Private Placement and Direct Investment Fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
Valmark Securities, Inc. (CRD #31243, Akron, Ohio) and Richard Michael Arceci (CRD #1173612, Registered Principal, Sagamore Hills, Ohio) submitted an Offer of Settlement in which the firm was censured and ordered to pay $350,000 in restitution to investors through a receiver the U.S. District Court for the Central District of California appointed. Arceci was fined $10,000 and suspended from association with any FINRA member in any principal capacity for 10 business days. Without admitting or denying the allegations, the firm and Arceci consented to the described sanctions and to the entry of findings that the firm, through Arceci, approved an offering for sale based exclusively on its review of the issuer’s unverified and uncorroborated statements in the offering document. The findings stated that the firm, through Arceci, designated an individual to conduct the marketing review for the offering. The individual created a summary page by cutting and pasting language directly from the private placement memorandum (PPM), including a statement about the unblemished payment history of the offering’s affiliates. The individual then completed, signed and dated the requisite 18-question review checklist. The findings also stated that the firm, through Arceci, designated an associated person of the firm to conduct the due-diligence review of the offering. The person had not heard of the issuer prior to receiving the PPM and the other individual’s summary report, so he used the summary report and the PPM to conduct the due diligence review, including his assessment of the risks of the offering, and completed, signed and dated the requisite 14-question due diligence review checklist. The firm, acting through Arceci, approved the offering for sale based on the PPM, the checklists and the summary report. The findings also included that the firm, acting through Arceci failed to adequately supervise its due-diligence review, in that it failed 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; failed to research background information on the offering’s officers, which would have informed it that the chief executive officer (CEO) had been barred from the insurance industry by a state and later charged with fraud; and failed to use the services of third-party due-diligence providers that conducted due diligence research and drafted reports that would have identified material risks of the later offerings. The firm’s due diligence review, completed in less than three days, was based solely on the self-serving representations the issuer made in the PPM.
FINRA found that the firm, acting through Arceci, ignored red flags and failed to adequately supervise the sale of the offering after learning about liquidity issues, and failed to suspend sales based on a PPM containing false statements. FINRA also found that no one at the firm conducted an investigation or due diligence to determine whether customers who invested were in danger of incurring loss of principal and interest given that affiliates had delayed making payments to note holders. In addition, FINRA determined that the firm continued to leave its customers in the dark regarding the issuer’s financial problems and to sell the offering using a PPM that contained a material misrepresentation, without disclosing missed payments on securities, and failed to provide customers with copies of correspondence from the issuer describing problems with making payments on previously issued notes. The firm’s decision to continue selling the offering constitutes a failure to observe high standards of commercial honor and just and equitable principles of trade.
The suspension was in effect from December 19, 2011, through January 3, 2012. (FINRA Case #2009018817601).