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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.


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?


  • Mikaele

    Awesome stuff LD
    Keep it up

  • Jefferson Smith

    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.


    • coe

      A vote for LD is a vote for common sense (cents!)

      • Jefferson Smith

        Run, Larry, Run!

  • Jefferson Smith

    Contact your elected representatives. DRAFT LD


    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)]


    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.

  • Kathy

    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.

  • Kathy

    edit: it does NOT make sense that all federal awuthroities are looking the other way on this $330 billion fraud.

  • FINRA 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.

  • curious

    LD: Thanks for providing this great info about FINRA.
    I have a few questions.
    FINRA’s 2007 financial report mentions Auction Rate Securites only 4 times – all on page 48. All of the dates in the paragraph about ARS are in 2006 (why are they talking about 2006 in their 2007 financial report?). Where is the wording in the financial report that says they sold ARS during 2007?
    Is it possible FINRA still owned ARS at the end of 2007?
    Are the financial reports the only source of info about FINRA’s ARS trading?
    Thank you.

    • Curious,

      You have come to the right place.

      I first unearthed the fact that FINRA owned ARS in its investment portfolio in January 2009 when I read their then most recent Annual report that being the one for 2007.

      I was in test mode on my blog at that point but wrote about this find early on and continued to harp on ARS in general and FINRA’s holdings and liquidation for the next 5 years.

      To the best of my knowledge, the report on page 48 is a review of FINRA’s overall investment portfolio.

      Once having read that piece of data and knowing that the ARS market had froze in February of 2008, I was massively intrigued to learn whether FINRA continued to hold these ARS or had liquidated. What did I do?

      1. I called reporters from The Wall Street Journal who had written a scathing review of Mary Schapiro and her tenure at FINRA just two days prior to her confirmation hearing to be the new head of the SEC. These reporters informed me that they very much wanted to pursue this fabulous lead but that their editors told them that the WSJ would not be doing so. What does that tell you about our major media?

      2. I called the folks at FINRA and asked them whether they still owned the ARS or had liquidated them and if so I wanted the details on the liquidation. I was told “we’re not going to tell you that.”

      3. I called the folks at the SEC who oversee FINRA and informed them of this info (which is public info right there in the annual report) and told them this is worthy of further investigation and public exposure. They took the info and it went into the proverbial black hole.

      4. In late February of 2009, I crossed paths with a reporter from Bloomberg who covered the municipal market and developments with ARS and shared this color with him. To his credit and his editors, they pursued the lead, interviewed folks from FINRA including Schapiro herself, and they reported that FINRA liquidated their ARS holdings “mere months” before the ARS market froze in February 2008.

      Here is my blog post from April 2009 that has the Bloomberg story embedded in it:

      The question I posed then and still pose now is that why aren’t those at FINRA involved in this liquidation held to account for engaging in what certainly appears to be a blatant case of insider trading or front running the market as opposed to upholding its mandate to protect investors.

      I stated as much in an interview on Fox News later that year in 2009. If you have interest in that, here is the clip:

      Lastly, I go into much greater detail about this entire ARS situation in my book In Bed with Wall Street. Chapters 3 and 4 cover FINRA’s portfolio and its ARS holdings and liquidations in real depth. If you care, here is a link to my book:

      I do not mean to throw too much at you but given your inquiry on this topic almost 7 years after the ARS market froze, I hope this material helps answer your questions.

      If you would like to talk offline, please write to me at

      • curious

        Thanks for the info, and thanks for discovering those facts about FINRA.

        I would really like to know the answer your question – did FINRA have non-public info when they sold their ARS?

        What if your website offered a reward for this information?
        You could use a crowdfunding site (there are dozens of them now) to fund the reward.
        Perhaps there are some wall street firms with deep pocketbooks that would be interested in knowing these details about FINRA even 7 years later.
        I believe some of the crowdfunding sites allow anonymous contributions.
        If the reward grows large enough maybe it will motivate someone to speak up.
        The person who provides the correct answers to you gets the reward.
        If no one comes forward the reward could be distributed back to the contributors.


        • Curious,

          I recommend you read my book in order to get the answer to that question.

          I provide what I believe is an overwhelming case with extensive evidence and documentation that FINRA knew the ARS market was failing and had been manipulated going back to 2003.

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