In the end, it appears that Claimants chose to stand up, take their remaining chips off the table, push their chair back to the table, and walk away. At that point, Respondents pursued the expungement request on behalf of Respondent Norton.On or about August 11, 2015, FINRA Dispute Resolution attempted to determine the status of this matter, and alerted the parties that this matter would be referred to the panel, if we did not hear from them by August 26, 2015.By email dated September 24, 2015, Claimant's counsel requested additional 30-days to confer with Claimants to determine whether or not they wish to pursue this matter.By email dated October 7, 2015, Claimants' counsel notified FINRA Dispute Resolution that Claimants do not object to the closure of this matter, but did not confirm whether Claimants were withdrawing their claims with or without prejudice.By email dated October 7, 2015, FINRA Dispute Resolution attempted to determine whether Claimants were withdrawing their claims with prejudice since Respondents answered Claimants' claims. Claimants did not respond to FINRA's inquiry.By email dated November 11, 2015, Respondents requested that this matter be dismissed with prejudice. Claimants did not file a response. By Order dated December 16, 2015, the Panel granted Respondents' request and dismissed Claimants' claim with prejudice.
Bill Singer's CommentClaimants and their attorney failed to meet FINRA's established deadlines required to move this case forward, therefore, their case has been deemed Abandoned. Claimants failed to present any documentation that they sustained any losses on the accounts in question. No evidence has been provided to prove that Respondents misrepresented or omitted information regarding the REITs in question, that the REITs were unsuitable for Claimants, or Claimants suffered damages.Michael Norton and David Lerner Associates did not engage in any activity that breached FINRA Rules, did not breach any duty owed to Claimants, did not make unsuitable recommendations (Apple REITS Six through Ten), did not misrepresent anything to Claimants, and did not cause the alleged (and unspecified) decline in value in Claimants account. Claimants earned a combined profit of $96,656 for the investments in question.On April 3, 2013, Judge K. Matsumoto of the U.S. District Court for the Eastern District of New York issued a fifty-seven page memorandum and order dismissing, with prejudice, all claims against defendants - David Lerner Associates, its president, Apple REITs Six Through Ten, and certain officers and directors of the REITs in a punitive class action: In re Apple REITs Litigation, 11cv 02919 (EDNY.)The Court found that the offering documents and related documents contained no material misstatements or omissions, and that the Apple REITs offering documents fully disclosed the information that plaintiffs claimed was omitted or misrepresented. This is identical to Claimants' claim in this action: misrepresentation of investment objectives and the value of the Apple REITs.The Second Circuit, on appeal, affirmed the district court's holding that "the alleged misleading statements were not actionable." Thus, as a matter of law, Norton's attorney, Eugene L. Small, states," Respondents did not mislead Claimants."
In fairness to the Claimants Palladinos, they filed their FINRA Arbitration Statement of Claim in October 2012, which was about six months before Judge Matsumoto's ruling and about 18 months before the Second Circuit's largely affirming opinion. Notwithstanding, by April 2014, when the Second Circuit had largely delivered a lethal blow to the Apple REIT cases, one has to wonder what the Palladinos and their counsel were contemplating. Perhaps the arbitration was in the midst of settlement discussions or perhaps Claimants were hoping that Respondents would blink. It's all the stuff of conjecture but, in the end, we must be mindful of Judge Matsumoto's blunt admonition that "the Apple REITs are currently functioning in exactly the manner that was anticipated and disclosed in the REITs' prospectuses and other offering documents." Truly, such language from the bench doesn't leave a lot of wiggle room for disgruntled investors to advance most claims.
Ultimately, the issue of the Apple REITs is still, in some quarters, a contentious one. Detractors point to the October 2012 FINRA settlement: "FINRA Sanctions David Lerner Associates $14 Million for Unfair Practices in Sale of Apple REIT Ten and for Charging Excessive Markups on Municipal Bonds and CMOs" (Press Release, FINRA, October 22, 2012). In that FINRA settlement (which respondents entered into without admitting or denying the allegations), DLA was ordered to pay about$12 million in restitution to affected customers who purchased shares in Apple REIT Ten, and to customers who were charged excessive markups on municipal bonds and collateralized mortgage obligations. FINRA fined DLA founder, President, and CEO David Lerner $250,000 and suspended him for one year in all capacities, to be followed by a two-year principal-only suspension. The firm's Head Trader, William Mason, was fined $200,000 and suspended six months.
How do we put into context the relatively harsh language and sanctions in the 2012 FINRA settlement with the relatively supportive language from both the EDNY and Second Circuit?
To some extent, one can make some sense out of the disparate outcomes by noting that we are comparing a self-regulatory matter with cases before the civil courts. One must always be mindful of the historic complaints by many smaller FINRA member firms that they feel, at times, strong-armed by the self regulator and that they do not feel that FINRA's approach to regulation is even-handed when it comes to investigating, charging, and sanctioning larger versus smaller firms. Similarly, FINRA and those who support self regulation, would argue the opposite: That self regulation is fair and that the history of gripes from smaller firms is indicative of the bona fides of the enforcement effort.