerner Associates to pay $24,450 in compensatory damages to claimants Joseph Graziose and Florence Hechtel, who were required to return their Apple REIT Nine shares to the firm as part of the award. An estimated 100 additional claims were pending at the time.17InvestmentNews. First Apple REIT Case Goes Against Lerner Outcomes varied. One 2012 panel directed David Lerner Associates to repurchase a claimant’s Apple REIT units at $7.00 per share in an award totaling $260,000. Other cases settled for amounts ranging from a few thousand dollars to $180,000, sometimes structured as the firm repurchasing the investor’s REIT units.18FINRA BrokerCheck. David Lerner BrokerCheck Summary
Where Things Stand Now
The Apple REIT entities eventually consolidated. Apple REIT Six, Seven, and Eight were merged into what became Apple Hospitality REIT, which then merged with Apple REIT Ten in a $1.3 billion deal that closed in 2016.19Blue Vault Partners. Apple Hospitality REIT/Apple REIT Ten Merger Can Move Forward Apple Hospitality REIT is now a publicly traded company. Its 2024 annual report discloses no active litigation tied to the original Apple REIT investor claims.20Apple Hospitality REIT. 2024 Annual Report on Form 10-K