Sense on Cents

Did we just find the smoking gun which indicates that FINRA (Financial Industry Regulatory Authority) actually invested in the Madoff Ponzi scheme?

I was on a panel last evening on America’s Nightly Scoreboard on Fox Business News (the entire transcript can be found at this link). The topic was one which regular readers of Sense on Cents are most familiar, that being FINRA.

The show is hosted by David Asman. Panelists included Richard Greenfield, an attorney representing Amerivet Securities in its suit against FINRA; former SEC chair Harvey Pitt; Madoff Victims Coalition head Ronnie Sue Ambrosino and her husband Dominic; and yours truly.

I commend the host of the show, David Asman, for being thorough, professional, balanced, and aggressive in addressing the topic. We covered a number of angles including:

1. Amerivet Securities complaint vs. FINRA

2. Mary Schapiro’s tenure and compensation at FINRA

3. FINRA’s investment portfolio, including its sale of auction-rate securities.

4. Did FINRA invest in Bernard Madoff’s Ponzi scheme?

There were a few bombshells that came out of our discussion, including a claim by Mr. Greenfield, the Amerivet Securities attorney, that “somebody well-placed within the organization (FINRA) that told us, in no uncertain terms, there was an investment with Madoff.”

Additionally, former SEC chairman Harvey Pitt provided a qualified endorsement of FINRA opening its books and records in an acknowledgement of the need for greater transparency.

I am happy to provide the transcript of the dialogue which encompassed these two momentous statements:

ASMAN: Harvey, for example, I used to work at the “Wall Street Journal” and we had very strict restrictions about what we could buy, how long we could hold stocks if we bought it, and how we had to disclose it and that sort of thing. It doesn’t seem at least that those disclosure policies apply to FINRA, at least in the case finding out whether they invested with Madoff.

PITT: I don’t — there has been a fair amount of, shall we say, opacity with respect to what the investment activities are and the like. In a real sense, I think that’s probably ill-advised for an enterprise that has regulatory responsibilities.

But so putting that to one side, I do think that people are entitled to know where their money is coming from, where their money is going, what it is being spent and the like. The fact of the matter is the SEC does oversee all these operations. It does overlook all these things. FINRA has been under the microscope at the SEC for many, many years, long before Mary Schapiro got to the SEC.

ASMAN: I want to bring in other parties. But I want to go back to Counselor Greenfield.

Richard Greenfield, how did you get information suggesting that indeed FINRA was investing with Madoff?

GREENFIELD: Well, we got the information, number one, in two different ways. Number one, it has been rumored through many people on Wall Street that there was an investment either through a feeder fund or some other means. Secondly, we also got information from somebody well-placed within the organization that told us, in no uncertain terms, there was an investment with Madoff.

ASMAN: OK. All right. So I think it’s fair to say that FINRA owes the public some answers here.

So joining us now with — are some people who are demanding answers. Larry Doyle, a Wall Street veteran, 23 years, who currently operates his own web site, Sense on Cents — “sense” with an “S” and “cents” with a “C” — which is geared to help people navigate the landscape.

Ronnie Sue and Dominic Ambrosino, good friends of “Scoreboard”, they are Madoff victims who are mobilizing a campaign for greater transparency.

Thanks for coming in.

RONNIE SUE AMBROSINO: Thank you.

ASMAN: Larry, first to you. What do you think about Harvey’s description of the situation?

LARRY DOYLE, WALL STREET VETERAN & SENSE ON CENTS WEB SITE OWNER: I would say two things in regard to the former chairman’s statement. First and foremost, Madoff did not become a registered investment advisor until 2006. FINRA obviously wasn’t formed until 2007. FINRA’s parent, that being, FINRA was formed from the regulatory arms of the New York Stock Exchange, and the NASD.

ASMAN: Right.

DOYLE: The fact is, the NASD did have oversight of Madoff, and so there is an obligation by, to look into the NASD’s activities because, at that point, it was just a broker-dealer.

ASMAN: Have you formulated your own opinion whether there was a conflict of interest here?

DOYLE: Without a doubt. Without a doubt. The fact of the matter is FINRA is a big-money organization. We know they invested in hedge funds, fund of funds, private equity. And they also had a significant investment in auction rate securities, which is sector of the market that has been designated as a fraud by federal judges. The fact of the matter is we know, and have learned from FINRA, that FINRA exited their auction rates securities position, $647 million worth, in mid 2007, as the market was failing, and when they were supposed to be protecting investors.

Further along in the dialogue, we engage in the need for FINRA to open its books and records:

ASMAN: That is great point, Ronnie Sue.

And, Larry, it goes to the point that a lot of people are looking from the outside at what goes on inside in Wall Street and Washington. It’s that Wall Street, Washington nexus. They see all these folks kind of related with each other. The SEC related with FINRA, and related with NASD. You look at Mary Schapiro’s career and you see that. They can miss things because they’re only talking to each other.

DOYLE: I think the term there is incestuous. So the fact of the matter is Washington has an opportunity through this financial regulatory reform to bring total transparency.

ASMAN: How would you do that? Open the records of FINRA?

DOYLE: Open the books. What — what individual in America right now wouldn’t make — doesn’t it make sense for FINRA to be forced to open their books and records, full and total transparency? The markets demand it. The economy demands it. Ronnie Sue and Dominic demand it. For market confidence.

ASMAN: Harvey, if we demand it of banks, why not FINRA or for that matter, why not the Fed? We have a lot of people in Congress saying everybody needs to open the books, everybody needs to be transparent?

PITT: Well I think there’s no question that we need far more transparency throughout the regulatory environment, both for those regulated and those doing the regulation. That, I think, is a very clear proposition, and one that I’m hopeful will be addressed in whatever new legislation comes about.

ASMAN: So we have to leave.

But, Harvey, does that mean you’re in favor of FINRA opening the books so we can find out if they invested in Madoff?

PITT: I’m in favor of there being far more transparency, permitting privacy concerns to allow certain information to be withheld, as long as somebody is overseeing what they’re doing.

I am thrilled that these issues which Sense on Cents has been focused on for the last 8 months are coming into the public light. That said, there remains plenty of work left to do to generate the truth, transparency, and integrity that our markets, economy, and country so badly need.

You can help by spreading this story amongst friends and colleagues. While the Amerivet complaint vs. FINRA will be addressed in the Washington D.C. courts, the fact is the issues revolving around FINRA and regulatory transparency need to be highlighted in the court of public opinion.

What do you think?

LD

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Related Sense on Cents Commentary

Madoff Victims Call Out FINRA (September 3, 2009)

Amerivet Complaint Against FINRA Alleges Madoff Investment (August 25, 2009)

How Courageous is Mary Schapiro? (June 4, 2009)

U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s (May 21, 2009)

FINRA Is Supposed to Police the Market (April 29, 2009)

This entry was posted on Friday, September 4th, 2009 at 1:20 PM and is filed under ARPS, ARS, Auction Rate Securities scandal, Bernie Madoff, FINRA, General, regulation, transparency. 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.