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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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  • EddieD

    ARS arbitrations are starting in larger numbers the very near future. First of all it’s despicable that with all our regulators, AG’s and laws auction rate securities victims are left no other option then to roll the dice at a FINRA arbitration. All finacial firms make every client file an arbitration agreement. This is not because these arbitrations favor the client. FINRA purchased ARS for their own potfolio and never divulged this as a potential conflict of interest. At the very least this is suspicious. How can anyone arbitrating ARS feel comfortable at an ARS arbitration not knowing the full extent of FINRA’s involvement? At this point ARS victims have no were to turn, no one to trust. We have to fight for ourselves as best we can. Some firms were made to redeem ars and other firms were not. They all used the exact same sales pitch word for word. Selective justice?

  • fiscalliberal

    As a newcommer to this game, I have been trying to pick up the finacial jargon. You have been a big help

    Re ARS do I have a correct example?

    A bank offers for sale a set of securities to people to purchase. These could be MBS, car, student or credit card loans. The reason for the dutch auction is that it gets the lowest interest rate some one is willing to take for the investment. So – if you bought the securities, you owned them. The sellers said they would take them back on a moments notice ( like a bank). These securities would go into the next ARS pool to be re-sold. However for some reason they renigged,hence the fuss.

    Now – one has to ask, does any paperwork come with these securities. In the fine print, does it say they can withhold redemption like the Hedge Funds do?

    So – how is this not buyer beware.

  • Larry Doyle

    It has been universally accepted that the underwriters (banks) represented ARS as cash surrogates. People bought them based on that pretense…when in fact they weren’t.

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  • Rocky Raccoon alias

    E*Trade should be in your “Hall of Shame”

    E*Trade has been totally intransigent, unresponsive, and demonstrated nothing but stonewalling and plain rude behavior. Complaints with FINRA about E*Trade just seem to languish. ( The same is true of Ameritrade and Schwab I understand.)

    I have been “frozen” in $250K ARS trash at E*Trade since February 2008. As you are well aware E*Trade is one of the worst of the scum. I won’t give you my details on them as it is the same recounting as others have well documented. I digress.

    My nominee for one of the least responsive to the plight of ARPS holders is:

    Fred J. Joseph, Colorado Securities Commissioner
    Colorado Div. of Securities
    1560 Broadway Ste 900
    Denver, CO 80202

    This “regulator” has demonstrated, so far, a total disregard, complete unresponsiveness, and lack of concern in this matter. I have been writing his office, to his attention, for a year asking for help and an investigation into this matter and I have not even received a ” thank you for contacting your State Securities division.”

    One gets the feeling he is in the pocket somehow of the likes of E*Trade, TD Ameritrade. The State of Colorado seems to be viewing this ARS fraud as essentially a non-event or of no concern, unlike some states such as NY, MO, PA, MA.

    Here is a synopsis of my correspondence to his office I will share with you.

    March 16th, 2009 ( as well as three dates prior starting with April 2008.)

    Colorado Div. of Securities
    1560 Broadway Ste 900
    Denver, CO 80202

    RE:Auction Rate Securities

    Dear Fred J. Joseph, Colorado Securities Commissioner:

    I want to bring to your attention the fact that many Colorado residents – and people throughout the country – are still trapped in auction rates through firms like Oppenheimer, E*Trade, Charles Schwab, and TD Ameritrade. Actually, the number of people trapped in each one of these firms easily surpasses the number trapped through Citibank.

    I know my brokerage, E*Trade, has done business in Colorado for almost ten years. Many individuals who live in Colorado are trapped in auction rates sold them by E*Trade and the other brokerages above, to the tune of $X,X00,000’s individually.

    The frozen auction rate money is money that would be used to purchase goods and services and homes in Colorado and throughout the nation.

    Anything you can do to bring E*Trade and the others to justice is appreciated. As you know these securities were grossly misrepresented by the firms who sold them, and many of those trapped are elderly. I know of one elderly woman who is unable to pay for her cancer medication because her money is frozen. Anything to can do to right this travesty is appreciated.

    The State of Colorado should revoke the securities’ licenses of the aforementioned firms to do business in Colorado until they redeem all of the ARS for those investors who want them redeemed. FINRA is nothing but a kangaroo Court and is biased to the brokers, the expense notwithstanding to folks who can ill afford to pay arbitration fees just to get their own money back.

    • arps victim

      Rocky Raccoon,

      I couldn’t agree with you more. I am furious about this situation. These ARP’s were supposed to be cash equivalents able to be cancellable at any time on 7 days notice. I too have been victimized by E*TRADE. I am in NY and have not seen a penny of my ARP’s redeemed. I have a huge stake in these ARP’s which currently are completely illiquid. I could have been earning significantly more if this money hadn’t been locked up for the past 18 months. While I bought them thru ET, I now have my accounts elsewhere. I’m not sure if my current brokerage house is responsible for redeeming them or if ET is still responsible. I can’t seem to locate an answer on this. I hope that you and all of us E*TRADE ARP’s victims get resolution in the very near future. I am hoping that Andrew Cuomo can take E*TRADE to task and get justice for all of us. He has been leading this charge extremely effectively to date against other brokerages. I need him to focus on E*TRADE. He’s currently going after Schwaab.

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