The Wall Street Journal (11/25/15) reports that NSM Securities Inc. founder Niyukt Raghu Bhasin, and broker Naveen K. Bhagwani committed numerous illegal acts, including fraud, unsuitable investment recommendations and account churning. A lawyer for the investors said illegal activities included moving money from one account to another with forged documents.
FINRA, which does not usually provide a reason for its decision, awarded $1.7 million in damages, plus interest, and additional punitive damages. The claimants originally sought more than $10 million.
NSM and Bhasin were also accused by FINRA of failing to develop proper systems to prevent brokers from churning or violating other rules. In a complaint filed separately by FINRA, the agency alleged Bhasin “fostered a culture of non-compliance that resulted in widespread sales practice violations, numerous customer complaints, related reporting violations, and cold-calling abuses,” according to documents found at disciplinaryactions.finra.org.
Overall, FINRA alleged, NSM and two of its brokers were involved in unauthorized trading in seven accounts, churning and excessively trading on five accounts, and recommending unsuitable investments to two customers. Furthermore, FINRA alleged that from February 2009 through May 2012, NSM failed to report 27 complaints to FINRA, and failed to make a timely report of three other complaints.
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Brokers are required to make investment recommendations that are suited to investors based on their age, risk tolerance, financial status and ability to withstand losses. Unsuitable investment recommendations occur when brokers suggest investments that do not meet the client’s criteria. Churning occurs when excessive transactions occur to increase the broker’s commission on an account. Both are violations of financial regulations. Brokers were reportedly encouraged to aggressively trade accounts because they were paid on a sliding scale depending on their production level.
The investor arbitration is Grewal et al. v. Bhagwani et al., case number 12-02861, before FINRA. The disciplinary proceeding is number 2011027667402.