Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2010
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
November 2010
Biremis, Corp and Peter Beck (Principal)
AWC/2008014753602/November 2010

Biremis employed an individual as its controller and as controller for several of its affiliated companies who was arrested and charged with numerous criminal violations. The individual informed Beck that criminal charges had been filed against him and, although the individual misrepresented the nature of the charges, Beck failed to follow up or otherwise investigate the criminal allegations against the individual. Beck failed to instruct other firm employees to investigate the charges against the individual. The Firm's written supervisory procedures, which were Beckís responsibility, did not require any such follow-up.

FINRA found that the individual was convicted, which made him statutorily disqualified from employment in the securities industry; and the firm, acting through Beck, failed to file a written application (Membership Continuance Form-400 (MC-400)) for relief from the statutory disqualification so that the individual could continue to associate with the firm, and the individual continued working as the firmís Financial and Operations Principal (FINOP).

Acting through Beck, the Firm failed to establish, maintain and enforce a supervisory system and/or written supervisory procedures reasonably designed to investigate prospective employeesí backgrounds, follow up on any red flags and achieve compliance with its registration and Uniform Application for Securities Industry Registration or Transfer (Form U4) reporting obligations.

Biremis, Corp: Censured; Fined $50,000

Peter Beck: Fined $10,000; Suspended 6 weeks in Principal capacity only

Tags:  statutory disqualification    conviction        FINOP     |    In: Cases of Note : FINRA
October 2010
Lisa Renee Mello (Principal)
AWC/2008012444202/October 2010

Mello served as her member firmís FINOP and was responsible for monitoring the firmís financial condition to determine whether its net capital was sufficient to conduct a securities business. The firmís registered representatives effected trades in collateralized mortgage obligations (CMOs) through the firmís proprietary trading account. The transactions appeared to remove beneficial ownership of the CMOs from the firm, but they were sham transactions because the securities remained in the firmís inventory.

The registered representative was able to accomplish and maintain his scheme because Mello and others at the firm reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firmís losses and risk. As a result of the registered representativeís activity and the firmís method of monitoring it, the firm conducted a securities business on multiple days while failing to maintain its required minimum net capital and, because Mello failed to discern the true effect of the registered representativeís trading on the firmís net capital, she allowed the firm to conduct a securities business on multiple occasions while in violation of SEC Exchange Act Rule 15c3-1.

Lisa Renee Mello (Principal): Fined $8,000; Suspended as FINOP for 6 months
Tags:  CMO    Proprietary Traders    Net Capital    FINOP     |    In: Cases of Note : FINRA
Bill Singer's Comment

As I noted in the apparent companion case of Kevin Bradley Martin:

According to FINRA, Martin erred because:

The registered representative was able to accomplish and maintain his scheme because Martin reviewed his activity on a daily basis rather than in a manner that would evidence trading patterns over time and expose the firmís losses and risk.

I suspect that FINRA wanted to say -- meant to say -- something a bit different than how this came out.  If you take the statement as written, the Supervisor is being chastized for doing a daily review of his subordinate's trading.  And that's wrong, why?  If FINRA suggests that the daily review was improper, then the regulator owes its members a far more cogent explanation (if not warning), than to merely note that the the review should have been undertaken "in a manner that would evidence trading patterns over time and expose the firm's losses and risk."  Just exactly what is the regulator suggesting would have been preferable -- and not just for the sake of debate but for the pointed reason of eliminating Martin's liability for failing to review prop trading activity over a given period of time. Moreover, assuming that Martin was victimized by the fraud of the subject trader (which FINRA oddly doesn't note pro or con), is there any proof that a different frame of review would have elicited the patterns that, in hindsight, FINRA now concludes are so apparent?

August 2010
CMG Institutional Trading, LLC and Shawn Derrick Baldwin (Principal)
2006006890801/August 2010

Acting through Baldwin, CMG Institutional Trading

  • participated in securities related activities without employing a qualified municipal securities principal;
  • failed to timely file quarterly lists of issuers with which it engaged in a municipal securities business;
  • failed to adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that the conduct of the broker and associated persons in municipal securities activities are in compliance with Municipal Securities and Rulemaking Board (MSRB) rules and that the procedures shall codify the brokerís supervisory system for ensuring compliance;
  • had an inadequate Anti-Money Laundering (AML) compliance program, in that it failed to
    • verify customer identification information,
    • conduct independent testing of its AML program,
    • designate a person to transmit contact information to FINRA and
    • to provide AML training for two years;
  • failed to timely create and maintain a business continuity plan and engaged in securities transactions without a qualified financial and operations principal (FINOP);
  • conducted a securities business while its net capital was below the required minimum;
  • failed to prepare an accurate general ledger, trial balances and books and records; and failed to file an annual audit report and a quarterly Financial and Operational Combined Uniform Single (FOCUS) report; and
  • failed to file an application for approval of a material change in its business operations even though it participated in an offering as an underwriter on a firm commitment basis, and disseminated sales literature that contained numerous inaccuracies and misrepresentations.

Also, the firm permitted Baldwin to engage in its securities business even though his registration was inactive because he had failed to complete a continuing education course.

FINRA's National Adjudicatory Council (NAC) imposed these sanctions following appeal of an Office of Hearing Officers (OHO) decision:

CMG Institutional Trading, LLC: Expelled

Shawn Derrick Baldwin (Principal): Barred

Tags:  Unregistered Principal    WSP    MSRB    AML    NAC    FINOP    FOCUS    Material Change Of Business     |    In: Cases of Note : FINRA
Bill Singer's Comment

On August 30, 2007, FiNRAís Department of Enforcement (ďEnforcementĒ) filed a 14-cause complaint against CMG and Baldwin alleging the aforementioned violations of SEC, NASD, and MSRB Rules.

On September 26, 2007, CMG and Baldwin filed answers to the complaint. The Hearing Panel conducted a hearing on July 7, 2008.

On October 14, 2008, the Hearing Panel found CMG and Baldwin liable under each cause alleged in the complaint.

On November 4, 2008, the Respondents appealed the Hearing Panelís decision. Oral argument was held on June 12, 2009. The Decision was published on May 3, 2010.

See the 2010 NAC Decision at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisions/p121380.pdf

See the 2008 Office of Hearing Officers Decision at http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/ohodecisions/p117583.pdf

I commend both the OHO and the NAC decisions to you as they are well-written and reasoned, and set forth in a comprehensive manner the allegations, findings, and rationale.  An excellent effort by FINRA.

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