Ace Diversified Capital, based in San Rafael, CA, and a Registered Principal agreed to settle numerous FINRA charges that resulted from a single private placement offering.

FINRA Alleged Findings and Determination.   The firm, acting through Registered Principal Lynwood Jen - acting as its CCO and President - executed an agreement to market and sell interests in Medical Capital Holdings, Inc., a Regulation D offering of promissory notes.  They sold $677,262 of the notes to customers, generating $30.5K in commissions - nearly $22K going to the RR who sold the MedCap notes. 

However, at the time of the MedCap sales, the firm’s membership agreement did not permit it to engage in the sale of any private placements. 

Therefore, by selling the notes, the firm effected a material change in its business operations without applying for FINRA’s approval to do so.  [VIOLATION #1]

Principal Jen was deemed was responsible for ensuring that the firm had in place an effective supervisory system and/or WSP's to ensure that the firm achieved compliance.  Yet, although the firm was not approved to sell interests in private placements, it maintained WSP's pertaining to the sales of private placements - which FINRA found to be deficient.  [VIOLATION #2]

[C-I Note:  FINRA examiners often cite firms - even fine them - for having pols and procedures in place for business activities they either do not currently engage in, or are not approved for.]

Notwithstanding the deficiencies in the WSP's, the firm and Jen were faulted for failing to conduct adequate due diligence on the issuer’s offering - e.g., Jen didn't research the issuer’s past performance, which would have revealed that the issuer had defaulted on its earlier notes offerings and, that the private placement memorandum (PPM) misrepresented the issuer’s past performance.  Consequently, Jen could not advise the firm's RR's to disclose those facts and risks.  [VIOLATIONS #3,4]

Ace Diversified Capital and Lynwood Jen were fined $25K, jointly and severally;  Jen also was suspended as principal for 15 days.  This is FINRA Case #2009020356901.   [Disciplinary Action for June 2011]