And yet some people who purchased an investment in hotels then have received comforting account statements from their broker, David Lerner Associates. If you believe those statements, the value of their real estate investment trust has never wavered.

Unfortunately, that is nonsense. The real estate investment trust, Apple REIT Eight, is facing significant problems. It has failed to make mortgage payments on four hotels it owns, and says it may have to surrender the properties to the lenders. Yet it has not written down the values of those hotels on its financial statements.

It has made monthly payouts to investors, but much of the money needed to make those payments was borrowed. At first, borrowing was easy, but it seems to have become more difficult. The last loan was made after the trust’s chief executive agreed to personally guarantee repayment.

Yet every month David Lerner has sent out statements showing the value of shares in Apple Eight at $11 each, just what most of them sold for. The first investors in 2007 were sold shares at $10.50, so their statements indicate gains.

This week the Financial Industry Regulatory Authority filed a disciplinary action against Lerner, accusing it of misleading investors in selling the current Apple REIT, No. 10. It said Lerner was “targeting unsophisticated and elderly customers with unsuitable sales of this illiquid security” and misled them regarding the record of earlier Apple funds.

Just a day later, an investment management company began a tender offer for up to 5 percent of the outstanding Apple Eight shares. It did not offer $11, or anything close to that amount. It offered $3.

The Apple REITs are perhaps the most egregious of a little-known class of investments. unlisted REITs, that are sold to investors who think they are being cautious. They are registered with the Securities and Exchange Commission, but not publicly traded. The Apple REITs will repurchase a small number of shares each year, but most investors will have to wait five years or more to get their money back, when the REIT either liquidates or begins to trade publicly.

Oddly, the very lack of liquidity is used as a selling point by brokers selling to investors who fear the volatility of the stock market and crave a steady income. The fact that the steady income may simply come from borrowing more money is not emphasized. Apple Eight buyers expected an 8 percent annual payout, although the figure was reduced to 7 percent last year.

In bringing charges against David Lerner, a company that claims to emphasize safe investments and advertises heavily in Florida and New York City, Finra chose to focus on the sale of the shares to customers for whom such risky investments were not appropriate, as well as claiming deception in the way the shares were marketed.

Lerner, which gets most of its income from selling the Apple funds, used to primarily be a seller of muni bonds. Last year, Finra charged it with overcharging customers through excessive markups of bonds sold to them. Lerner denied the allegations and is still fighting them.

In its response to the latest charges, Lerner evidently decided that the best defense is a good offense. After calling the complaint “baseless” and “rife with falsehoods, distortions, and misleading statements,” the firm, which uses the initials D.L.A., chose to bring up Bernard L. Madoff, who was convicted of organizing the largest Ponzi scheme in history:

“What is obvious is that D.L.A. and other small firms have become the scapegoats for Finra’s utter failure to address Madoff’s fraudulent scheme.”  

When I asked Lerner officials which other small firms had been badly treated, they referred me to a column in The New York Post that quoted an anonymous broker who complained that Finra was unfair, but did not cite any examples.

Bringing up Mr. Madoff may be relevant here, but not for the reasons Lerner cited. Mr. Madoff preyed on wealthy investors who wanted good returns without volatility.

There is no question that the Apple REITs own real hotels, and are not Ponzi schemes. But the lack of volatility shown in the Lerner account statements has been a lure for customers and is misleading.

The nontraded REIT sector is big but generally sails below the investment horizon. Last year sales of such shares by sponsors raised $8.3 billion from investors. That was up from $6.4 billion the year before but below the 2007 record of $11.8 billion, according to figures compiled by Blue Vault Partners, a research firm.

Article source: http://feeds.nytimes.com/click.phdo?i=8398ed7abe53b8c48fbc256bd9b1f90f