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Wall Street’s Greatest Fraud

Posted by Larry Doyle on July 20, 2009 9:07 AM |

Bernie Madoff’s Ponzi scheme has to be the greatest fraud of all time, right? Allen Stanford is likely a distant second, correct?

Well, actually, no. Madoff has certainly reserved a special place in financial ‘hell’ for his fraud, but make no mistake, the single greatest fraud ever perpetrated on investors is the collective Wall Street enterprise that marketed and distributed Auction-Rate Securities. The ARS market at its peak was a $330 BILLION market. Of that initial size, those on Wall Street tracking developments within the ARS market project that $165 BILLION held by thousands of retail and institutional investors remain frozen.

The Wall Street Journal highlights the next in what could be a long running series of ARS investigations in writing this morning, Cuomo Says Schwab Faces Fraud Suit:

In an official notice sent to Charles Schwab & Co. Friday, Attorney General Andrew Cuomo warned that his office plans to sue the largest online brokerage firm for civil fraud over its marketing and sales of auction-rate securities to clients. Emails and testimony cited in the letter show Schwab’s brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing.

I am heartened to see AG Cuomo launch this action against Schwab but I wonder why he does not simultaneously take the same action against EVERY bank, broker, and investment management firm involved in the marketing and distribution of ARS.

Regular readers of Sense on Cents know that I believe the ARS trail leads back to the Wall Street self-regulatory organization, FINRA. For the benefit of our newer readers, allow me to reconnect the dots once again.

In reading FINRA’s 2007 Annual Report, I unearthed that FINRA owned $647 million ARS. In reviewing NASD’s (FINRA’s parent) 2003-2005 Annual Reports, I highlighted that the NASD did NOT account for ARS as cash. I pursued this story of FINRA’s ownership of ARS and Bloomberg broke it in late April. There is much more that needs to be exposed. The WSJ continues:

Mr. Cuomo writes in the letter that his office would be open to a settlement with Schwab, but it must agree to buy back the securities from investors still stuck with them.

Why just Schwab? Why shouldn’t every institution involved in this fraud be similarly engaged and held to the same standard right NOW!! Who are some of these outfits? Oppenheimer and Co. and PIMCO to start.

More than a dozen Wall Street firms and small brokerages agreed to pay more than $60 billion to buy back the securities from investors after investigators found they didn’t properly inform clients about the risks, or that the market was crumbling, increasing their losses. Schwab is among a handful that haven’t settled.

“The Attorney General’s allegations are without merit,” Schwab said in a statement. “They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created” and then stopped supporting the market.

At Charles Schwab, which uses the advertising slogan “Talk to Chuck,” brokers admitted their ignorance about the product, according to Mr. Cuomo’s letter.

“Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee,” Schwab said.

The attorney general’s investigation of Schwab found that brokers were unaware of and misleading about the risks of the securities — promoting them to customers as cash-like investments, according to the letter. It also found that some traders and executives knew the market was cracking as early as the autumn of 2007 and took steps to protect the company, but didn’t disclose those problems to customers.

Schwab mistakenly believes they are being singled out. EVERY institution should be pursued in similar fashion. Last I checked, ignorance of the law is no excuse for perpetrating a crime.

Who is charged with protecting investors and making sure investment products are marketed and sold appropriately? FINRA (Financial Industry Regulatory Association):

The Financial Industry Regulatory Authority (FINRA), is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,850 brokerage firms, about 173,000 branch offices and approximately 649,000 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.

FINRA failed miserably in protecting investors from this Auction-Rate Securities fraud. Was FINRA merely asleep at the wheel and missed this fraud? Anything but.

FINRA owned $647 million ARS and liquidated them in Spring 2007. Lehman Bros. liquidated ARS positions in the same time frame. On that topic, I wrote “U.S. Attorney and SEC Investigating Lehman’s Auction-Rate Securities Sales; They Should Also Invstigate FINRA’s.”

While AG Cuomo should pursue each and every institution involved in this fraud, in my opinion, he is working from the top down. He should start at the bottom by pursuing FINRA’s actions and involvement in this fraud.

I write this commentary in hopes that interested parties are able to further pressure media outlets and regulators to address FINRA’s liquidations of ARS and lack of investor protection from this fraud.

Meanwhile, I am in the process of writing to members of the FINRA board on this topic.  Will they respond?

For interested parties new to Sense on Cents, please access all information on this topic by typing Auction-Rate Securities in the search window on any page.

Thousands of investors with $165 BILLION frozen in ARS. Each and every investor deserves an immediate return of all their capital. If our markets are ever able to achieve real transparency and integrity, the public at large needs to know the full extent of the FINRA angle in this ARS fraud!! This story is not going away.


