As recently reported, on July 16, 2020, the Enforcement Section of the Massachusetts Securities Division filed an Administrative Complaint against former NEXT Financial Group, Inc. (NEXT Financial) registered representative Charles C. Kulch (CRD# 2371584). As alleged, Mr. Kulch was charged with violations of the Massachusetts Uniform Securities Act, including, among other things, purportedly effecting transactions in various complex and illiquid investments in client accounts without regard to the investments’ suitability.

The products involved, which were allegedly overconcentrated in certain of Mr. Kulch’s customer accounts, included non-traded real estate investment trusts (non-traded REITs) and variable annuities. Non-traded REITs and variable annuities are complex and illiquid investments that may be appropriate for certain investors under specific scenarios. However, these products are very complex in nature and are typically very illiquid. For example, with respect to non-traded REITs, investor capital may effectively be locked up for 7-10 years, until such time as a liquidity event transpires (such as shares being listed on a national securities exchange). And with regard to variable annuities, these extremely complex investment products typically carry hefty surrender charges, which often remain in effect for a decade (or even longer) after an initial investment.

The Administrative Complaint against Mr. Kulch—a previously registered broker and investment adviser who was most recently affiliated with NEXT Financial from 2006-2020—alleged that he “profited handsomely by overconcentrating his customers in illiquid, risky, and, conveniently, high commission products.” By “disregarding or circumventing established concentration limits” Mr. Kulch allegedly “generated hundreds of thousands of dollars in commissions at the expense of Massachusetts investors.”

As alleged by Massachusetts securities regulators, internal policies at NEXT Financial during the relevant time period limited non-traded REIT purchases to no more than 5% of a customer’s liquid net worth for any single product, and furthermore, no more than 20% of a customer’s liquid net worth for all alternative investments combined. Mr. Kulch purportedly exceeded these limits with respect to several customers’ accounts and allegedly recommended that many of those customers “diversify” their illiquid investment positions by adding investments in variable annuities.

When an investor becomes overconcentrated in complex and illiquid investment products, it often presents significant risk, especially for an average retail investor who may require liquidity in the near-to-medium term. While non-traded REITs are registered with the SEC, they do not trade on a national exchange, and perhaps equally as troubling, they are often sold with high up-front fees and commissions. Likewise, variable annuities present significant complexity and risk. Uninformed investors may not be made aware that a variable annuity’s rate of return is not fixed, and moreover, that the investment product is typically very costly and difficult to exit in the near-to-medium term (without incurring surrender charges).

The attorneys at Giarrusso Law Group LLC have significant experience in working closely with investors to resolve all manner of issues concerning investment losses, including losses suffered due to misconduct or negligence by a broker or financial advisor. Investors may pursue a claim to recover monies through securities arbitration before the Financial Industry Regulatory Authority (FINRA), or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.