NEW YORK, June 20 (Reuters) - Investors in a series of real estate investment trusts have accused the funds' managers and underwriters of duping them into buying more than $6 billion worth of shares by concealing the questionable nature of the underlying investments.
David Lerner & Associates Inc. (DLA) was named as a defendant in two class-action lawsuits, filed separately in federal courts in Brooklyn and New Jersey, on behalf of investors who purchased public shares of a series of real estate investment trusts known as Apple REITs, which are not traded on standard stock exchanges.
DLA, which distributed and underwrote the Apple REIT offerings, has made more than $600 million by selling $6 billion in Apple REIT shares over the last seven years, according to the New Jersey lawsuit. DLA has worked on public offerings for seven Apple REITs, used primarily to finance investments in hotels and other real estate purchases.
The New Jersey lawsuit filed Monday accuses DLA of targeting unsophisticated and elderly individuals by "misstating the fundamental business model" of the Apple REITs, omitting material information about the trusts' operation, failing to disclose their material risks, and misrepresenting their value.
According to allegations in both lawsuits, DLA valued shares in five Apple REITs at a steady $11, paying out distributions between 7 and 8 percent. But the valuations were a sham designed to cover the deteriorating worth of the investments in a volatile real estate market, the plaintiffs contend.
FINRA COMPLAINT
The lawsuits claim distributions were paid by new money from fresh investors or by tapping lines of credit, a structure similar to a Ponzi scheme. By failing to communicate the real value of the investments -- particularly as the older Apple REITs were faltering -- DLA failed to do its due diligence in preparing and offering the shares, according to the lawsuits.
The New Jersey lawsuit is filed on behalf of all investors who purchased the securities through DLA. The Brooklyn complaint, filed late Thursday, only names investors in two newer funds.
DLA senior vice-president and general counsel Joseph Pickard called the claims "nothing more than frivolous lawsuits filed by attorneys seeking a quick payday."
"The allegations are baseless and rife with falsehoods, distortions and misleading statements, and we look forward to the opportunity to be vindicated in a court of law," Pickard said in a statement.
On May 31, the Financial Industry Regulatory Authority filed a complaint against DLA over the Apple REIT Ten stock sales. The FINRA complaint accused DLA of failing to conduct a reasonable investigation into the true value of the investments, providing misleading information on its website about the sales, and targeting "unsophisticated and elderly customers."
DLA has denied FINRA's allegations.
The lawsuits name the Apple REIT Companies Inc. and its chairman and CEO, Glade Knight, as defendants in addition to DLA, as well as specific REIT funds and managers. A call to Apple REIT Companies was not immediately returned.
The cases are Kronberg et al v. David Lerner Associates Inc. et al, in the U.S. District Court for the District of New Jersey, number not available; and Kowalski v. Apple REIT Ten Inc. et al, in the U.S. District Court for the Eastern District of New York, no. 11-2919.
For the Kronberg plaintiffs: James Cecchi of Carella Byrne Cecchi Olstein Brody & Agnello; Jacob Zamansky, Edward Glenn, Kevin Galbraith and Daniel Fried of Zamansky & Associates; Jonathan Levine and Daniel Girard of Girard Gibbs; and David Meyer and Matthew Wilson of David P. Meyer & Associates.
For the Brooklyn plaintiffs: Lawrence Sucharow, Joseph Sternberg and Michael Woolley of Labaton Sucharow; Nicholas Chimicles, Kimberly Donaldson and Timothy Mathews of Chimicles & Tikellis; James Eccleston of Eccleston Law Offices; and Andrew Stoltmann of Stoltmann Law Offices.
(Reporting by Jessica Dye)