The Class Action Complaint alleges that David Lerner acted negligently in its sales, marketing and underwriting of more than $3.2 billion of securities in Apple REITs to DLA' brokerage customers. DLA allegedly sold Apple REITs, which invested in extended stay hotels such as Marriott and Hilton, to many elderly, retired and/or unsophisticated customers, as conservative investments that paid safe and secure returns from earnings. The Complaint alleges that DLA negligently misrepresented the risks associated with the Apple REITs which were not conservative investments, and the source of the returns. The Company also alleges that DLA misstated the fundamental business model of the Apple REITs, and omitted material information about how the Apple REITs were intended to operate.
The Complaint further alleges that DLA negligently failed to disclose to investors that Apple REITs were sold at artificial prices of $11 per share, and that its 7-8% returns paid to investors were not from income or funds from operations but paid from new investor money or borrowing. Since 2007, DLA also allegedly failed to disclose that the Apple REITs were not financially healthy but that they had deteriorated far below the artificial $11 values on investors' account statements. The Apple REITs also, as alleged, had not paid dividends from earnings for over seven years, and that 7-8% dividends were likely unsustainable in the future. DLA allegedly breached its due diligence obligations, and obligations as financial advisor to customers, and investors have unknowingly suffered large unrealized losses.
For its efforts, DLA received more than $600 million in fees and commissions which represented 60-70% of DLA' business annually over the last seven years. DLA received 10% of all funds invested, which included underwriting fees and marketing expenses. The Complaint alleges that DLA was unjustly enriched at the investors' expense.
The Complaint alleges that the Apple REITs and its primary principal, Glade M. Knight, as liable for DLA' acts under agency law. DLA was the exclusive selling agent for the Apple REITs, and sold to its captive customer base of over 120,000 accounts. DLA used radio, the internet and investor seminars to sell Apple REITs. The Complaint alleges that the financial fortunes of DLA and the Apple REITs were so intertwined that the Apple REITs and Knight are liable for its negligence.
