UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
RALPH H. BALDWIN, Jr.
CAMBRIDGE FINANCIAL CORP., HARTFORD FINANCIAL GROUP, INC. and THOMAS KENNEDY
CFTC Docket No.
Reparation complainant Ralph H. Baldwin, Jr. ("Baldwin") appeals two aspects of the Initial Decision on Default ("ID") of the Administrative Law Judge ("ALJ"). The ALJ concluded that respondents cheated and defrauded Baldwin in violation of § 4b of the Commodity Exchange Act ("CEA") and awarded damages corresponding to the purchase price of certain options positions in the account that expired worthless. On appeal, Baldwin contends that because his complaint also included a churning claim, he is entitled to an award of the commissions and brokerage fees charged as well. Additionally, Baldwin urges that he should be permitted to amend his complaint to include as a respondent an entity that, as the ALJ informed him, may have been a guaranteeing futures commission merchant ("FCM") for respondent Hartford Financial Group, Inc. ("Hartford") during the relevant period.
In his original complaint against Cambridge Financial Corporation ("Cambridge"), an introducing broker ("IB"), and Kennedy, an associated person ("AP") of Cambridge, Baldwin alleged that he began doing business with Cambridge on November 15, 1996. Complaint at 1. His broker was Joel Reid ("Reid"). Shortly after his first trade with Reid in heating oil options, Reid recommended that he speak with Kennedy, whom he described as a "real whiz at S&P futures trading." Id.
Kennedy contacted Baldwin, "resulting in the November 19, 1996 purchase of 20 S&P 775 December 1996 option contracts," which were sold profitably the next day. Complaint at 1. Kennedy "suggested that it was best we take our profit and get out, never mentioning that he intended to recommend putting us back into S&P contracts the very next day." Id. On November 21, 1996, Kennedy recommended the purchase of 30 S&P 780 December 1996 option contracts. These were sold on November 25, 1996 at a profit. Baldwin alleged that "[l]ike the S&P 775 trade, Mr. Kennedy stated that we had a profit and should take all money [sic] and get out, never mentioning that he would be back again with yet another S&P trade recommendation." Id. On November 26, 1996, Kennedy called and recommended the purchase of 30 December 1996 S&P 795 option contracts. Baldwin bought those options, too.
After the November 26 trade, Kennedy, who had been a very frequent caller, "suddenly disappeared." Complaint at 1. Baldwin called for Kennedy "repeatedly but was given a series of ‘not available’ excuses." Id. He also asked Reid, who was handling "all of [his] other trades at Cambridge," about Kennedy’s whereabouts. Id. Reid was "very elusive" but Baldwin "persisted in continuing to inquire both of Mr. Reid and the telephone answering staff at Cambridge." Id. According to Baldwin, "[o]nly after the S&P 795’s had expired and I had lost my entire investment [on that trade] did I learn from Mr. Reid that Mr. Kennedy was no longer with the firm and had left very shortly after the November 26, 1996 trade." Id. Summing up, Baldwin alleged that "this firm hung me out to dry while never disclosing that my broker had left the firm or making any attempt to place me with another broker within the firm so that I would know the progress of my investment and have assistance in protecting same." Id.
Baldwin alleged that Cambridge brokers made "many recommendations without fundamental or technical basis and [had a ] tendency to recommend selling when there is a modest profit, only to return in very short order with yet another recommendation and more commission." Complaint at 2. Baldwin also charged that Kennedy "intentionally engaged in churning in order to generate over $17,000 in commissions and brokerage fees." Id.
As to damages, Baldwin asked for the $19,000 premium price of the expired S&P 795s; $17,007 in commissions and brokerage fees on all the transactions in his account; prejudgment interest at the rate of 12% per year (which he calculated as $3,752.62), and the $250 filing fee. The total amount of his claim was $40,009.62.
Cambridge failed to file an answer or a prehearing memorandum. It also failed to file an answer to the ALJ’s March 16, 1998 order to show cause why it should not be held in default. Accordingly, on March 31, 1998, the ALJ found Cambridge in default. Hartford, which had been added as a respondent (see footnote 1), did not respond to the ALJ's May 19, 1998 order to show cause why it should not be found in default on or before June 1, 1998.
Baldwin and Kennedy engaged in telephone settlement negotiations with the ALJ, which resulted in Kennedy’s settling Baldwin’s claim for $5,000. During the conference the ALJ advised that a guarantee agreement between Hartford and First American Discount Corporation ("First American") may have been in effect during part of the trading in complainant’s account. On May 14, 1998, the ALJ issued a notice enclosing a copy of a CFTC Form 1-FR-IB (guarantee agreement) for review. The notice stated that "according to NFA records, Hartford Financial Group, Inc. was guaranteed by First American Discount Corp. from November 5, 1996-December 8, 1996." The next day, May 15, 1998, the ALJ issued an order giving additional notice that "there is a paucity of information in existing legal publications concerning guarantee agreements."
