David Lerner Associates Inc., a New York-based broker-dealer, has agreed to repay more than $1 million in restitution to resolve allegations by the Financial Industry Regulatory Authority (FINRA) regarding the firm’s inadequate supervisory system. The system failed to properly flag recommendations of illiquid limited partnerships to thousands of customers. The settlement notably includes no fine against the firm.
Between January 2015 and November 2019, representatives of David Lerner Associates recommended two proprietary, illiquid limited partnerships to more than 6,000 customers. FINRA’s investigation found that the firm overlooked critical red flags related to the suitability of these investments and made unsuitable recommendations to approximately 200 customers, including over 120 individuals aged 76 or older.
While David Lerner Associates neither admitted nor denied FINRA’s allegations, the firm reaffirmed its commitment to compliance and regulatory standards. The company stated that investors holding the questioned investments currently enjoy net unrealized profits and receive approximately 7% in annual distributions.
The limited partnerships, LP1 and LP2, involved significant sales—approximately $374 million and $219 million, respectively—in interests tied to hydrocarbon-producing properties. Both partnerships’ prospectuses disclosed that their units were illiquid, with no established market for resale, no guaranteed distributions, and limited operating history.
FINRA’s findings highlighted that the firm’s supervisory controls were not reasonably designed to oversee the sale of these limited partnerships. In some cases, representatives altered customer risk profiles and liquid net worth without proper documentation, enabling sales to customers otherwise deemed ineligible. Additionally, representatives resubmitted trades after initial system rejections due to supervisory compliance issues.
As part of the settlement, David Lerner Associates agreed to a censure and to reconfirm the investment profiles of affected customers. The firm will also engage an independent consultant to review these reconfirmations.
In related actions, FINRA sanctioned three individuals associated with the firm: Daniel Todd Lerner and Maxim Tulupnikoff received two-month suspensions and $5,000 fines each, while Martin Lerner was suspended for one month as a principal and fined $10,000.
The firm and these individuals are represented by James Dombach of Davis Wright Tremaine LLP. FINRA is represented in-house by Kerry Land.
Case Reference: Re: David Lerner Associates Inc., FINRA case number 2019063686211.
