Next Financial Group Inc. has agreed to pay $2 million in restitution to clients who bought oil and natural gas private placements of Provident Royalties LLC, which the Securities and Exchange Commission in 2009 accused of fraud.
According to a
Financial Industry Regulatory Authority Inc. letter of acceptance, waiver and consent, Next Financial sold $20 million of three separate Provident private placements from July 2008 to January 2009. Over that time, the firm's due diligence was lacking, according to the Finra AWC.
“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 AWC, which was finalized last month.
“We are pleased to have this serious matter resolved,” said Barry Knight, chief executive of Next Financial. “And we have made dramatic improvements not only in our due-diligence process but in all of our compliance areas in the past two years. We are pleased to bring this chapter to a close.”
Next Financial reported $136.1 million in gross revenue last year and has 866 affiliated reps and advisers.
Next Financial and Mr. Nelson's due diligence on Provident fell short in several areas, according to Finra. Mr. Nelson “did not travel to Provident's headquarters in Texas to conduct due diligence on three separate offerings,” according to the AWC. He also “did not see any financial information regarding Provident Royalties, other than the information contained in the private-placement memorandum. Further, once [Mr.] Nelson had concluded that Next could sell [the three offerings], he did not conduct adequate continuing due diligence.”
Outside due-diligence reports highlighted a number of red flags of the Provident offerings, and Mr. Nelson “should have scrutinized each of the [Provident] offerings, given the purported high rate of returns,” according to the AWC.
Next's $2 million in restitution to investors is part of a larger case brought by the receiver for Provident in federal court in Dallas. While at least 20 broker-dealers that sold Provident private placements have shut down or declared bankruptcy, others, now including Next Financial, have had the funds to pay the claims and remain open for business.
About 50 broker-dealers in total sold Provident, which raised $485 million from 7,700 investors from 2006 to 2009.
(Click here to view a list of broker-dealers, including Next, that sold Provident, as well as the commissions earned off of these sales.)
According to the AWC, Finra censured and fined Next $50,000, and fined Mr. Nelson $10,000 and suspended him as a principal for six months. Next Financial also failed to supervise adequately a registered rep's sale of fraudulent life settlement products from 2007 to 2009, according to the AWC. The rep, who was not identified, sold $3.5 million in life settlement contracts to 35 clients.
