HomeBlogInvestmentDavid Lerner’s latest proprietary fund snag

David Lerner’s latest proprietary fund snag

A settlement last week between a barred veteran David Lerner Associates Inc. broker and Finra highlights the millions of dollars of unpaid distributions — think dividends — owed to investors who bought a proprietary energy fund, Energy 11 L.P., before energy prices collapsed in 2020 amid the Covid-19 pandemic.

The broker, Jeffrey Basford, was registered with David Lerner in Westport, Connecticut, for 16 years but was barred last Monday by the Financial Industry Regulatory Authority Inc. after he declined to be interviewed by the regulator about the “potential unsuitable sales of proprietary energy products at the firm,” according to the settlement, which Basford agreed to without admitting or denying Finra’s findings.

Energy 11 L.P. faces the hurdle of $45 million of unpaid distributions, according to its annual report from earlier this year, or $2.39 per common unit, which is private placement nomenclature for share. At the end of June, the private fund had close to $360 million in total assets, according to its most recent quarterly report.

Basford, who’s facing two pending arbitration complaints from customers, couldn’t be reached for comment this morning. But on his BrokerCheck report, Basford said he strongly disagreed with Finra’s allegations.

“I take my regulatory responsibilities, and my responsibilities to my clients, very seriously,” he wrote in his response on BrokerCheck. “I firmly believe that my recommendations were suitable and consistent with the firm’s robust compliance protocols.”

David Lerner Associates has faced multimillion dollar settlements with regulators in the past over the sales of proprietary products, including a brand of nontraded real estate investment trusts known as Apple REITs. In 2013, Finra ordered the firm to pay $12 million in restitution to clients who had purchased shares of Apple REIT 10. At the time, Finra also fined Lerner more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.

According to its website, David Lerner Associates has $4.5 billion in client assets; it doesn’t list the number of registered reps or investment advisers working with the firm.

Energy 11 L.P. was formed in 2013 by Glade Knight and David McKenney of the Apple REIT companies, along with Anthony Keating and Michael Mallick, according to the company. It raised $374 million from investors over two years starting in 2015.

Brokers are typically paid higher commissions to sell private placements than they are paid to sell or recommend mutual funds or exchange-traded funds.

Jeffrey Basford had an “unblemished record until Energy 11 suspended distributions,” a David Lerner spokesperson wrote in an email, adding that the limited partnership paid its required distribution of 7% from 2015 until early 2020, when Covid-19 hit and the demand for oil and gas dropped dramatically.

Due to these circumstances, Energy 11 suspended its payments to investors from March 2020 until November 2021, when it started paying half the regular monthly distribution, according to the spokesperson. The fund resumed its monthly distribution at the annual 7% rate at the end of last year.

Distributions not paid at the moment “must be accumulated and paid” before the partners receive their payout, the spokesperson said.

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