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According to the complaint, between May 2001 and May 2003, David Lerner and the firm used radio advertisements, investment seminars and other communications that contained numerous statements and claims that were misleading, exaggerated or unwarranted.
The firm advertised heavily on New York metropolitan area radio stations with 60-second spots that ran several days a week, frequently throughout the day. The firm's expenditures on advertising and marketing were equivalent to 17 percent of its total 2002 total revenue of $12 million, with the vast majority of the expenditures going to radio advertisements. Lerner developed the ideas for the radio advertisements and narrated all of the radio spots as the "voice" of the firm. A recurring theme of the ads was the concept of "providing returns of 10 percent and more" to "tens of thousands" of customers. Among the claims made in the radio ads:
"For 25 years, we at David Lerner Associates have provided tens of thousands of people with investments that even in these turbulent times, continue to pay over 10%."
"We are currently providing returns of 10% and more in investments that have nothing to do with the stock market."
"In spite of the gyrations of the stock market, our clients continue to enjoy high dividend returns - in many cases 10% and more."
NASD charged that these statements, which the firm could not support, were exaggerated, unwarranted or misleading. In addition, some ads contained stories about individuals Lerner allegedly had met, suggesting the person's investments would have performed better had the person invested with the firm or followed the firm's investment philosophy. The firm, however, could not provide support that the incidents described actually occurred.
"Exaggerated and misleading claims of investment returns violate NASD rules designed to protect the public" said NASD Vice Chairman Mary L. Schapiro. "In this case, the firm's unjustified suggestion of consistent 10 percent investment returns over a period of years, together with its use of statements designed to appear as customer testimonials, is misleading and an abuse of the investing public."
The firm's advertisements also suggested that individuals who invested with David Lerner Associates would retain the value of their assets regardless of market conditions, or would regain prior losses sustained in the stock market. For instance, the advertisements stated:
"While past performance can never be a guarantee of future results, we at David Lerner Associates are proud and pleased that for 26 years, tens of thousands of our investors have been receiving high income and solid returns regardless of whether interest rates or the stock market went up or down."
"As a result of our conservative investment philosophy, tens of thousands of investors have been spared the agony of the financial markets, and every day new investors are coming to David Lerner Associates to repair the damage."
NASD charged that these statements were also exaggerated or misleading and improperly implied guarantees.
Investment seminars were also important to the firm's marketing efforts. During the relevant period, the firm conducted approximately 70 to 80 seminars for the public, with Lerner appearing as the principal speaker at each seminar. Lerner's PowerPoint presentations contained statements and claims similar to those made in the radio advertisements. As with the radio ads, the firm did not have factual support for many of the claims and also omitted to disclose important information.
Finally, SSH Securities prepared, and David Lerner Associates distributed, fact sheets concerning Spirit of America mutual funds which NASD charged contained inaccurate information. Specifically, the fact sheets' listings of the top ten holdings of the Spirit of America funds were inaccurate at the time the sheets were distributed. In addition, the material compared the funds' performance with that of the S&P 500 and the Dow Jones Industrials without explaining the many differences between the Spirit of America funds, which were comprised of publicly traded real estate investment trusts (REITs), and those broad stock market indices.
NASD also charged Dempsey, the principal of David Lerner Associates responsible for approving advertisements, with failing to discharge his supervisory responsibilities. Dempsey violated NASD rules by approving the misleading radio ads as well as by failing to review and approve the other advertising cited in the NASD's complaint.
Under NASD rules, the respondents named in the complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business — from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.
