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Home« Mary Schapiro Still Not Being Questioned; Independent Investigation Still Required
Is The Government Bond Bubble Getting Ready To Burst? UPDATE #2 >> »
U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s
Posted by Larry Doyle on May 21, 2009 11:34 AM |
The Wall Street Journal reports this morning Lehman Role Probed in Selling Securities:
The Justice Department has questioned several former executives at Lehman Brothers Holdings Inc. as part of its criminal investigation into whether they sold supposedly safe, liquid securities to clients while knowing that the market for the securities was drying up.
Prosecutors from the U.S. attorney’s office in Brooklyn and lawyers from the Securities and Exchange Commission in recent weeks interviewed several former executives who ran Lehman’s auction-rate-securities business, these people said. Auction-rate securities are short-term debt instruments in which the interest rates reset at periodic auctions.
The inquiry centers on whether Lehman employees defrauded customers as the market for these securities broke down in 2007. Authorities want to know if Lehman executives got these auction-rate securities off the firm’s books and into client accounts at a time in which the securities were becoming hard to sell, according to the people with knowledge of the matter.
Authorities also want to know if executives knew the market was in trouble and sold their own personal holdings of auction-rate securities, which could constitute insider trading, according to the people. (LD’s highlight)
I wrote on January 16th, “Let’s Really Question Ms. Schapiro.” In that post, I was raising the same questions about FINRA that the U.S. Attorney is now raising about the Lehman executives. I wrote:
Additionally, as of the end of 2006, FINRA acknowledged that the assumed portfolio held a cool $647 million dollars in Auction Rate Securities!!!
For those not familiar with Auction Rate Securities, this sector of the market totally imploded last Spring leaving institutional and individual investors holding the bag. While many institutional investors were made somewhat whole via settlements from the larger broker-dealers, many individual investors remain holding the bag as smaller broker-dealers, who did not necessarily underwrite these securities but did distribute them, have not been forced to make clients whole. WOW!!!
Are you kidding me!!?? The main regulator of the financial industry happens to be an investor in securities which virtually every Attorney General in the country is going after every Wall Street institution for improper marketing and distribution!! Are we looking at gross negligence, ignorance, incompetence or all of the above?? The question that MUST be answered is what has FINRA done with these Auction Rate Securities. Do they still own them? Did they liquidate them? If so, when and at what price? How was the sale negotiated? So many questions.
Over and above that, given that Ms. Schapiro is the chief executive of FINRA, don’t you think it would have been appropriate for her to address which hedge funds, fund of funds, and private equity shops were in FINRA’s portfolio? FINRA’s Annual Report categorically states its’ investment committee addresses any potential conflicts of interest. The public deserved to have this topic openly addressed during Ms. Schapiro’s hearing. WHY? For the simple reason that FINRA is feeding from the very same trough it is supposed to be regulating.
I followed this post up with numerous other posts raising the same questions. On March 31st, I wrote “Before Any Fraud Ensued,” in which I aggressively put forth:
Given that there is public acknowledgement by a federal judge that a fraud had ensued in the marketing and distribution of ARPS, let us return to the case Sense on Cents has been highlighting. FINRA’s Annual Report for 2007 publicy records that FINRA owned $647 million ARPS at year end 2006.
The questions that need to be answered:
1. Was FINRA defrauded in the purchase and sale of their bonds?
Note from LD: I have subsequently unearthed, in reading NASD Annual Reports from 2003-2005, that FINRA assumed the ownership of their ARS holdings from NASD. I highlighted as much in my post, “NASD Knew Auction Rate Securities Weren’t Cash”
2. If FINRA has sold their bonds subsequent to the publishing of that report in April 2008, to whom did they sell them? at what price? on what date?
Note from LD: The Bloomberg article from April 30th, FINRA Oversees Auction-Rate Arbitrations After Exit offered the following color addressing FINRA’s sale of their ARS holdings:
Finra, responsible for educating and protecting investors, owned as much as $862.2 million of the debt before exiting the market in the spring of 2007, less than six months before auctions began to fail, according to spokesman Herb Perone.
3. Did FINRA have material non-public information at the time of sale, if in fact they sold them? Did they act on that information?
