The Financial Industry Regulatory Authority ("FINRA") announced on November 29, 2011 that it has ordered Texas-based brokerage firm NEXT Financial Group Inc. to pay a $50,000 fine and $2 million in restitution to clients who bought Provident Royalties LLC private placements from NEXT. The sale of fraudulent Provident Royalties (a/k/a Shale Royalties) private placements by numerous brokerage firms gave rise to thousands of customer complaints and FINRA arbitrations over the past two years. In those cases, customers and their securities arbitration lawyers accused the brokerage firms of negligence for failing to conduct adequate due diligence on Provident.
According to a FINRA, NEXT sold tens of millions of dollars of Provident private placements. The SEC has accused Provident of fraud and at least one Provident principal has admitted to committing fraud. Investors, including many NEXT clients, collectively lost hundreds of millions of dollars after buying the fraudulent Provident securities. According to FINRA, NEXT failed to conduct adequate due diligence on Provident before approving the securities for sale to clients.
"Despite the fact that NEXT received a specific fee related to the due diligence that was purportedly performed in connection with each offering, beyond reviewing the private-placement memorandum for the offerings, [Steven Nelson, vice president of investment products and services] did not perform adequate due diligence on the [Provident] offerings," according to the FINRA AWC.
According to FINRA, NEXT's due diligence on Provident fell short in several areas. Among other things, NEXT "did not see any financial information regarding Provident Royalties, other than the information contained in the private-placement memorandum. Further, once [NEXT] had concluded that [it] could sell [the three Provident offerings], [it] did not conduct adequate continuing due diligence." FINRA also noted that Provident's lack of audited financial statements was a red flag.
This is not the first time that NEXT has been fined by securities regulators. In May 2008, NEXT was fined $10,000 for failing to timely report customer complaints. In June 2008, the SEC fined NEXT $125,000 for disclosing private customer information to third parties. In 2009, FINRA fined NEXT $1 million for supervisory violations, including allowing branch managers to supervise their own handling of customer accounts and failing to detect churning of customer accounts. NEXT's customers, including elderly and retired individuals, lost hundreds of thousands of dollars. In November 2010, FINRA fined NEXT $400,000 and ordered restitution to customers of more than $100,000 as a result of excessive trading in customer accounts.
Despite the massive fines and customer restitution that NEXT has had to pay over the past several years, NEXT appears to care little about shoring up its supervisory and compliance systems in order to protect customers. Hopefully, this latest round of penalties will change NEXT's conduct.