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Amerivet Securities Files Complaint vs. FINRA for Release of Investment Information and More

Posted by Larry Doyle on August 17, 2009 11:53 AM |

The temperature is rising in the FINRA kitchen!!

Major high five to ARS investor ED for pointing out a breaking Bloomberg story that strikes right at the heart of our financial regulatory failings over the last number of years. Bloomberg reports Iraq Vet Asks Why Securities Overseers Can’t See.

This complaint encompasses a number of questions Sense on Cents has been asking over the last several months. As Bloomberg reports:

Amerivet Securities Inc. v. Financial Industry Regulatory Authority, a complaint filed in the District of Columbia Superior Court on Aug. 10 against Finra, the regulator whose Web site boasts of “proactively addressing emerging regulatory issues before they harm investors or the markets.”

If you can stifle your chortling over Finra’s psychotic break of a self-description and pay attention, the Amerivet complaint is example of regulators and those they regulate at their farcical finest.

Plaintiff Amerivet is run by Lieutenant Colonel Elton Johnson Jr., a one-time Special Forces soldier who served two tours of duty in Iraq in the U.S. Army Reserve, earning a bronze star and other decorations. Johnson has a long history with Finra — previously NASD — whose enforcement arm first went after him in 1997, censuring and fining him for violations of minimum capital requirements and for failing to file municipal securities offerings on a timely basis.

Complaining to Bush

Most recently, Finra suspended him as a supervisor from December 2006 to June 2008 because he didn’t properly manage an employee. Johnson says in his stockbroker records that the case was retaliation by Finra, which didn’t like it when he wrote to President George W. Bush to complain about how Finra was treating him.

While it does seem more than a little weird that Finra would bring a case in 2006 based on actions that happened a decade earlier, it’s hard not to wonder whether Johnson — with Army obligations, a real estate license, a firearms business and a private-detective operation — is a guy who might be a tad too busy to keep up with the details that a well-run brokerage firm should attend to.

His lawsuit against Finra, though, provides a funhouse window into what’s wrong with securities regulation.

‘Trusted Advocate’

Amerivet says Finra isn’t protecting investors. It failed to avert catastrophe at Bear Stearns Cos., Lehman Brothers Holdings Inc. or Bernard L. Madoff Investment Securities LLC, among others.

The suit also says that even as Finra vigilantly accounted for its own stake in auction-rate securities as a “non-cash” investment, the regulator that calls itself a “Trusted Advocate for Investors” didn’t take the opportunity to apply that knowledge to the public. “Finra knew ARS were not cash or cash- like even though they were marketed in that fashion,” the suit says. What luck for Finra that it unloaded $647 million of auction-rate securities in 2007, before the ARS market meltdown.

Amerivet isn’t asking for money in its suit. Johnson says that, as a Finra member, he is entitled under Delaware law to examine documents that would shed light on why Finra missed scandals, how it lost $568 million in its portfolio in 2008, and why, amid such abysmal performance, it paid former Chief Executive Officer Mary Schapiro $3.1 million in 2007, later sending her off with a $7.2 million “going away gift,” as the suit refers to it — a payment from Finra’s defined benefit program — when she became chairman of the SEC.

Portfolio Loss

On July 31, Finra denied Johnson’s request to look at documents, so he filed a suit demanding them.

There’s nothing unique about an operation that overflows with generosity for executives who do a crummy job. The edge in Amerivet’s claims is that the outfit under the hot lights is in the business of protecting investors and the overpaid executives are securities regulators.

At Finra, spokeswoman Nancy Condon said Finra’s 26.5 percent decline in its $1.5 billion investment portfolio last year compares with an average decline of 26.2 percent in similar portfolios, only slightly worse than average. Asked about possible conflicts of interest facing Finra’s investment committee, Condon said Finra doesn’t use investment managers who are broker/dealers.

Finra’s investment committee includes executives from the Vanguard Group Inc., Pershing LLC and the Travelers Cos. Condon said Vanguard provides Finra’s 401(k) plan, but wouldn’t elaborate on other possible relationships. A Travelers spokeswoman e-mailed Bloomberg to say that the firm gets no business from Finra. The investment committee chairman, Vanguard’s Jack Brennan, declined to comment through a spokesman. Pershing took down my questions but I never heard from them again.