On June 30, 1998, the ALJ issued an Initial Decision on Default and Settlement as to Respondent Thomas Kennedy. He dismissed the complaint as to Kennedy with prejudice in view of the settlement between him and complainant. The ALJ also found that Hartford and Cambridge had failed to file answers or to respond to the complaint or to the orders to show cause why they should not be held in default. He concluded that Hartford and Cambridge cheated and defrauded Baldwin in violation of § 4b of the CEA. The ALJ awarded Baldwin $14,000 in damages, representing the $19,000 purchase price of the expired options, minus the $5,000 received in settlement from Kennedy, plus interest and costs.
Baldwin filed a timely notice of appeal and appeal brief. He maintains that he is entitled to damages on his churning claim in addition to the damages the ALJ awarded him for the expired options. He also contends that the ALJ erred in not adding First American as a respondent or affording Baldwin the opportunity to request that it be done. Baldwin also asserts "upon information and belief" that Cambridge and Hartford have filed for bankruptcy.
I. Alleged Error Regarding the Churning Claim
Baldwin maintains that the ALJ erroneously failed to award him damages for churning. The ALJ's order does not mention the churning claim or explain why he either failed to consider or rejected this allegation. The ALJ may have believed that an award of damages for churning would be precluded because he awarded damages for the expired options. We do not believe that this is so.
In any event, we find that the factual allegations of the complaint set forth circumstances that raise questions regarding churning but that the record would require further development in order to determine whether churning occurred or not.
Commission Rule 12.22 governs default proceedings in reparation cases. As relevant here, Rule 12.22 provides that failure timely to respond to a complaint or, if applicable, to pay a filing fee, is "treated as an admission of the allegations of the complaint . . . by the nonresponding party" and constitutes a waiver by him or her of any decisional procedure afforded by the Part 12 rules "on the acts set forth in the complaint . . . ." A default proceeding follows. Under the default procedure set forth in Rule 12.22(b), the Judgment Officer or ALJ to whom the case has been forwarded "may thereafter enter findings and conclusions concerning the questions of violations and damages and, if warranted, enter a reparation award against the non-responding party."
Moreover, the rule also provides that "[i]f the facts which are treated as admitted are considered insufficient to support a violation or the amount of reparations sought, the Judgment Officer or Administrative Law Judge may order production of supplementary evidence from the party not in default, and may enter a default order and an award based thereon." Thus the rule gives the presiding officer some measure of discretion with respect to the production of supplementary evidence. In our view, this is best interpreted to mean that the presiding officer shall give the nondefaulting party the opportunity to place additional evidence in the record unless the presiding officer can articulate a reason, based on the current record, as to why doing so would be contrary to the public interest.
Based on the current record we find no reason why doing so would be contrary to the public interest. We therefore remand the proceeding to the ALJ. Complainant shall have 60 days from the date of this order in which to place in the record additional evidence with respect to the churning claim.
II. Naming First American as a Respondent
Complainant asks that he be permitted to amend his complaint to name as a respondent First American Discount Corporation, which may have been the guaranteeing FCM of Hartford. There appear to be several problematic aspects to the Cambridge/Hartford/First American relationship. For example, NFA's records show that Cambridge—the entity whose name was on complainant's account opening documents and account statements—was not guaranteed by First American at the time the violations occurred. Instead, Hartford was guaranteed by First American when the violations occurred. Moreover, for a number of months, Cambridge and Hartford were both registered IBs at the same time, a fact that appears to call into question the conclusion that one IB was the successor in interest of the other. Nevertheless, since we are remanding the matter to the ALJ, Baldwin shall have the opportunity to file an amended complaint and to address these issues with specificity.
Any complaint purporting to name First American would be filed more than two years after the cause of action accrued and therefore would be barred, presumptively, by the statute of limitations. Commission Rule 12.13. For this reason, Baldwin also shall demonstrate in his proposed amended complaint why the amendment adding First American should "relate back" to the time the complaint was filed.
There is one final issue. Baldwin asserts in his appeal brief that "upon information and belief" Cambridge and Hartford have filed for bankruptcy. If these parties are in bankruptcy, the Commission is subject to an automatic stay pursuant to the Bankruptcy Code. As a practical matter, this means that the Commission cannot take any action about this case during the pendency of the bankruptcy proceeding and that complainant's most effective manner of pursuing his claim is with the bankruptcy court. Therefore, in cases in which the bankruptcy proceeding is filed after issuance of the initial decision, the Commission's policy is to dismiss the proceeding without prejudice as to the party involved in the bankruptcy proceeding, absent a showing by the complainant that such a dismissal would be unjust and unduly prejudicial to his rights. Stone v. Premex, Inc., 1984 WL 48716 (CFTC Dec. 12, 1984). Accordingly, Baldwin shall show cause why the complaint should not be dismissed without prejudice as to Hartford and Cambridge.
Baldwin shall be afforded 60 days from the date of this order in which to file an amended complaint, if any, and to show cause why the complaint should not be dismissed without prejudice as to Cambridge and Hartford. Baldwin shall serve all parties and First American. First American is given 60 days from the date of service in which to respond to any proposed amended complaint. All filings are to be directed to the Administrative Law Judge.
This matter is remanded to the ALJ for further proceedings consistent with this order.
IT IS SO ORDERED.
By the Commission (Chairman RAINER and Commissioners HOLUM, SPEARS, NEWSOME and ERICKSON).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: November 24, 1999