Clyde M. Thornburg, a former stockbroker with NEXT Financial Group Inc., was charged earlier this month with unsuitable short-term trading and switching in the accounts of elderly and unsophisticated investors.
The FINRA Complaint
On Feb. 9, the Financial Industry Regulatory Authority (FINRA) filed a complaint against Thornburg, a Florida-based registered representative with NEXT.
The affected customers included a mentally infirm 91-year-old widow under a guardian’s care, and an 82-year-old widow who was beginning to experience the effects of Alzheimer’s disease.
The complaint alleges that between February 2008 and November 2009 Thornburg effected about 200 short-term transactions causing five customers to incur unnecessary sales charges of about $333,000 while Thornburg himself improperly gained about $300,000 in commissions for his firm.
Moreover, Thornburg listed the risk tolerance for most of these customers as moderate or higher, and their investment objectives as income and long-term growth when their actual risk tolerance was conservative and their objective was income, the complaint says.
Thornburg’s payout — a combination of commissions and salary – ranged from 85 percent to 90 percent 90 for these transactions. Over the same period, the customers’ accounts collectively lost almost $1 million, the complaint says.
FINRA’s complaint requests that Thornburg be required to completely disgorge any ill-gotten gains, make full and complete restitution, including interest, and pay the costs of the proceeding, among other possible sanctions.
Unsuitable & Excessive Trades: UITs, Mutual Funds & Corporate Debt Transactions
Unit Investment Trusts (UIT) are investment companies that purchase a fixed portfolio of bonds or stocks that they sell in redeemable shares or units. The units are normally held long term, similar to mutual funds, but they are not managed and they have a termination date. Some UITs have up-front sales charges and some maintain a secondary-market for those who wish to sell before the termination date.
Mutual funds are investment companies that collect money from multiple investors to invest in various stocks, bonds or commodities. The investments usually have a common theme such as large cap or technology. The funds charge shareholder fees and annual operating expenses and are generally designed for long-term investors.
The corporate debt in this case included corporate bonds, notes, and similar products. The complaint states that Thornburg charged his customers markups, markdowns, and underwriting compensation ranging from 0.25 percent to 2.76 percent of the price. However, these charges were not reflected on either the customer’s trade confirmations or their monthly account statements.
The complaint alleges that Thornburg would caused a customer to sell one UIT, mutual fund, or corporate bond and invest all or part of the proceeds into another, a strategy known as switching. On average, Thornburg switched the products every two months.
Switching is contrary to the design of the investments used by Thornburg. These investments are designed to be held long term and carry substantial transaction fees.
The short-term trading in UITs, mutual funds and corporate debt was not suitable for any of these customers, the complaint says. Thornburg did not have reasonable grounds to believe that these transactions were suitable based on their size, frequency, and the five customers’ financial objectives and needs, which were known to him. Thornburg therefore violated a whole collection of FINRA rules and National Association of Securities Dealers (NASD) rules.
In addition, Thornburg omitted information and misled the customers concerning the costs of these transactions in violation of yet more FINRA and NASD rules. He led them to believe that they would not be charged sales fees or commissions when in fact they were.
To top it off, Thornburg violated rules prohibiting discretionary trading in customers’ accounts without prior written authorization. He traded without permission to further his short-term trading and switching strategy, the complaint says.
The complaint also states that Thornburg forged the names of at least three of the customers or their representatives on 19 mutual fund disclosure forms, caused his firm to maintain inaccurate books and records.
Descriptions of the Unsuitable Trading Listed in the Complaint
- In 2008, Thornburg recommended 41 short-term UTI, corporate debt, and mutual fund trades in account of a 91-year-old widow suffering from Alzheimer’s disease. The positions were held for an average of only 39 days and cost the woman $72,999 in sales charges, during which period her account lost $149,136 in value.
- Between February 2008 and January 2009, Thornburg recommended 34 short-term UIT, mutual fund, and corporate debt trades in the account of an 82-year-old widow in the early stages of Alzheimer’s. The positions were held for an average of 68 says and cost $35,926 in sales charges. During this period, the woman’s account lost $116,552.
- Between April 2008 and January 2009, Thornburg recommended 20 short-term UIT, mutual fund and corporate debt trades the account of a 74-year-old retired school teacher and housewife with limited investing experience. Her account held individual positions for 70 days on average, and incurred $54,058 in sales charges. During this period, the woman’s account lost $250,084.
- Between February 2008 and September 2009, Thornburg recommended 49 short-term UIT, mutual fund and corporate debt trades in the account of a 52-year-old widow with limited investing experience, causing her to hold individual positions for an average of only 66 days. The customer paid $59,429 in sales charges and her account lost $182,284 during the period.
- Between February 2008 and November 2009, Thornburg recommended 57 short-term UIT, mutual fund, and corporate debt trades in account of a 70-year-old retiree. The positions were held an average of 80 days and the customer incurred $109,819 charges. Her account lost $285,096 over this time.
Thornburg made a heap of money from all this short-term trading, according to the complaint. As a result of roughly 200 unsuitable transactions, he made an estimated $250,000 at the same time the five customers’ accounts cumulatively lost almost $1 million.
FINRA public disclosure records reveal that Thornburg has another regulatory action pending against him. He has also been involved in 10 disputes with customers. One resulted in an arbitration award, five settled, three were dismissed and one is pending.
Guiliano Law Group
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