FINRA Fines David Lerner Associates and Reps More Than $1M for Unsuitable Sales
The Financial Industry Regulatory Authority announced that it has issued a series of disciplinary actions against broker-dealer David Lerner Associates Inc., known as DLA, and several of the company’s associated individuals for recommending unsuitable investments in proprietary, illiquid, energy-focused limited partnerships to retail customers, including senior and unsophisticated investors.
According to FINRA, from January 2015 through November 2019, DLA’s representatives recommended two illiquid, proprietary limited partnerships to thousands of customers. The partnerships were formed to acquire and develop hydrocarbon-producing properties and intended to pay 7% annual distributions with the potential for a liquidity event five to seven years after the end of the offering period. For one fund, DLA sold approximately $374 million in interests, and in the other it sold approximately $219 million – for a combined total of approximately $593 million.
The offering period for the first fund ended in April 2017, and the second ended in November 2019. While the partnerships have continued making scheduled 7% distributions in recent years, neither has undergone a liquidity event. One of the partnerships paused distributions during the COVID-19 pandemic, resuming only partial payments in late 2021.
FINRA further emphasized that the offerings were highly illiquid and speculative, and came with significant risks, all facts that were disclosed in the prospectuses, and, as such, were inappropriate for investors without a high tolerance for illiquidity and risk. In several cases, according to FINRA, DLA representatives updated customer investment profiles to reflect higher risk tolerances or liquid net worth immediately before submitting trades, raising suitability concerns that supervisors failed to adequately investigate.
FINRA stated that the firm’s supervisory system was not reasonably designed to ensure compliance with suitability requirements, and DLA failed to adequately respond to the red flags, such as the updated investment profiles and sales to elderly clients, among others.
Without admitting or denying the charges, DLA agreed to pay restitution of $1,002,566.16 and a censure. It is also banned from selling proprietary, illiquid products for two years and must retain an independent consultant to review its supervisory systems and reconfirm client investment profiles.
Three former DLA reps also entered into separate agreements related to the matter, without admitting or denying the charges:
- Martin Lerner, a former general securities principal who retired in 2024, was fined $10,000 and suspended for one month for failing to reasonably supervise the sales of the partnerships. FINRA cited his approval of trades despite red flags, including last-minute changes to risk tolerance and sales to senior investors;
- Daniel Todd Lerner, a general securities representative and principal with DLA since 2000, was fined $5,000 and suspended for two months. He was found to have recommended a $60,000 investment in the limited partnership to a 92-year-old retiree, despite her “moderate” risk tolerance. The investment represented roughly 25% of her liquid net worth; and
- Maxim Tulupnikoff, registered with DLA since 2013, was also fined $5,000 and suspended for two months. FINRA determined that he made nine unsuitable partnership recommendations totaling nearly $148,000 to a married couple, both around age 50, who had a moderately conservative risk profile and were saving for retirement.
In 2017, DLA was fined by the New Jersey Securities Bureau for similarly selling non-traded REITs to investors who did not meet suitability standards.
Founded in 1976, David Lerner Associates is a privately held securities broker-dealer with client assets in excess of $4 billion. The firm is headquartered in Syosset, N.Y., with multiple branch locations throughout the New York tri-state area and Florida.
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