Firm fights suit over former agent’s ‘Ponzi scheme’
NEXT Financial Group, a Houston-based investment firm with offices in Altoona, has asked the U.S. District Court in Johnstown to stop to arbitration proceedings involving a claim of several million dollars lost by a Maryland company after investing in a “phony” coal mine through a former NEXT agent.
That former agent, Douglas P. Simanski, 54, of Lilly, was sentenced in June by U.S. District Judge Kim R. Gibson to 78 months in a federal prison for his operation of a “Ponzi scheme,” which bilked 33 investors out of at least $4.5 million, according to figures presented during his court case.
Simanski is serving his sentence in the Federal Correctional Institution at Beckley, W.Va.
NEXT fired Simanski after it was revealed that while working for the company, he also started an investment scheme, unbeknownst to his employer, in which he offered “tax free investment accounts” to several of his clients.
He asked the clients to give him their money for a two-year period for returns of between 5 and 10 percent.
Any money he made above what he owed his clients would be his, according to the agreements.
One of his outside investments involved a “black diamond” coal mine.
Simanski, according to papers filed in the federal court in Johnstown, convinced GMS Mine Repair and Maintenance Co. of Garrett County, Md., to invest $3.45 million in the coal operation, which eventually failed.
According to the GMS arbitration complaint, the company invested $1.25 million of its own money and borrowed the rest from a bank.
Over the years, its investment with Simanski yielded just over $90,000 in return.
It lost the rest of the money, and in September filed a complaint with the Financial Industry Regulatory Authority.
It contends that Simanski was a NEXT agent and that NEXT had a duty to supervise him.
GMS claims that as an investment adviser, NEXT had a “heightened duty” to its clients, and it is asking the industry’s arbitration board not only to order reimbursement of its investment but also to impose punishment damages on NEXT.
NEXT, through its attorneys, James A. McGovern of Pittsburgh and Christopher J. Conrad of Camp Hill, has asked the U.S. District Court to put a halt to the arbitration proceeding prior to the November date on which NEXT is expected to answer the complaint.
The investment firm contends that if it enters the arbitration process, it will lose its right a jury trial in the federal court.
Gibson late last week referred the NEXT injunction request for review under the federal court’s Alternative Dispute Resolution program.
NEXT contends that the arbitration process involving the Simanski situation is illegal because Simanski’s investment scheme was unknown to the company and GMS was not a NEXT client.
The NEXT complaint states, “Defendant (GMS) claims losses in its statement of $3.45 million. (NEXT) denies that it is liable.”
The investment company maintains it never had an agreement to arbitrate with GMS and does not consent to arbitration.
It claims GMS “is not now, nor has … ever been, a customer.”
Defendant has never had a brokerage account with NEXT, it points out.
GMS, the complaint stated, alleges it was defrauded into investing in a “phony” coal mine.
NEXT replied, it “does not now, and has not ever, had any interest in the mine operation,” and it stated, it “never provided (GMS) with any investment guidance concerning the mine operation.”
Simanski, NEXT states, completed an Outside Business Activity Disclosure form in which he reported “his 100 percent ownership interest in Black Diamond Coal Company.”
The disclosure by Simanski of outside business activity indicated GMS had a direct investment with Simanski , who as operating outside the scope of his work.
NEXT claims that the arbitration process should be halted because participation in arbitration “could result in a waiver of NEXT’s right to defend against GMS claims in a court of competent jurisdiction.”