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Is Wall Street On the Up and Up?

Posted by Larry Doyle on October 3, 2009 11:57 AM |

The core of that question resides within the regulatory oversight of our financial industry.  The American public is beginning to learn a lot about this financial regulatory oversight. How so? A month ago, SEC Inspector General David Kotz released a report, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (embedded here). Yesterday, the Wall Street self-regulatory organization, FINRA, released Report of the 2009 Special Review Committee on FINRA’s Examination Program In Light of the Stanford and Madoff Schemes.

What did we learn from yesterday’s report? Plenty. For that, I commend all those involved in this effort. With all due respect to FINRA employees who have legitimately tried to fulfill their obligations to the best of their abilities, yesterday’s report is nothing short of a massive indictment of FINRA’s management, FINRA’s board, and the SEC which is charged to oversee FINRA. Why? Having read this report twice and studied critical components of it, FINRA is exposed as nothing more than a collection of crossing guards . . . said with all due respect to crossing guards. Have the supervisors of the crossing guards been so heavily influenced by Wall Street so as to render large parts of the FINRA mission ineffective? Many believe this to be true, including me.

Why so harsh? Let’s navigate and be a little more aggressive than the mainstream financial media in analyzing this report. In the process, I think you will appreciate my assessment and also realize there are many more questions which need to be answered.

The FINRA report is largely divided into the organization’s dealings with the financial frauds encompassing Allen Stanford and Bernard Madoff. Referencing the massive regulatory failings on FINRA’s behalf in these two cases, the authors provide recommendations which FINRA’s management will present for approval or ratification at the December 2009 Board meeting.

For purposes here, I will not regurgitate the numerous individual failings of FINRA examiners and management in each of these cases. Rather, I will highlight those failings which I find most egregious. In turn, I want to focus on highlighting the recommendations so the American public can truly understand how woefully inept, incompetent, and ill-prepared this financial self-regulatory organization has been and currently is to uphold its mission to protect investors. Against that backdrop, I will then lay out questions which I deem to be critically important for FINRA to answer if the American public can ever regain a degree of confidence in the oversight of Wall Street.

>> Stanford Case

1. In 2003, the Stanford broker-dealer generated 68% of its revenues from the sale of Stanford International Bank CD’s. Are you kidding me? Red Flag!! That finding did not prompt the examiner to dig deeper?!

2. A 2003 Anonymous Tip Letter laid out the Stanford scheme in detail.

3. In 2005, a FINRA examiner learned that the Stanford broker-dealer is paid an annual fee of 3% of the deposit sum for every CD. Another red flag! Standard practice would have bankers or securities salespeople earning a one-time fee of maximum .25%.

At this point, Stanford International Bank had raised approximately $1.5 billion in what would grow to a $7.2 billion scam.

With all due respect to FINRA employees who may have continued to look into Stanford over the 2005-2008 time period, truth be told FINRA did not further aggressively pursue this case until the Madoff situation broke in December 2008.

>> Madoff Case

1. FINRA largely limits its review of the Madoff scam to the 2003-present time period. Why not go back further? FINRA had longstanding oversight of the Madoff enterprise.

2. FINRA largely reduces the extensive relationships between Bernie Madoff and family members with FINRA to nothing more than a footnote. That footnote on page 46 provides a cursory approval of FINRA’s relationship with the Madoff firm and family. Why aren’t these relationships more deeply explored?

3. The report acknowledges what we always knew about FINRA having oversight of Madoff’s operation. FINRA representatives, including Mary Schapiro, have willingly and intentionally misrepresented the fact that FINRA had oversight of Madoff’s enterprise. Did Mary Schapiro perjure herself on this topic during her confirmation hearings to be Head of the SEC? Well, she may not have perjured herself, but she and others have willingly misrepresented FINRA’s required oversight of Madoff over the long time period when Madoff was strictly a registered broker-dealer and ran this massive Ponzi scheme within that framework.

4. FINRA failed to detect the full breadth of the relationship between Cohmad Securities and Madoff.  Bernie Madoff and his brother Peter owned 24% of Cohmad, and the Cohmad broker-dealer operated within the same office space as Bernard Madoff Investment Securities. Cohmad was largely a front for feeding customers into Madoff’s scam. The report provides:

Cohmad was registered as a broker-dealer and reported having approximately 750 to 850 customer accounts, which were held by and cleared through Bear Stearns Securities Corporation. These accounts usually generated roughly 300 transactions per month, mostly in equities and, to a lesser extent, municipal bonds.

I would very much like to know more details about these municipal bonds. Were they municipal auction rate securities?

5. How did FINRA miss the Madoff scam? This report acknowledges the fact that FINRA examiners merely took Madoff and his representatives at their word that Madoff was running nothing more than a broker-dealer. Are you kidding me? It was common knowledge that Madoff had a money management business. FINRA maintains that the FINRA ‘crossing guards’ checked the little boxes on their Madoff review sheets and went on their way.

>> Request and Recommendations

FINRA is currently lobbying to gain regulatory oversight of the investment advisory industry. Representatives of the Investment Advisors Assocation are working diligently to remain under the purview of the SEC. FINRA makes the case in this report that if it had oversight of investment advisors it may have detected the Madoff scam. That argument runs very shallow. FINRA has not displayed the capabilities of managing its current jurisdiction. Why should it be charged with greater oversight responsibilities?

