COVID-19 has had a far-reaching impact, well beyond the world of public health policy. Because people have traveled so much less in 2020, the demand for oil and gas has plummeted, leading to some rude awakenings for energy investors. For instance, David Lerner Associates’ registered representatives are facing mounting customer complaints regarding investments in energy funds. These were high-risk investments that investors allege came without any warnings from their financial advisers.

Unfortunately, investors in Energy 11 may have heard financial advisers describe the fund as a conservative investment with reliable distributions. But as the value of the fund has plummeted, those payout distributions are in jeopardy. According to Business Wire, Energy 11 “interest payments received by investors are now considered return of capital.” This could be a massive financial blow to an investor who is already in retirement, or to someone who simply wasn’t in a position to take risks with their finances.

Investors should note that David Lerner Associates representatives have also come under fire for their recommendations of similar investments, including Energy 12 and Spirit of America Fund.

What Type of Investment is Energy 11?

Energy 11 is a limited partnership investment that attempted to produce interest from leaseholds for oil and gas properties, mostly concentrated in North Dakota. The Energy 11 website lists its assets as 221 producing wells and 247 undeveloped locations, and states that the “Partnership’s primary investment objectives are to acquire producing and non-producing oil and gas properties with development potential.” What about their money-making strategy? According to the site, the fund will “engage leading operators of the assets acquired to maximize operating results.”

What Makes Energy Investments So Risky?

Fluctuating demand is nothing new for energy securities. Natural disasters, like hurricanes that damage offshore drilling sites, routinely affect supply, and therefore the price, of oil. 2020’s lockdown measures cut the demand for oil as much as 40%, the biggest dip in demand since the Gulf War in 1991. This is due in part to the vast reduction in air travel, which CNBC reports may extend “well beyond” 2020.

Moreover, investments in structured products such as Energy 11 are illiquid and so investors cannot easily sell their interests.  Investors that have need for safety and liquidity should have never been sold Energy 11. 

Failure to Supervise and Over-Concentration

Investigations into David Lerner Associates have sought to determine if the firm failed to supervise its registered representatives, allowing them to over-concentrate these energy securities in their investors’ portfolios. Even if an investor did want to expose their portfolio to a certain amount of risk, responsible financial advisers would make sure to balance these investments with more conservative securities. There is simply no justification for having a high concentration of energy securities in a conservative investor’s portfolio.  

FINRA Rule 3110 requires firms to establish and maintain a system to supervise the activities of its registered representatives. Firms routinely employ automatic flags to review investments for their suitability – for instance, a firm might automatically review recommendations for notoriously risky investments, including energy securities.

Investors who have worked with registered representatives from David Lerner Associates should know that the firm has 38 disclosures on their disciplinary record. Most recently, the firm entered into an Acceptance, Waiver & Consent agreement (AWC) with FINRA in which they consented to the findings that they had failed to disclose four written customer complaints alleging sales practice violations. You can read a copy of the AWC here.

What Steps Should Investors Take?

If you have concerns about investments places with David Lerner Associates, you should contact a securities attorney. Get in touch with the experienced securities attorneys at Fitapelli Kurta for a free case evaluation. Call (877) 238-4175 or email info@fkesq.com.

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