FINRA Sanctions David Lerner Associates and Its Supervisors Over Illiquid Investment Sales: A Cautionary Tale for Investors and Firms Alike

In a sweeping set of disciplinary actions, the Financial Industry Regulatory Authority (FINRA) recently sanctioned David Lerner Associates, Inc. (DLA), a New York-based brokerage firm, along with multiple individuals associated with the firm, for widespread supervisory and suitability violations tied to the recommendation and sale of proprietary, illiquid limited partnerships. These enforcement actions, culminating in censures, fines, suspensions, and mandated restitution totaling over $1 million, underscore FINRA’s heightened scrutiny of firms that promote complex products to retail investors without establishing reasonable supervisory systems and suitability safeguards.

At the center of the sanctions were two illiquid, proprietary limited partnerships marketed and sold exclusively by DLA. These products were structured to invest in hydrocarbon-producing properties and promised prospective returns in the form of annual distributions and potential liquidity events five to seven years after the offerings closed. Yet, as disclosed in their offering documents, these investments carried a high degree of risk, lacked a ready secondary market, and were suitable only for investors willing to commit to long-term, speculative holdings with no guaranteed exit.

From 2015 through 2019, DLA sold approximately $593 million of these partnerships, LP1 and LP2, to more than 6,000 customers through over 200 representatives. FINRA found that during this period, DLA failed to maintain a supervisory system reasonably designed to ensure compliance with the suitability requirements under FINRA Rule 2111 and failed to adequately respond to multiple red flags that unsuitable recommendations were being made. These supervisory lapses amounted to violations of FINRA Rules 3110 and 2010, which require firms to supervise their representatives’ activities in a manner that upholds high standards of commercial honor and just and equitable principles of trade.

According to the settlement, DLA’s supervisory policies ostensibly required that representatives evaluate customer profiles, including age, risk tolerance, net worth, liquidity needs, and time horizon, before recommending purchases. However, the firm lacked systems to flag questionable changes to customer profiles and failed to scrutinize a pattern of last-minute adjustments that conveniently rendered customers eligible for the high-risk offerings. Among the most troubling findings was that numerous elderly customers and investors, including retirees and investors with moderate or conservative risk profiles, were persuaded to invest substantial portions of their liquid net worth into the partnerships, often after questionable modifications to their risk tolerance or net worth entries.

The individual respondents sanctioned in related FINRA settlements included Martin Lerner, a long-time principal at the firm, who was suspended in all principal capacities for one month and fined $10,000. FINRA concluded that Lerner failed to reasonably supervise sales of the limited partnerships despite being aware of patterns of potentially unsuitable recommendations, including sales involving updated investment profiles that conveniently made customers eligible for the offerings. Rather than investigating these red flags or inquiring into the suitability of the transactions, Lerner approved them without further scrutiny, a supervisory failure that violated FINRA Rules 3110 and 2010. See Martin Lerner, FINRA AWC No. 2019063686212 (May 20, 2025).

Daniel Todd Lerner, a General Securities Representative with the firm since 1985, was also sanctioned. In March 2019, he recommended a $60,000 investment in the limited partnership to a 92-year-old retiree, representing roughly 25 percent of her liquid net worth. Her investment profile listed her risk tolerance as moderate. FINRA found this recommendation unsuitable given her age, financial profile, and investment objectives, and imposed a two-month suspension and $5,000 fine. See Daniel Todd Lerner, FNIRA AWC No. 2019063686213 (May 20, 2025).

Maxim Tulupnikoff, another DLA representative, received a similar sanction. Between 2015 and 2019, Tulupnikoff recommended multiple purchases of the limited partnerships totaling nearly $148,000 to a married couple aged 48 and 50 who were saving for retirement and had a moderately conservative risk profile. FINRA found these investments unsuitable and held that Tulupnikoff failed to ensure that the customers’ profiles supported such a high concentration in speculative, illiquid products. See Maxim Tulupnikoff, FINRA AWC No. 2019063686214 (May 20, 2025).

The firm itself was censured, ordered to pay restitution of $1,002,566 to 146 affected customers, and suspended for two years from selling proprietary, illiquid products. Notably, FINRA imposed non-monetary sanctions as well: DLA is required to retain an independent consultant to review the reconfirmation of certain customer investment profiles and to overhaul its supervisory systems before being permitted to resume the sale of such products. In lieu of a fine, FINRA acknowledged the firm’s agreement to pay restitution, its willingness to implement corrective measures, and its financial condition. See David Lerner Associates, Inc., FINRA AWC No. 2019063686211 (May 20, 2025).

All respondents accepted and consented to the disciplinary findings listed above without admitting or denying them.

These enforcement actions reflect FINRA’s continued focus on protecting vulnerable retail investors, particularly elderly clients and those with conservative investment profiles, from being exposed to high-risk, illiquid securities without full transparency and suitability evaluation. The cases also serve as a stark reminder to brokerage firms and supervisors of their legal and regulatory obligations to monitor not only the transactions their representatives recommend, but also the patterns and systemic risks those transactions may reflect.

At AMW Law PLLC, we understand both the regulatory landscape and the realities of the brokerage industry. Our principal attorney brings experience from four vantage points: as a former FINRA enforcement attorney, outside defense counsel to major broker-dealers, current claimant’s counsel representing investors, and as a FINRA arbitrator. Whether you are an investor who believes you were misled into purchasing an unsuitable or illiquid investment or a registered representative facing a regulatory investigation or disciplinary action, we offer seasoned legal guidance tailored to your circumstances.

For investors, we can assess potential recovery through FINRA arbitration or litigation. For industry professionals, we provide experienced FINRA defense counsel and regulatory investigation representation. We know how to navigate complex matters involving FINRA and SEC rules, including the standards imposed by the Reg BI, supervisory system violations under Rule 3110, and violations of FINRA Rule 2010’s ethical conduct requirements.

Illiquid, complex investment products are not inherently improper, but they require careful vetting, transparency, and rigorous supervisory oversight. When firms or individuals fail in these duties, the consequences can be significant for investors and industry professionals alike. If you have questions about your investment losses or regulatory exposure involving such products, contact us today for a confidential consultation.