A former investment advisor with NEXT Financial Group has been charged by Massachusetts’ regulators with overstuffing client accounts with high-commission, high-risk nontraded real estate investment trusts and variable annuities.
For nearly 10 years, Charles C. Kulch roped in new investors by convincing them that nontraded REITs were a suitable product for long-term investment and would subsequently buy as many shares of the risky product as possible, according to the administrative complaint filed last week by Massachusetts Commonwealth Secretary William Galvin.
Kulch generated almost $1 million in commissions resulting from the sales of REITs and variable annuities between 2010 and 2015, according to the complaint.
The volume of the transactions exceeded NEXT Financial policies that limit client exposure to a maximum of 5% of their net worth for a single issue, or no more than 20% of their wealth aggregated across all alternative investments, the Securities Division argued. Kulch knew those limits but disregarded them in the pursuit of higher commissions, according to the complaint.
In one instance, Kulch reportedly made three simultaneous REIT transactions on behalf of a customer on the same day the client opened their account. While each transaction was in the amount of $42,000, the customer had a liquid net worth of $730,000; Kulch listed the purchase of each transaction as being 5.4% of the client’s liquid net worth.
“On its face, Kulch initiated the transactions without regard for NEXT’s concentration limits. Although NEXT required Kulch to provide a detailed explanation as to why any amount more than 5% is appropriate, Kulch lazily provided four words; ‘future retirement income stream,’” the complaint read. “This explanation does not form a complete sentence; much less provide a detailed explanation as to how over-concentrating an individual in illiquid products is appropriate.”
Kulch did not respond to requests for comment.
Additionally, Kulch failed to account for the reduction in a client’s liquid net worth after each transaction, according to the complaint.
For the client who started with a $730,000 in liquid assets, Kulch entered the three REIT transactions sequentially, with each transaction reducing that client’s liquid net worth by $42,000. The second and third REIT transactions made by Kulch in fact then represented 6.1% and 6.5% of the client’s net worth, respectively.
“Unsurprisingly, Kulch failed to account for the change in customer liquid net worth after each transaction,” the complaint read. “By making such misrepresentations, Kulch was able to vastly inflate his commissions by over-selling non-traded REITs to trusting customers at an average commission rate of approximately 6.5%.”
Kulch was registered as a broker/dealer with NEXT Financial Group between 2006 and earlier this year and was registered as an investment advisor representative in Massachusetts between 2003 and 2006. He operates Kulch Financial Services out of Nashua, N.H. It is a registered branch office of NEXT, according to the complaint.
In a statement, a spokesperson for NEXT Financial said, "Mr. Kulch is no longer with the firm. Additionally, we have made significant investments in our compliance controls and continue to focus on elevating our compliance practices across the organization."
The commonwealth secretary’s Securities Division began investigating Kulch after receiving a tip from a client who met the broker in 2004. Four years later Kulch had sold him more than $500,000 in alternative investment purchases, including more than $300,000 worth of nontraded REITs. In total, this was more than 25% of the client’s liquid net worth and almost all of his account holdings with NEXT. He became suspicious after meeting with Kulch in early 2017 to discuss why his portfolio remained flat even as the market rose.
Galvin’s office is asking for Kulch to offer restitution to investors, as well as imposing an administrative fine. Additionally, the complaint asked that Kulch be permanently barred from acting as a registered investment advisor representative in the state.