Note from LD: Today’s WSJ article is further acknowledgment that the Auction Rate Securities market was failing in 2007. FINRA first apprised investors of concerns in the ARS sector in Spring 2008. If in fact the ARS market was failing in 2007, the pressure on FINRA needs to increase. FINRA must release the trade information on their sale of ARS. Without that information, how can the investing public have any confidence in the integrity of FINRA and its procedures. Returning to my March 31st post:
Let’s put this into layman’s terms. FINRA was supposed to be overseeing and regulating the casino on Wall Street. In the process of regulating the casino, it appears that they put some of their own chips into one of the games. That game, ARPS, turned out to be a fraud, as publicly acknowledged by U.S. District Judge Lawrence McKenna in this case with UBS.
DID THE SECURITY GUARD, FINRA, PROTECT THE OTHER PATRONS AS REQUIRED OR DID THE SECURITY GUARD PROTECT HIS OWN INTERESTS TO THE DETRIMENT OF THE OTHER PATRONS?
Now here we are on May 21st, 2009. The questions that the U.S. Attorney is looking to get answered by Lehman executives are the EXACT questions that FINRA executives also should be compelled to answer.
Do you think representatives from the U.S. Attorney’s Office, the SEC, and defense counsel may also want to know the answers to these questions as well?
LD
This entry was posted on Thursday, May 21st, 2009 at 11:34 AM and is filed under ARPS, ARS, Auction Rate Securities scandal, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Awesome stuff LD
Keep it up
President Obama signed into law yesterday a bill (S. 386) that contains a provision to create a “Financial Crisis Inquiry Commission.” The commission will consist of 10 members – 6 appointed by the Democratic leaders in the Congress (including the chair of the group) and 4 by the Republican leaders in Congress. Selected members will be chosen from different walks of life, but no one from Congress, the federal government or state/local government can be chosen.
The commission will “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The group will meet once appointments are made (i.e. soon) and file a report by December 2010. It is specifically tasked with examining the roles of fraud and abuse, the laxity of regulation, accounting practices, tax treatment of financial products, lending practices and securitization, compensation structures, and “unregulated” financial products (including CDS), among others, in its report. The group will have very broad subpoena power and seemingly unfettered access to agency documents on targeted financial institutions. It will meet in what I believe will be highly-publicized meetings on a regular basis. Among other mandates, the group is told “to examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional government assistance from the Secretary of the Treasury during the period beginning in August 2007 through April 2009.”
Bottom line is that this group will be doing its work in a very public way and in a way that will likely bring further reputational harm to the financial services industry. Maybe the market is fatigued with industry bashing, but there will be more of it to come over the next year at a time when the big financials are trying hard to move on. Big TARP banks will be targeted especially, but the entire industry will take hits.
BOTTOM LINE: WHERE’S THE PETITION TO DRAFT LD?
A vote for LD is a vote for common sense (cents!)
Run, Larry, Run!
Contact your elected representatives. DRAFT LD
Membership:
The Commission will have ten members, who must be private citizens and may not be employed by any government entity. [§ 5(b)(2)(B)] Commission members will be appointed as follows: Three each appointed by the Speaker and Senate Majority Leader; two each appointed by the minority leaders in the House and Senate. [§ 5(b)(1)(A-D)] The Chair and Vice Chair must be from different parties and will be selected jointly by the respective leaders. [§ 5(b)(3)] Members are expected to be prominent U.S. citizens with national recognition and depth of experience in fields such as banking, regulation of markets, taxation, finance, economics, consumer protection and housing. [§ 5(b)(2)(A)]
Focus:
The Commission will have two primary areas of focus: (1) an examination of the role that a list of 22 distinct topics played in the current crisis; and (2) an examination of the specific causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Secretary of the Treasury during the period from August 2007 through April 2009. [§ 5(c)(1-2)] Assistance from the Federal Reserve does not appear to trigger the provision.
Really appreciate Larry for drawing the connections. The Great ARS Fraud of 2008 — which still has thousands of unsuspecting and unaided investors in its grip — was apparent in 2007.
Why is the US Justice department prosecuting the fallen Lehman and not Oppenheimer, which is resisting Mass. charges, and TD Ameritrade, E Trade, Wells Fargo and others?
And how is it that Finra managed to sell its own ARS before the freeze, but has failed to seek or achieve justice for the small investors ARS were foisted on?
Keep digging, Sense on Cents, because it does make sense that all federal authorities are looking the other way on this $330 billion fraud.
edit: it does NOT make sense that all federal awuthroities are looking the other way on this $330 billion fraud.
I just found your site. I find this material you have presented to be simply unbelievable. How is it that the general media has not more fully explored and exposed this story?
Talk about a total sham and abomination by an institution, FINRA, that is supposed to regulate the financial industry. America truly needs to learn more about this.