Articles Posted in Next Financial

Texas-Based Brokerage Firm Accused of Overconcentration & Supervisory Failures

NEXT Financial Group has arrived at a $750K settlement with the Financial Industry Regulatory Authority (FINRA) to resolve claims that the Texas-based broker-dealer overconcentrated customer accounts in Puerto Rico municipal bonds and did not have the kind of supervisory system that could have identified unsuitable trades. 

The self-regulatory organization (SRO) also contends that from January 2012 to February 2019 NEXT Financial Group did not set up, maintain, or enforce supervisory systems and written procedures that could have identified and stopped the short-term trading of Puerto Rico bonds and mutual funds when they were unsuitable for customers. 

Galvin’s Office Files Civil Lawsuit Alleging Overconcentration, Unsuitable Investments 

William Galvin, the Secretary of the Commonwealth of Massachusetts, has filed civil charges against former NEXT Financial Group broker, Charles Chester Kulch. 

The state is accusing him of selling real estate investment trusts (REITs) and variable annuities (VA) to customers for whom they were unsuitable and overconcentrating their portfolios in these high risk, illiquid investments.

Doraine Refused To Cooperate In FINRA’s Investigation 

The Financial Industry Regulatory Authority (FINRA) has barred former Next Financial broker, Charles Doraine after he refused to give testimony in the self-regulatory organization’s (SRO’s) probe into allegations that he unsuitably recommended Puerto Rico bonds to customers. 

Already, Doraine has been the subject of investor claims accusing him of overconcentrating customer accounts with these municipal bonds and engaging in short-term trading. 

NEXT Financial Group Sold Unsuitable REITs To Investors, Including Older Seniors 

If you were an investor who suffered losses in Real Estate Investment Trusts (REITs) that were recommended and sold to you by a NEXT Financial Group broker, Shepherd Smith Edwards and Kantas (SSEK Law Firm) wants to talk to you. 

The Houston-based independent brokerage firm was recently fined $150K by the Massachusetts Securities Division for selling REITs to investors even when these investments were not suitable for them. 

FINRA says NEXT Financial Group Inc. has agreed to a one million dollar fine for its alleged failure to properly supervise a number of client accounts and over 100 office of supervisory jurisdiction (OSJ) branch managers. The managers are in charge of overseeing sales and trading activities for branches and brokers. As a result of the alleged inadequate supervision, FINRA says that broker misconduct was able to take place, resulting in Texas securities fraud.

FINRA charges that between 1/05 and 11/06, the broker-dealer allowed its OSJ branch managers supervise to themselves. Even when NEXT Financial Group implemented a new Regional Manager supervisory system, FINRA says that this too continued to prove unreasonable for at least another year. Each month, three regional managers who were unable to adequately access client suitability data were in charge of reviewing thousands of transactions.

FINRA mandates that firms appoint at least one principal to set up, maintain, supervise, and enforce “a system of supervisory control policies and procedures.” FINRA says that because of Next Financial’s inadequate procedures and policies, the broker-dealer failed to notice that excessive markdowns and markups on corporate bond trades and the churning of customer accounts were taking place. Investors ended up losing some $768,000, FINRA contends. The funds have been reimbursed.

NEXT Financial Group’s former chief operating officer and chief compliance officer Karen Eyster has agreed to sanctions for failing to fulfill her obligations as a supervisor. FINRA fined her $35,000. She also has to undergo 15 hours of supervisory training and serve a 2-month suspension as a principal.

Also, FINRA says that the broker-dealer’s systems and procedures regarding variable annuity exchanges were unreasonable and did not give enough guidance about what needed to be looked at when making variable annuity exchange recommendations to clients.

By agreeing to settle, the broker-dealer and Eyster are not admitting to or denying the charges that FINRA has made against them.

Related Web Resources:
FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures That Led to Churning of Customer Accounts, Excessive Commissions, FINRA, July 22, 2009
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The Texas Supreme Court says that former NEXT Financial Group Inc. stockbroker Michael Clements’s claim that the brokerage firm fired him for refusing to cover up churning activity must be arbitrated. Clements was hired as a NEXT Financial regional supervisor in September 2006. Nearly a year later, the brokerage firm fired him because he allegedly failed to perform his required broker responsibilities related to an NASD audit.

Clements filed a lawsuit against the company, claiming he was terminated from his job because he refused to conceal the fact that a NEXT trader had violated federal securities laws by churning client accounts. NEXT pushed for arbitration, claiming that Clements had signed a Form U-4 when he was hired, which requires that he resolve any claims with the brokerage firm through arbitration-per the Federal Arbitration Act.

Clements has maintained that because his claim was based on at-will employment and wrongful termination, rather than a contract connected to a commercial transaction, his claim is exempt from the FAA’s arbitration requirement. He also asserted that his claim resulted from NEXT’s alleged illegal behavior, not its business dealings, and that a recent change in NASD code (following the National Association of Securities Dealers’s merger with the Financial Industry Regulatory Authority) indicated an intent to exclude disagreements involving employment matters from arbitration. Clements noted Sabine Pilot Services v. Hauck, (1 687 S.W.2d 733, 1985), a case where the Texas Supreme Court held that an employer had to pay an ex-employee damages because the worker was fired for refusing to perform an illegal act.

The Texas Supreme Court, however, upheld that the FAA was applicable in this case, NEXT could compel arbitration, and the NASD rule 13200 (a) did not exclude employment and termination-related claims. The court’s decision reverses the trial court’s ruling, which denied NEXT’s request, as did the court of appeals.

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Securities and Exchange Commission Administrative Law Judge James T. Kelly is ordering Next Financial Group Inc. to cease and desist from recruiting practices that violate privacy laws. He also has slapped the company with a $125,000 penalty.

Recruiting practices that need to stop included those involving use of clients’ private information. Next has been known to ask recruits to provide their user id and password so that the firm could enter the computer systems of the recruits’ brokerage firms and collect clients’ non-public personal information.

The SEC had originally requested that the judge impose a $325,000 on Next. Judge Kelly, however, acknowledged that there is general confusion within the securities industry about Regulation S-P, which implements stricter privacy laws under the Gramm-Leach-Bliley Act of 2000. However, even Next’s expert witnesses agreed that using the passwords and user ID’s of recruits in this way is not in line with normal industry practices.

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