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Does the Palace Guard Have No Clothes?

Posted by Larry Doyle on April 14, 2009 5:30 AM |

I eagerly await the soon to be released 2008 Annual Report of the Financial Industry Regulatory Authority (FINRA). Prior to its release and in light of all the turmoil on Wall Street over the last 24 months, I thought it may be timely to review the mission and some recent history of the “palace guard,” known as FINRA.  From the FINRA website, we learn:

The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 656,000 registered securities representatives.

Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.

While FINRA promotes investor protection and market integrity, the simple fact is there are still thousands of investors with an estimated hundred  BILLION dollars locked up in Auction Rate Securities. The ARS market has been designated as a fraud. FINRA not only did not protect the ARS investors, but participated in the ARS market as an investor themselves.  At year end 2006, FINRA had a $647 million position in ARS. Did they sell them? When? To whom? What price? If they did sell their ARS position, did they possess material non-public information and act upon it?  Will the 2008 FINRA Annual Report provide answers? I can only hope.  Aside from a few state attorneys general, who is truly looking to help these investors?

FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. It also performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange.

A consistent claim by ARS investors is the mismarketing of this product as a cash surrogate. Where was FINRA to educate investors and to monitor the broker-dealers?  Additionally, investors have reported that FINRA has provided them little to no support in reclaiming their funds.

FINRA has approximately 3,000 employees and operates from Washington, DC, and New York, NY, with 15 District Offices around the country.

FINRA believes investor protection begins with education. Using the internet, the media and public forums, we help investors build their financial knowledge and provide them with essential tools to better understand the markets and basic principles of saving and investing. In addition, the FINRA Investor Education Foundation is the largest foundation in the United States dedicated to investor education. As of June 2007, the Foundation had approved $10.4 million in grants and an additional $10.2 million in direct investor education programming.

In today’s fast-paced and complex global economy, FINRA is a trusted advocate for investors, dedicated to keeping the markets fair, ensuring investor choice and proactively addressing emerging regulatory issues before they harm investors or the markets.

Thousands of investors and billions of dollars remain frozen in ARS. For these individuals, FINRA’s assertions ring hollow.

Over and above FINRA’s investment in ARS, the 2007 Annual Report also indicated FINRA had hundreds of millions of dollars invested in hedge funds, fund of funds, and private equity. Perhaps in light of the desire for increased transparency in investment management along with stricter enforcement from regulatory authorities, FINRA could wear both hats and share with the public details on these investments.

I commend the consistent Bloomberg coverage of the ARS travesty.  The FINRA angle in this scandal remains a puzzle with many unanswered questions.  The former head of FINRA, Mary Schapiro, now heads the SEC. Could she be compelled to shed some light on her former employer and its overall investment activities in light of the ARS scandal?

For those interested in reviewing Sense on Cents‘ coverage on the FINRA connection specifically and the ARS scandal in general, I am happy to provide the following synopsis:

1. Let’s Really Question Ms. Schapiro…
January 16,2009

This piece reviews the kid glove treatment Ms. Schapiro received during her confirmation hearing to head the SEC. I also reveal the fact that FINRA, formerly headed by Ms. Schapiro, owned $647 million in ARS, along with investments in private equity, fund of funds, and hedge funds. Those facts are in FINRA’s 2007 Annual Report (pgs 47-51), a link to which is provided in the piece.

2. Riveting Testimony From a Great American, Harry Markopolos
February 4, 2009

This piece focuses on Mr. Markopolos’ scathing indictment of the SEC in the handling of the Madoff scam. Mr. Markopolos, however, also strongly indicts FINRA as being “corrupt.”

3. Warden Grows Veggies With Prisoners
March 4, 2009

This piece again highlights the fact regarding FINRA’s ownership of ARS. It also highlights a piece written by Cody Willard of Market Watch impugning Ms. Schapiro.

4. Turn That Screw A Little Tighter
March 10, 2009

This piece highlights the fact that issuers of ARS continue to pay underwriting fees to Wall Street firms for underwriting ARS, even though the market has totally dried up. Those fees in 2008 totaled $211 million. Make no mistake, those fees are ultimately borne by taxpayers.

5. Will TARP Screw ARPS Even Tighter?
March 25, 2009

This piece reviews the possibility that Oppenheimer Holdings, based in Toronto, may look to incorporate in the United States in order to access TARP funds to reimburse ARPS investors. Under that scenario, all American taxpayers will be reimbursing ARS investors for a fraud perpetrated by this Canadian money manager.

6. Oppy’s Pain In The ARS!
March 30, 2009

This piece further addresses the ridiculous potential of a company moving to the United States in order to milk the American taxpayer to provide bailout assistance!!

7. Bigger Than Madoff?
March 30, 2009

In this piece, I draw the striking similarities in the scams perpetrated by Bernie Madoff and those involved in the underwriting, marketing, and distribution of ARS.

8. Before Any Fraud Ensued
March 31, 2009

This piece addresses an ARS case found for the defense, that being UBS. The critical point in this piece is the quote by Judge McKenna in which he states that investors have been returned to their initial position “before any fraud ensued.” By that quote, the judge is confirming the fact that the underwriting, marketing, and sales of ARS constituted a fraud.

9. NoQuarter Radio’s “Sense on Cents with Larry Doyle”
April 5, 2009

This is a replay of my Sunday evening radio program from April 5, 2009 in which I interviewed Phil Trupp, a journalist, author, and an ARS investor. Mr. Trupp is writing Money On Ice: How Ordinary Investors Beat the Biggest Fraud in Wall Street History, an exposure of the Auction Rate Securities scandal.

For all those who have been, and still are, impacted by this scandal, I hope my writing here at Sense on Cents is helpful in returning your investment dollars in a very timely fashion.

I welcome any comments, questions, concerns, or criticisms.


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