Westport, CT David Lerner Advisor Has Two Pending Energy Investment Recommendation Disputes
According to publicly available information, Rafael Scott Klein (Klein, CRD# 2865823), a dually registered broker and investment adviser affiliated with David Lerner Associates, Inc. (David Lerner), has disclosed two pending customer disputes related to investments in the oil and gas sector. Mr. Klein is a longtime securities industry professional, with 23 years of experience as a stockbroker. Since 2005, Klein has been employed by Syosset, NY-based David Lerner, working in the firm’s Westport, CT branch office.
With respect to the pending customer disputes, the first matter concerns a securities arbitration filed by one of Mr. Klein’s customers around August 2020. That arbitration alleges damages of $300,000 and concerns allegations of misrepresentation and omission, breach of fiduciary duty, failure to supervise, fraud and unauthorized trading. Further, the products at issue in this arbitration include certain proprietary energy investment products offered by David Lerner: Energy 11, L.P. (Energy 11) and Energy Resources 12, L.P. (ER12).
The second pending dispute concerns a securities arbitration initiated by one of Mr. Klein’s customers around October 2020. This arbitration alleges damages of $300,000 and concerns allegations of unsuitability, misrepresentation and/or omission, breach of fiduciary duty, and failure to supervise. This dispute involves an investment in Energy 11. Investors in either Energy 11 or ER12—which are risky, complex and illiquid investments structured as limited partnerships—may be able to recover their investment losses, if the recommendation to invest by a financial advisor lacked a reasonable basis, or if the investor was otherwise misled into making the investment.
Formed in 2013 as a Delaware limited partnership, Energy 11 is focused on acquiring and developing “producing and non-producing oil and natural gas properties onshore in the United States...” As of March 31, 2020, Energy 11—which operates in proximity to the Bakken Shale in North Dakota—owned an approximate 25% non-operated working interest in 235 producing wells, an estimated approximate 20% non-operated working interest in 26 wells in various stages of the drilling and completion process, as well as future development sites in the Sanish field located in Mountrail County, North Dakota.
Formed in 2016 as a Delaware limited partnership, ER12 is also focused on acquiring and developing “producing and non-producing oil and gas properties with development potential by third-party operators on-shore in the United States.” As of March 31, 2020, ER12 owned an approximate 5.7% non-operated working interest in 347 producing wells, an estimated 1.2% non-operated working interest in 21 wells in various stages of the drilling and completion process, as well as possible future development sites in various locations in proximity to the Bakken shale formation.
Both Energy 11 and ER12 are extremely risky and complex investments. Unfortunately, in some instances, financial advisors may have recommended these investments to their customers without adequately explaining their many risk components and complex nature. To begin, both Energy 11 and ER12 are very illiquid in nature, as investors in either of these David Lerner-sponsored energy investments cannot readily sell their partnership units on a public market. Further, these investments are costly in nature. In fact, according to publicly available information, David Lerner received a total of 6% in selling commissions for units sold, as well as a marketing expense allowance based on the gross proceeds of total common units sold, in both Energy 11 and ER12. Such high up-front commissions and expenses act as an immediate drag on investment performance.
Moreover, these energy limited partnerships are directly exposed to the risky and capital-intensive subsector of the oil and gas market which involves costly exploration and production (E&P) activity. When a financial advisor recommends an oil and gas investment to a client, the advisor should first seek to inform his or her client of the risks associated with investing in the volatile oil and gas market. In addition, the financial advisor has a legal duty to perform a suitability analysis to determine if the investment is suitable in light of the customer’s profile and stated objectives. In instances where a financial advisor fails to disclose the risks associated with an investment (or investment strategy), or if an investor’s account becomes over-concentrated in oil and gas investments, then the advisor and his or her firm may well be held liable for losses sustained.
The attorneys at Giarrusso Law Group LLC possess considerable experience in successfully representing aggrieved investors in various complex and illiquid oil and gas investments. In many instances, investors may pursue claims to recover losses through securities arbitration before FINRA. Investors who wish to discuss a possible claim related to an oil or gas investment may contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, no-obligation consultation.