FINRA files complaint against Worden Capital Management

FINRA’s Department of Enforcement has filed a complaint against Worden Capital Management LLC (WCM).

The complaint alleges that, between January 2019 and March 2020, WCM, acting through its chief executive officer, JW, and its registered representatives, raised over $10 million from 121 investors in 22 private placement offerings without disclosing a material conflict of interest—that it had entered into a secret agreement to receive an additional eight percent commission on its sales of securities through these offerings.

In total, WCM received $609,500 in undisclosed commissions from sales of securities in the Offerings.

According to the complaint, JW approved the Offerings on behalf of WCM, and he knowingly or recklessly failed to disclose this secret compensation to WCM’s brokers who, at JW’s direction, sold the Offerings. Therefore, the WCM brokers did not disclose this secret commission to investors when they recommended the investments. As a result of the foregoing, WCM willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder, and it violated FINRA Rules 2020 and 2010.

WCM also failed to reasonably supervise the sales of the Offerings, including failing to enforce its own written supervisory procedures. The written supervisory procedures required the firm’s designated principal for private placements to conduct a reasonable investigation into each private placement offering sold through the firm and to complete a due diligence checklist for each offering.

WCM did not, however, conduct reasonable due diligence on the Offerings or complete a checklist for each of the Offerings. Instead, WCM only conducted a cursory investigation into the non-registered entity that structured, created, and managed the Offerings and partially completed a single due diligence checklist prior to selling securities in the first of the 22 offerings. JW’s signature on this checklist permitted WCM’s registered representatives to recommend and sell all 22 of the Offerings.

JW signed this partially-completed checklist even though he was not the firm’s designated principal for private placements. He did so because the designated principal for private placements and the firm’s compliance staff refused to sign it. At the time that JW signed this document, the firm had only just commenced its due diligence process, and personnel at the firm did not yet understand the features, characteristics, or risks of the Offerings.

The firm had also not gathered relevant information required by its own written procedures. As a result, certain items on the due diligence checklist were left blank or marked “provided by issuer,” when in fact, the issuer had not provided the information. Contrary to WCM’s procedures for private placements, WCM did not gather financial information regarding Manager or the Offerings, nor did WCM obtain information concerning any of Manager’s prior offerings.

WCM also failed to detect that FINRA had barred an individual who was associated with the Offerings, although that information was easily discoverable from a document in its possession. As a result of the foregoing, WCM violated FINRA Rules 3110(a) and (b), and 2010.

Due to its failure to conduct reasonable due diligence, WCM did not understand the Offerings, how they were structured and operated, and what risks were presented by investing in them. WCM, therefore, did not have a reasonable basis to believe that its investment recommendations in the Offerings were suitable for at least some investors in violation of FINRA Rules 2111 and 2010.

Finally, WCM never submitted to FINRA the offering materials provided to investors in the Offerings. By failing to submit these offering materials to FINRA within 15 days of the first sale in each offering, WCM violated FINRA Rules 5123 and 2010.

The Department of Enforcement seeks an order that one or more of the sanctions provided under FINRA Rule 8310(a) be imposed, including that Respondent be required to disgorge fully any and all ill- gotten gains and/or make full and complete restitution, together with interest.

2022-03-02