Valmark Securities of Akron, OH, and a Registered Principal, who served as its CCO and Chief Legal Officer, were charged in a FINRA complaint with approving a private placement offering for sale by firm registered reps without conducting adequate due diligence.  According to the complaint, approval for the sale was based exclusively on the review of the issuer’s unverified and uncorroborated statements in the offering document.  It was further noted that an RR, designated by Principal Richard Arceci to conduct a marketing review for the offering, created a summary report by cutting and pasting language directly from the PPM, including a statement about the unblemished payment history of the offering’s affiliates.  After completing the task, the RR signed off on a requisite 18-question marketing review checklist. 

Arceci, also designated an associated person to conduct due diligence on the offering.  That individual used the RR's summary marketing review report and the PPM to conduct the due diligence review for the offering, including his assessment of the risks of the offering.  Upon completion, the associated person completed, signed and dated the requisite 14-question due diligence review checklist. 

What Further Reviews Could Have Detected.   The firm's inadequate supervision did not pick up on the level or quality of these reviews.  Nor did it address a need to obtain or review financial statements for the issuer, which would have informed it in more detail of the liquidity issues of the offering’s affiliates.  Furthermore, had the firm researched background information on the offering’s officers, it would have been aware that the CEO had been barred from the insurance industry and later charged with fraud.  The firm, through Arceci, also failed to use the services of 3rd-party due diligence providers that conducted due diligence reports and drafted reports which identified material risks of the later offerings.  All told, the firm’s initial due diligence review was completed in under 3 days. 

Additional Problems Noted.   FINRA further alleged that the firm, acting through Arceci,:

• failed to act upon learning about delays in returning principal to note holders in another private placement;  
  • failed to obtain financial statements or other documentation to corroborate the issuer's self-serving assertion of a temporary liquidity issue;
  • failed to contact the issuer’s officers to obtain additional details about its problems with meeting interest payments on prior offerings;
• failed to adequately follow up on the red flags raised in communications associated with the issuer.
  
  • failed obtain a 3rd-party due diligence report, contact firm customers who had invested in a prior offering to determine whether the customers had received correspondence from the issuer re: the delay and received repayment of their principal;
• failed to supervise the ongoing sales of the offering although the correspondence alerted the firm that the offering’s affiliate had missed principal payments to investors,
  
  • failed to suspend the firm’s sale of the offering, as long as those sales used a PPM, which falsely stated that the offering’s affiliate had not defaulted on its obligations; 
  • failed to provide firm customers who had invested in issuer products with copies of the correspondence from the issuer;
  • failed to require the firm’s RR's to disclose to existing and new investors of the offering that there were delays in return of principal to a prior offering’s note holders;
  • failed to ensure the timely receipt of all correspondence from the issuer and any information regarding further liquidity issues, defaults, or delayed payments related to the offerings;
  • failed to instruct the RR who received an email on how to monitor the situation at the issuer based on the new information;
  • failed to instruct the RR who had  conducted the initial due diligence review to conduct additional due diligence in light of the new information.

The complaint further alleges that despite the firm’s knowledge that the assertion in the PPM of an unblemished payment history by the issuer’s affiliates was false, it continued to sell the offering using a PPM that contained a material misrepresentation.

In addition, the complaint alleges that the firm failed to provide new customers with copies of the correspondence it received from the issuer describing problems making interest and principal payments on notes that were previously issued, and omitted to disclose this information to the new customers.  Moreover, no one at the firm appeared to conduct an investigation or due diligence to determine whether firm customers who invested in the offering were in danger of incurring loss of principal and interest. 

Finally, Placed on 'Do Not Sell List'.   The complaint alleges that the firm’s president placed the offering on the firm’s “do not sell list” after receiving an unsolicited email from a 3rd party due diligence firm and the SEC sued the issuer, affiliates and individuals associated with the companies alleging they committed fraud in the sale and offer of the securities.  The complaint further alleges that for each offering sale the firm effected, it provided investors with a PPM that falsely stated that affiliates had never defaulted in payment of obligations and had made all payments timely; the firm knew this statement was false for over a year but never disclosed this material fact to customers or stopped sales while the misrepresentation was outstanding. 

This is FINRA Case #2009018817601.   [Disciplinary Actions for May 2011]