Worden Capital Management LLC, a securities broker dealer headquartered in Garden City, New York, has been charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement with failing to supervise private placement offerings, including its failure to conduct due diligence to ensure that investments were suitable for investors. Department of Enforcement v. Worden Capital Management LLC, Disciplinary Proceeding No. 2019064746502 (February 28, 2022).
According to the Complaint, between 2019 and March of 2020, Worden Capital Management accumulated $10,000,000.00 from 121 investors for purposes of 22 private placement offerings. FINRA states that with each offering, Worden Capital Management was the placement agent. Worden Capital Management’s CEO, JW, and stockbrokers recommended and sold membership interests in five private funds. The funds were invested in private companies that were potentially going public through an initial public offering.
FINRA states that the securities broker dealer did not identify that it had arrangements to receive eight percent commissions through the securities sales. This conflict of interest was not disclosed to investors. The securities broker dealer received $609,500.00 in undisclosed commissions.
The Complaint states that Worden Capital Management’s Chief Executive Officer, Jamie John Warden, authorized the offerings knowing that the company’s brokers were going to receive secret compensation for selling the securities. FINRA alleges that investors who were recommended the private placement offerings were not told by Worden Capital Management’s stockbrokers about the commissions. FINRA states that Worden Capital Management violated Securities Exchange Act of 1934 Section 10(b), SEC Rule 10b-5, and FINRA Rules 2010 and 2020.
Department of Enforcement also alleges Worden Capital Management failed to supervise the offerings. Written supervisory procedures called for supervisors to reasonably investigate each private placement offering and to compile a due diligence checklist. FINRA states that no reasonable due diligence was undertaken by the supervisors. Worden Capital Management supposedly only did a simple review of the company which was managing the offerings.
A partial due diligence checklist was apparently completed by JW before securities were sold in the first offering, but JW was not the designated supervisor for private placements. FINRA contends that the checklist was only signed by JW because the supervisor designated for private placements refused to sign off.
The regulator also alleges that the due diligence process into these offerings had only just begun when a person signed off on the due diligence checklist. The stockbrokers were potentially unaware of the risks, characteristics, and features of the offerings. The securities broker dealer went against its own policy, which called for the checklist to be completed and for the required financial information to be documented relating to the manager and the offerings.
FINRA states that Worden Capital Management’s failure to reasonably conduct due diligence precluded the company from learning that someone employed by the offerings had been barred by the regulator.
FINRA states that Worden Capital Management failed to supervise in violation of FINRA Rules 2010 and 3110(a) and (b).
The regulator also states that because Worden Capital Management failed to understand the risks and terms of the offerings, the company failed to have an adequate basis to believe that the offerings were appropriate for investors. The securities broker dealer violated FINRA Rules 2010 and 2111 for this reason.