WASHINGTON — David Lerner Associates Inc. has agreed to pay about $4.3 million in fines and restitution for charging excessive markups on transactions of municipal bonds and collateralized-mortgage obligations between 2005 and 2012.
The payments, announced Monday by the Financial Industry Regulatory Authority, are part of a larger, $14 million settlement FINRA reached with the Syosset, N.Y.-based firm. The majority of fines and restitution relate to excessive markups and other violations related to the firm’s sale of shares of a real-estate investment trust.
As part of the settlement, the firm’s founder, president and chief executive David Lerner will pay $250,000 in fines. He has been barred from the securities industry for one year and from acting as a securities principal for an additional two years.
In addition, David Lerner’s head trader William Mason was hit a $200,000 fine and a six-month suspension from the industry, according to settlement documents.
In a statement, the firm said there is no evidence the investments weren’t suitable for its customers.
The firm said it “decided it is time to move ... past these distractions and settle with the regulators.”
The muni-related payments include $2.3 million in fines and $1.4 million in restitution to customers imposed on the firm by a FINRA hearing panel in April. The firm appealed the hearing panel’s findings, but agreed to drop the appeal as part of the settlement.
The panel had said David Lerner violated Municipal Securities Rulemaking Board rules G-17 on fair-dealing and G-30 on prices and commissions by charging prices that were not fair and reasonable on municipal bond transactions executed between Jan. 1, 2005 and Jan. 31, 2007. The fines and restitution were also related to excessive prices charged for collateralized-mortgage obligations.
The firm bought muni bonds, held them for a few hours or few days, and then sold them to customers at “excessive markups” ranging from 3.01% to 5.78%, according to the hearing panel.
As part of the settlement, the David Lerner firm also agreed to pay nearly $600,000 in restitution to customers for similar violations between Feb. 1, 2007 and Oct. 16, 2012.
During that period, the firm charged excessive markups, some up to 22.6%, on thousands of municipal bond transactions. The firm also did not record terms and conditions and the time of receipt on trade memoranda for 1,634 muni bond brokerage orders, FINRA said.
The firm also charged excessive markups of between 4.1% and 26.3% on 880 collateralized mortgage obligations during the period, FINRA alleged.
In addition to muni-related fines and restitution, David Lerner agreed to pay roughly $12 million in restitution to customers that were charged excessive markups for shares of Apple REIT Ten, a real estate investment trust sold solely by the firm.
FINRA said the firm marketed the trust to unsophisticated investors, including elderly investors, with inadequate due diligence as to suitability. The firm also used misleading market material, exaggerated prospects of the trust and omitted material information, FINRA alleged.
As part of the settlement, the firm agreed to hire an independent consultant to review the firm’s policies and systems related to markups and markdowns of muni bonds and collateralized mortgage obligations.
Prior to working in the finance industry again, Lerner must pass a Series 7 exam. He must pass the Series 24 exam prior to working as a securities principal.
Reached for comment, staff at the firm referred questions to Great Neck, N.Y.-based media relations firm Zimmerman/Edelson, Inc., which issued a statement on behalf of the firm.
“Contrary to FINRA’s suggestion in the press release, there were no charges nor findings that any of the investments were not in fact suitable for any of the individual investors,” the statement said.
It added that Lerner will be “stepping aside” for the next year and will focus on other non-dealer-related businesses, such as the “Spirit of America mutual funds.”
The statement quoted Lerner saying, “I am proud of what has been accomplished at David Lerner Associates, our exceptional employees, and of the fact that the firm has been able to help tens of thousands of people over the years.”
David Lerner has five offices in the New York metropolitan area and an office in Boca Raton, Fla.