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An Open Letter to the Board of FINRA Regarding Auction-Rate Securities

Posted by Larry Doyle on July 27, 2009 3:17 PM |

To: The Board of the Financial Industry Regulatory Authority (FINRA);
FINRA Investment Committee;
FINRA Audit Committee

From: Larry Doyle, Sense on Cents

Re: Auction-Rate Securities

I am a longstanding Wall Street veteran, a private investor, an avid supporter of free and fair markets, and a financial blogger at my site, Sense on Cents.

I launched my website/blog earlier this year specifically to help people more fully understand the economy and the markets during these challenging times.

In my opinion, the greatest challenge facing our markets and our country at this time is the question of confidence and integrity in the system. Little surprise why the topic of financial regulatory reform is receiving so much attention.

Against that backdrop, I am heartened by recent increased legal action taken primarily by selected attorneys general in pursuing entities involved in the fraudulent marketing and distribution of Auction-Rate Securities. We could debate at length why and how the ARS market failed, but there is no doubt these securities, sold as cash surrogates, were distributed in a fraudulent fashion. Thousands of investors and approximately $165 billion in ARS remain frozen.

I view the ARS market as having three legs — issuers, investors, and distributors (both primary Wall Street banks/brokers and downstream entities). Who was situated at the epicenter of this debacle charged with protecting investors? The SEC and FINRA.

FINRA specifically occupied a position not only as a regulator but also as an ARS investor. Whether FINRA representatives want to believe it or not, any semblance of rational and prudent thought would determine that FINRA was conflicted as a result.

Having written extensively on this topic and engaged FINRA spokesperson Herb Perone on this issue, I call upon you, the members of FINRA’s Board, Investment Committee, and Audit Committee, to release all pertinent details involved with FINRA’s liquidation of their ARS position in 2007.

Why is this necessary? Very simply, in order to regain total confidence in the markets it is of paramount importance that there be complete transparency and integrity on behalf of the regulators. To that end, for the benefit of all issuers, investors, and distributors of ARS, I believe it is incumbent on you to release the following information regarding FINRA’s liquidation of ARS:

1. Date of sale

2. To whom or through whom did the liquidation occur?

3. At what price did FINRA sell their ARS?

4. Why did FINRA decide to liquidate the entire $647 million ARS at that time?

5. Did FINRA possess material non-public information at the time of liquidation and act upon it?

6. Given that FINRA is charged with protecting investors, and given its position in the financial industry, how and why did they not post an investor warning about the freezing and subsequent failure of the ARS market prior to its complete failure in early 2008? How many investors and how many dollars could have been protected in the process?

I issue this letter publicly hoping that others may also be able to utilize the information contained herein and generate the release of this information.

In the spirit of full disclosure, I have never owned an Auction-Rate Security. I write merely as a private individual interested in helping the thousands of investors looking for a timely return of their capital.

I thank you.


Larry Doyle

  • Thank you for relentlessly continuing to fight this battle Larry and never giving up on it. These questions must be answered for me to have any future confidence in FINRA and/or the SEC.

  • Pip Daddy

    Get em’ LD!

  • Kathy

    Well done, Larry. If Finra wants open markets, and if they presume to run arbitrations for ARS victims, let them open their own transaction history.

  • coe

    LD – I applaud your tireless efforts to get some answers from FINRA. I think you are absolutely correct that transparency and confidence are both sorely needed to help pull us out of the economic malaise we are stuck in. Just out of curiosity, I took a peek at the members of the FINRA Board of Governors and I discovered a virtual potpourri of senior Industry representatives, including leaders of the Vanguard Group, Pershing, Edward Jones, Sterne Agee, Coordinated Capital, and even the head of Deutsche Bank here in the States. It’s not a stretch to presume that each of these firms was a stakeholder in the ARS market in some way, shape, or form. Who, among this group of Governors, sat on the committees responsible for the investment portfolio, the balance sheet restructuring, the investor protection group et al? Were they complicit or even aware of the inherent conflict of interest you have been chronicling? Or, were they merely going through the motions, periodically meeting to share lunch, commiserate over the extent of the markets damage, rubber stamp the FINRA actions, and get back to their own respective corners of the financial markets?

    It surely will speak volumes if/how they respond to your open letter. You do everyone a service by keeping the pressure on and frankly, simply by keeping us informed and up to speed. My cynicism would suggest that the FINRA silence will be deafening!

  • Stu

    FINRA paid Mary Shapiro $2.75 million in compensation in 2008, the year FINRA lost so much money. In addition, she’s getting a lump sum payout of over $5 million from FINRA’s defined benefit plan.

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