Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Lawsuits Trying for Transparency at FINRA

Posted by Larry Doyle on September 21, 2009 2:55 PM |

Will the American public receive real transparency from the financial regulatory community? We will learn a lot more over the next 6 weeks.

Bloomberg News has filed a Freedom of Information request compelling the Federal Reserve to release information on loans it made to a wide array of banks. The Fed is currently appealing a judge’s order requiring the release of this information. The judge is expected to rule on the Fed’s appeal by month end. Sense on Cents will be monitoring this situation closely.

A second situation which has received less public notice but is no less important revolves around two lawsuits filed by a Washington D. C. law firm, Cuneo, Gilbert and LaDuca against FINRA (Financial Industry Regulatory Authority). High five to BA for bringing this story to my attention. The Corporate Crime Reporter highlighted these suits the other day and writes:

They say sunlight is the best disinfectant.

If so, then Jonathan Cuneo is on a campaign to disinfect FINRA.

Cuneo and his law firm – Cuneo Gilbert & LaDuca – have three lawsuits pending against the Financial Industry Regulatory Authority (FINRA).

In each, FINRA is being represented by F. Joseph Warin of Gibson Dunn & Crutcher.

“FINRA is the largest private regulator for all securities firms doing business in the United States, yet it is run like a secret society,” Cuneo told Corporate Crime Reporter. “The organization claims to promote transparency in the financial industry, while simultaneously fighting a battle to hide very basic information from its members and the public. Our lawsuits challenge this secrecy and aim to bring accountability to this organization.”

Two of the lawsuits – Benchmark Financial Services v. FINRA and Standard Investment v. FINRA – allege that FINRA member firms are due more than the $35,000 they received as part of the 2007 merger between National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange – a merger that resulted in the creation of FINRA.

At the time of the merger negotiations, NASD told its members that because it was a non-profit, the most it could pay each firm was $35,000.

But in March 2007, the Internal Revenue Service (IRS) issued a private letter ruling which indicated that in fact NASD could pay a lot more than $35,000.

How much more is a secret.

Earlier this month, the Second Circuit Court of Appeals ruled that amount of money the IRS said NASD could pay each firm was confidential.

The NASD told its members at the time of the merger negotiations that the source of the $35,000 “was projected future savings resulting from anticipated efficiencies of the consolidated entity.”

“This was false,” the Benchmark lawsuit declares. “The true source of the funds was an over $1 billion fund that constituted a portion of NASD’s member’s equity, a pool of cash that had been amassed largely as a result of the development and sale of the NASDAQ stock trading system.”

“The misrepresentation was designed to deceive members into believing that they should accept the amount offered lest they upset the NASD’s projections of future efficiencies and cause difficulties for the consolidated entity going forward. Defendants knew that if they told members the truth – that they would be paid $35,000 each (or a total of $175 million) out of their own equity fund of more than $1 billion – they risked a wide-open evaluation demand scenario that would have delayed, invited more scrutiny concerning – and potentially even threatened – the whole transaction.”

The Benchmark lawsuit alleges that one motivation for the merger was to secure higher executive compensation for officers.

Mary Schapiro is currently the chair of the Securities and Exchange Commission (SEC).

Before leaving to the SEC, Schapiro was CEO of NASD, then FINRA.

In 2006, before the merger, Schapiro’s compensation was $1.9 million.

In 2007, as head of the newly created FINRA, her compensation jumped to $3 million.

“The amounts of total executive compensation are eye-popping by any measure, but are especially staggering for a non-profit institution,” the lawsuit alleges.

The third lawsuit – Amerivet Securities v. FINRA – was brought by a firm owned by an African American California Army Reserve officer and Green Beret – Lt. Colonel Elton Johnson Jr.

Johnson has served two tours of duty in Iraq and is about to be deployed to Afghanistan.

He’s had a long running battle with FINRA.

FINRA suspended him as a supervisor from December 2006 to June 2008 for failure to properly manage an employee.

Johnson claims that FINRA was retaliating against him because he complained publically about how FINRA was treating him.

As a member of FINRA, Johnson’s company – Amerivet – wants FINRA to open its books.

In particular, the lawsuit seeks to find out where FINRA has invested its many hundreds of millions of dollars – and why.

It wants a federal judge to rule that Delaware Code Section 220 allows members of FINRA to inspect the company’s books.

According to the lawsuit, in 2008, FINRA lost $568 million, or 26.5 percent of its investment portfolio.

“These losses wiped out the reported investment returns over the previous four years,” the lawsuit alleges.

“FINRA has been reckless in pursuing high-risk strategies inappropriate to preservation of capital,” the lawsuit alleges. “It appears that, despite the fact that FINRA requires investment earnings as a supplement to other sources of funds (e.g. member payments, fines), its emphasis on short-term investment returns and apparently risky vehicles was unwarranted, quite costly and a waste of its assets.”

The lawsuit alleges that “while FINRA has been reasonably vigorous in its oversight of smaller member firms, frequently devoting substantial resources to dealing with insignificant technical infractions, FINRA has, due to conflicts of interest, given a virtual ‘free pass’ to large member firms and their affiliates such as Bear Stearns, Lehman, Merrill, Madoff, Sky Capital and Stanford.”

“In Madoff’s case, there appears to have been a particularly cozy relationship between Madoff and senior FINRA executives which resulted in virtually no oversight of Madoff and its affiliates or its $65 billion Ponzi scheme,” the lawsuit alleges. “It appears that due to the personal relationships between Bernard Madoff, members of his family and FINRA executives, there was a ‘hands off’ policy in place to his activities and those of his firm, which allowed their Ponzi scheme to flourish.”

Do not forget that this is the same FINRA which Harry Markopolos said was ‘in bed’ with the industry. Who in America right now would not support any and all measures promoting total transparency by a Wall Street self-regulatory organization?

FINRA should stop the madness and open their books . . . NOW!!

LD

  • Richard Friedman

    It appears that because everyone in the country has heard of the SEC, their being examined by the Inspector General is clearly understood, whereas few know about FINRA and Mary Schapiro’s relationship with FINRA as its chairman. It appears that FINRA might be even more culpable than the SEC in its dealing with Madoff. Congress has come off as apathetic in its investigation of the SEC and appears completely unaware of the existence of FINRA, giving them a free ride on Madoff and once again turning its back on the needs of the American people. Yeah, capitalism is great, but when it gets as abused as it has, one has to evaluate the big picture and bring things back to the way things were before everything got out of hand. We have witnessed the fall of communism. Let’s not be too smug about it.

  • Larry Doyle

    Richard,

    You hit the nail on the head. I thank you.

  • sergio deltoro

    FINRA are a bunch of crooks who use the law for their own pockets period…we must bring them to justice

  • John Devorak

    It is clear that substantive and disconcerting changes were made during the NASD to FINRA transition. Both entities have always used the veil and cloud story of their private entity status to force “compliance” on member firms. This information would be turned over to their SEC handlers on an as needed basis. This smoke and mirrors scam shell game of entities allowed the SEC to gain access to documents without going through legal due process and thus avoiding that inconvenient body of rules known as the law. It is time that both of these so called regulatory agencies are held to the highest standard of accountability and transparency. The hypocrisy smells so bad that even the average investor can smell it now.






Recent Posts


ECONOMIC ALL-STARS


Archives