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Finra Sanctions Upheld For Failure To Respond Completely To Information Requests

CMG Institutional Trading, LLC and Shawn D. Baldwin, Exchange Act Rel. 59325, January 30, 2009

Time since appeal filed – 10 months 11 days
Time since last brief – 7 months 7 days
Pages – 16
Footnotes – 53


CMG was a $5,000 net capital introducing broker. In the fall of 2005 SEC staff informed the firm it had a $44,000 deficiency in net capital. Baldwin, the firm's president and CEO contributed $75,000 to the firm to cure the deficiency. Soon after CMG claimed to have received $3 million in permanent capital from an account at a foreign exchange dealer. It claimed the money was held in an account at the dealer. SEC and NASD staff sought to verify this claim and Baldwin produced documents that he asserted showed the contribution. Commission staff thought the documents might be altered and asked for further documentation of the purported contribution. Shortly after this, the CFTC brought a civil action freezing the assets of the foreign exchange dealer. NASD staff also requested that CMG and Baldwin submit corroboration for the purported capital infusion. Baldwin did not timely submit those documents. In a meeting with SEC and NASD staff Baldwin gave contradictory explanations for the source of the capital infusion and shortly afterward produced various documents he claimed supported the claimed existence of the funds. He never produced sufficient records verifying receipt of the money.

NASD suspended CMG and Baldwin for two years and fined them $25,000 jointly and severally. The Commission upheld the sanctions.


Baldwin first claimed he provided the $3 million and later claimed that it was a loan from a third party. He claimed that the third party deposited the cash in his personal account at the currency dealer which he then transferred to CMG's account at the dealer. He also testified at the NASD hearing that he never had a personal account at the currency dealer.

Rule 8210 requires that firms and their associated persons fully cooperate with Finra requests to produce information in the course of a staff investigation. Here Baldwin and CMG did not fully comply with requests to produce requested documentation. If a claim is made that documents are unavailable, a detailed explanation of efforts to obtain them and an explanation of why they remain unavailable is required. Baldwin and CMG also argued that since there was no proof the documents he produced were in fact altered, they had no obligation to produce additional documentation. Finra has no obligation to explain its reasons for or justify its requests for information so this argument fails. Because CMG and Baldwin were not charged with violations of the net capital rule, it is irrelevant whether the firm had sufficient capital at the time.

The opinion upheld the sanctions because compliance with the net capital rule is important for the protection of investors. Lack of harm to investors is irrelevant to an evaluation of the sanctions as rarely does a violation of the rule result in direct harm to investors.


Chairman Schapiro and Commission Walters are both recusing themselves from Finra matters as both were employed there previously. This is a serious situation and prevents full Commission review of Finra disciplinary matters. Only three SEC Commissioners, two of whom are Republicans, are hearing these appeals.

This case was a completely routine matter that involved no novel issues of law or complex factual matters. There is no reason why the Commission should have labored for more than seven months to produce an opinion.