Not Speaking

Kurt P. Stocker, a committee member and a former media professor at Northwestern University, said in an e-mail that “it would be more appropriate” for me to talk to Finra. That would be the same Stocker who told the ABA Banking Journal in 1993 that executives are making a mistake “when there is bad news and you refuse to speak.”

Finra, though, has plenty to say when it controls the message. Its ad budget soared to $6.7 million last year, up from $2.9 million in 2007. The warm and fuzzy TV ads out this year are replete with children blowing bubbles and a mom smooching her baby. “If brokers break the rules, we can fine them, suspend them, even put them out of business,” one TV ad says.

Elton Johnson is wondering why those fines, suspensions and banishments haven’t been happening before the public gets fleeced. Lieutenant Colonel Johnson, I think a lot of people have been wondering the exact same thing.

Sense on Cents has been asking for this information for the last 6 months. FINRA has had ample opportunity to provide real transparency and integrity to the issues highlighted in the Amerivet complaint. They have been anything but forthcoming and have done a disservice to the American public in the process. If FINRA has nothing to hide then it should be totally forthcoming. If not the judge should compel FINRA to release this info.

I can only hope the judge hearing this complaint adjudicates appropriately and promotes truth, transparency, and integrity.

Sense on Cents will be monitoring this case very closely.

Starting to get a little hot in here.

I love it!!


Related Sense on Cents Commentary:
   FINRA Is Supposed to Police the Market (April 29, 2009)
   Does the Palace Guard Have No Clothes? (April 14, 2009)

  • ed

    great follow up. keep the heat on!

  • TeakWoodKite

    Ok this is a good one. I read;

    Kurt P. Stocker, a committee member and a former media professor at Northwestern University

    I think North Western and media and Chicago…what are the odds. ( Like in the movie “Working Girl”) Googled Kurt P. Stocker and Axelrod, and get;


    Susan F. Axelrod
    Senior Vice President and Deputy,
    Regulatory Operations

    naw it couldn’t be …she is married to a David Axelrod.

    Members of the Audit Committee:
    James E. Burton, Chair
    Charles A. Bowsher
    John F. X. Dolan
    W. Dennis Ferguson
    Kurt P. Stocker
    May 22, 2008

    I would really like to know if any of the ARS was unloaded by these individuals and when and by degree anyone else who did.

    Secaond it is next to impossible the BO did not know what was up.
    Martha Stewart anyone?

    LD, you called it “a funhouse window into what’s wrong with securities regulation”.

    Isn’t odd that the president, his closet advisor, the wife of his closet advisor who is in charge of Regulations, and a member of the Audit committe Plus the HR guy Steve Jarrett all move in very close close circles?

    If the Lt Col. is successful in discovery, I am sure there will be some VERY interesting disclosures.

    • Larry Doyle

      TWK…..very, very interesting. I don’t think, however, that there is any connection between the Susan Axelrod at FINRA and Obama’s adviser David Axelrod.

      • TeakWoodKite

        Other than them being husband and wife and the pillow talk. I confirmed this because Susan and David have a special needs child and during the primaries it came up because Hillary Clinton had done some work on Susans behalf for her charity only to get punked by the Axelrods.

        David; Hey Susan how was your day?

        She goes on to explain to David how FINRA is unloading their position in ARS and next thing you know David tells BO. It is to close and it is human nature to talk and given Susans position as as internal regulator she WOULD know.

        If I am incorrect about BO knowing BEFORE FINRA unloaded it’s position and, I will send you a fine bottle of wine from here in the wine country. But hey LD, I am not into tinfoil, just a good study in human nature.

        • Larry Doyle

          TWK….I love your persistence. I dug through every White House and FINRA site I could find and nowhere did I see them linked.

          I will say, though, that in the process of digging for Susan Axelrod I came across Susan Merrill’s testimony which I utilized in my post today.

          The Amerivet case is going to be very interesting to monitor. How can a judge worth his salt not find for Amerivet? If not, he is saying that our financial regulator FINRA has no transparency. What is FINRA looking to hide?

          “The dogs have a heavy scent and are tracking hard. Pack light, we’re riding…!!”

          TWK…it is ALWAYS a total pleasure engaging with you.

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