  • AMEN Larry! Schwab is just the tip of the iceberg, and you are 100% correct. Every single major brokerage firm, major bank, and Financial Planning firm sold ARS, and they all mispresented them in the same way that Schwab did. This was an industry wide fraud, and I hope that the Schwab case is only the beginning of what the New York AG is going to do. The media has also massively underreported this story. Thank you as always for your commitment and pursuit of this story Larry!

  • Aaron kramer

    This is what I was discussing last night LD. I am happy to see them go after Schwab and others for fraud, it might not be fancy but it sums up the practices they engaged in. Wachovia, JPM, Wells Fargo and others need to be prosecuted. There is no excuse for a financial professional not doing his or her own due diligence. BRAVO!

    • Kathy

      Aaron, you raise a very important point: The ARS fraud typifies the negligent, self-serving and essentially deceiptful practices that have typified investment banking in the recent era.

      I think it was under-reported because it was so widespread. When regulatory overhauls talk about fiduciary responsibility, I think ARS is one of the underlying reasons.

      One point you didn’t mention: Not only did so-called “financial advisors” not know what they were selling (while taking substantial fees for their advice), some in the financial media have tried to blame the investors themselves for not knowing more about ARS. Can’t have it both ways — if you let the brokers off the hook for not knowing, how on earth are investors supposed to know?

  • Bravo on another great read!!!
    Keep up the good work

  • woward

    Good article and right on point. ARS was a massive fraud on investors. However, you should give some credit to the few institutions who (albeit under some pressure) stepped up and voluntarily redeemed their clients’ interests in ARS such as BofA and Merrill, as well as some fund managers who arranged alternate financing and took their investors off the hook.

  • fiscalliberal

    I would postulate that Cuomo is picking the first case he can win which sets precident to go after the others.

    Kind of amazing that a state AG has to go after this versus the Justice Dept – Aaron called it right last night this is plain old fraud

    • Kathy

      This is not the first case. It is thanks to Cuomo and William Galvin in Massachusetts that UBS and Citibank were pushed to return ARS. Cuomo seems to be making his way down the list.

      But he should get to Oppenheimer, which is fighting MA tooth and nail in court, and E Trade, Wells Fargo, H&R Block and others.

      Every penny should have been paid back 18 months ago.

  • Larry Doyle

    Yes he did. Fraud by any other name is fraud.

    What boggles my mind is the fact that the ARS market was failing in 2007, totally froze in February 2008, and here we are in July 2009 with 50% of investor funds still frozen even after federal justices (and now Cuomo) have designated the sales and marketing of ARS as a fraud.

  • Mike


    Do you think its possible that organizations guilty of ARS fraud have been keeping this off the radar through bribes? I find it hard to believe that this hasn’t blown up all over the media at this point. Maybe you should e-mail Mr. Cuomo a link to sense on cents!

    • Aaron kramer

      This has been in and out of the news cycle for the better part of the last 18 months. I think it has been ignored because there have been bigger and better stories, from the media perspective not mine. Additionally many institutions have settled with Cuomo and the SEC in regards to this matter. Of course the institutions in question admitted no wrong doing.

  • Larry Doyle


    Believe me, I have sent a wealth of information to a variety of AG’s offices, including Cuomo’s.

    Are bribes being paid? Who knows? Hush money? Political favors? Anything is possible. Probably more like, “hey, help me here and I’ll help you down the road.”

  • EddieD

    Thanks again Larry. It is important that FINRA, specifically Mary Schapiro, be held accountable for their involvement in auction rate securities. What’s the difference between Albert Lowenthal, CEO of Oppenheimer & Co, dumping his ARS before the market was frozen and FINRA dumping their’s? Lowenthal has to appear in court in Mass this Nov being charged with insider trading and other crimes. FINRA should be held to the same standard, are they above the law? They are required to report any conflict of interest to the investors they are supposed to be protecting. If this situation gets swept under the carpet no one who has any extra cash saved somewhere should feel safe. Without the AG we would have no protection at all.

  • Larry Doyle

    EddieD….I was not aware that Lowenthal is appearing in court. You are right. What is good for the goose, is good for the gander.

    I am heartened to see Cuomo moving on this again.

    I remain energized. Hang in there.

  • Big M

    Yeah, yeah, sound and fury, signifying nothing. Let’s forget Wall St. for a sec, shall we? How about mentioning the biggest fraud and Ponzi scheme of all time — Social Security?

    • Larry Doyle

      Big M….I stand corrected. You are right. In chatting with my accountant, I referenced a benefits statement I received from SS.

      His response was ‘rip that up’ and put a big fat zero in the SS space.

      I actually had written how I believe SS and Medicare will both be means tested in the future. Not sure where the line will be drawn but there is no way around it.

      Thanks for setting the record straight.

  • Jamol

    Does anyone know what were the charges to Oppenheimer. What was the conclution of this issue?

    Thank you

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