Suspended brokerage got $600K in ‘secret’ commissions: FINRA

The CEO of a brokerage firm used a “secret agreement” to get hundreds of thousands of dollars in undisclosed extra commissions for sales of private placements, according to FINRA.

Jamie J. Worden, the barred chief and member of a New York-based firm called Worden Capital Management whose FINRA membership has been canceled, violated the company’s own due diligence policies in selling $10.6 million worth of costly membership interests in five private funds investing in pre-IPO stock shares, the regulator’s Feb. 28 disciplinary proceeding alleges. An oral understanding between the unidentified fund manager and Worden that he hid from the firm’s brokers and clients enabled the firm to collect $609,500 in extra commissions on top of its disclosed 10% rate between January 2019 and March 2020, according to FINRA.

The case comes after FINRA’s fines reached their highest level in five years in 2021 at $91 million while restitution nearly doubled to $49 million, amid a continuing problem with unpaid arbitration awards that totaled $91 million between 2016 and 2020. FINRA postponed Worden’s registration in November over $89,000 in unpaid dues and other fees, and the firm’s owner faces 10 pending client arbitration claims seeking a combined $6.8 million, according to BrokerCheck. That places FINRA’s latest case against Worden seeking disgorgement at risk of going unpaid for 121 investors who allegedly shelled out estimated commissions of 18%.

Worden’s CEO “approved the offerings on behalf of WCM, and he knowingly or recklessly failed to disclose this secret compensation to WCM’s brokers who, at [his] direction, sold the offerings,” according to FINRA’s disciplinary complaint. “Therefore, the WCM brokers did not disclose this secret commission to investors when they recommended the investments.”

Although the case mentions the CEO by his initials, it only names the brokerage as a defendant and not Worden himself. An attorney who has represented Worden and his brokerage in the past didn’t respond to inquiries seeking comment. A call to the brokerage’s official listed number in its FINRA filings went straight to a voicemail which said the mailbox was full.

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Asked whether FINRA has any concerns about the potential restitution being paid in this case or the 10 client claims, FINRA spokeswoman Michelle Ong declined to comment on pending litigation but referred Financial Planning to a page on its website noting that just 2% of client claims between 2012 and 2016 had unpaid awards. In addition, she sent a section of a February 2018 “discussion paper” issued by FINRA on clients’ ability to recover damages.

“FINRA has taken a number of steps to address the issue of unpaid awards to date, including by suspending member firms or individuals who do not pay their awards from the industry, and FINRA is continuing to pursue a number of proposals to further address this issue within the scope of its jurisdiction,” the discussion paper said. “Fully addressing the issue of customer recovery requires an approach that takes into account the different channels through which customers receive financial services and prevents regulatory arbitrage between them.”

In its overall enforcement efforts, fines ordered by FINRA jumped by 60% year-over-year in 2021 while restitution surged by 96%, according to the law firm Evershed Sutherlands, which represents wealth managers in cases. Combined fines, disgorgement and restitution soared by 53% to $144 million last year. This year could bring more enforcement cases involving the SEC’s Regulation Best Interest and the current volatility in equity values with the pressure from inflation and Russia’s invasion of Ukraine, partner Brian Rubin said.

“The big bump was primarily related to one case that was very significant,” he said. “FINRA had a very active year in terms of enforcement issues. They haven’t slowed down, and I anticipate that we will see more of the same this year.”

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Worden’s brokerage did pay the fines and restitution of $1.6 million ordered by the regulator in its last significant case, which the firm settled with FINRA in December 2020, according to its detailed BrokerCheck file. In that case, FINRA accused Worden of unsuitable recommendations, interfering with customer requests to transfer their accounts when 13 registered representatives left the brokerage and a failure to file 59 amendments to Forms U4 and U5. The company settled the case without admitting or denying the charges.

As part of the latest case, investigators allege that the firm’s entire due diligence of the private placements amounted to the CEO signing a partially completed checklist that the firm’s compliance team and designated principal for such products had refused to sign. Worden reached a secret “oral agreement” with the issuer before the firm sold any of the private placements, according to FINRA. As a result, most of the 170 sales included a commission rate of 18% after the extra 8 percentage points as a result of the agreement, according to FINRA.

Worden “decided if, when and how much of the secret compensation he would distribute to others at WCM,” the document states. “For instance, [he] distributed part of the secret compensation to WCM brokers who referred [the] manager to WCM. He also distributed part of this compensation to WCM compliance staff. The remainder of the secret compensation went to the firm’s general fund, from which [he] drew his own compensation.”

The case accuses the brokerage of fraud, failure to supervise private placement offerings, violations of the suitability rule and failures to make required filings. FINRA’s department of enforcement seeks a finding that the brokerage committed the violations, disgorgement of “any and all ill-gotten gains,” and an assessment of its investigative costs to the firm.