FINRA has clearly been incompetent. We know that not only from reviewing the analysis provided in the Madoff and Stanford cases, but moreso in the recommendations proposed by the authors of this report. I highlight these recommendations not to embarass but to further publicize just how poorly managed this organization is currently and has been for a LONG time.

The recommendations are:

1. Establish a Fraud Detection Unit . . . are you kidding me? How is it that a financial self-regulatory organization charged with protecting investors does not have a unit like this to this point? The lack of a fraud unit is clearly a ‘failure of management.’

2. Prioritize Examinations and Resources According to the Seriousness of Misconduct. I repeat my question and assertion from above: another gross ‘failure of management.’

3. Strengthen the Cause Examination Program; Revise the Cycle Examination Program . . . this initiative entails shifting resources from lower risk ‘cycle’ (perfunctory) exams to higher risk ’cause’ exams. A tremendous grasp of the obvious here is another gross ‘failure of management.’

4. Assess Structure and Management of District Offices . . . focus on quality of exams rather than the quantity. Another gross ‘failure of management.’

5. Improve Documentation and Tracking of Enforcement Referrals to and from the SEC and Other Authorities . . . the lack of communication and ability to record and track referrals between FINRA, the SEC and other regulatory authorities is another gross ‘failure of management.’

6. Improve Procedures to Assure Legal and Regulatory Issues Are Properly Escalated, Addressed and Documented . . . yes, the fact that FINRA has fallen woefully short on this front is another gross ‘failure of management.’

7. Increase Use of Examination Staff with Specialized Qualifications . . . crossing guards are not typically qualified to undertake and pursue simple frauds such as Stanford’s and Madoff’s let alone the complicated frauds on Wall Street.

8. Enhance FINRA’s Information Technology and Systems . . . FINRA has not had the technical wherewithal to collect and process member firms information in a timely and effective fashion. Yes, the lack of this capability is another gross ‘failure of management.’

9. Confirm Member-Provided Information with Independent Third Parties; Cross Check Data Provided by Member Firms . . .the fact that FINRA has utilized the ‘trust’ method rather than the ‘trust but verify’ method in its collection and processing of member firm information is . . . another gross ‘failure of management.’

>> Sense on Cents Questions
While I can appreciate that readers may be exhausted, exasperated and bewildered at this point, I would ask you to stick with me because the questions I raise for FINRA remain critically important.

1. Nowhere in this report is there a reference to Mary Schapiro. How can a report of this magnitude be put forth without referencing the head of FINRA? Given her tenure at FINRA, is she really the right person to be running the SEC?

2. When will the authors of this report call for and work to produce a report of similar depth in the study of FINRA’s interactions with its major member firms which brought our financial industry and economy to its knees? I speak of Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, Morgan Stanley et al.

3. Will the authors of this report support that FINRA provide full and total transparency across all of its investment activities in its internal investment portfolio? FINRA should provide all details on its investments across EVERY hedge fund, fund of fund, and private equity position. Additionally, FINRA should provide EVERY detail involved in its liquidation of its $647 million auction rate securities position in mid-2007.

4. How do FINRA and the authors of this report in good conscience promote the messages embedded in FINRA’s Annual Reports along with the messages promoted in its massive national advertising campaign? This report provides an expose of the enormous holes in this organization, not only from a structural standpoint but clearly from a cultural standpoint as well.

While this report focuses on the Stanford and Madoff frauds, against the backdrop provided I am now more convinced that there have been and likely still are other massive frauds perpetrated on the American public.

I write this commentary strictly in an attempt to get to the total truth so real market confidence can be restored. Perhaps more of this truth will be revealed in the adjudication of the three lawsuits (Amerivet, Benchmark, Standard Investment Chartered) currently facing FINRA.

The American public deserves the truth.

Comments, questions, constructive criticisms always appreciated.


  • Richard D. Greenfield

    Larry: You are to be credited for your bloody-minded doggedness regarding the gross failings of the regulators of our securities markets. I note that you have mentioned the Amerivet, Standard Investment Chartered and Benchmark suits against NASD/FINRA in which litigation I and my co-counsel represent small broker-dealers. If any of your readers wish to see copies of the operative Complaints in those cases, email me.

    Richard D. Greenfield

  • Ralph

    Bravo. If only the major news operations (press and tv) would have the courage to get these messages out. If only our elected officials had the courage to do what they are elected to do. The American people deserve better.

  • Larry,
    You have, once again, stated your case in a clear and concise manner.
    I am a Madoff victim and have been trying, as Ralph suggests, to get these messages out to the public.
    As the Coordinator for the Madoff Coalition for Investment Protection group, we are extremely concerned that all American investors are subject to the lack of oversight and transparency that you speak of.
    Thousands, if not tens of thousands, of investors have suffered greatly by the inactions and incompetence of the SEC and FINRA.
    I wonder at what point investors will begin to demand accountability for the actions of the agencies that were created to protect them?
    I fear that until they do, we will continue to throw more money and resources to these agencies which are no more than facades of protection.
    Our already weakened financial market system can no longer afford the false sense of confidence offered by the SEC, FINRA and SIPC to investors who have already suffered so greatly as a result of the agencies’ failures.

    Ronnie Sue Ambrosino

  • Tony Ryals

    I am very sceptical of Mary Schapiro’s sincereity about cleaning up Christopher Cox’s and his predecessors mess at the SEC based upon her all too cozy connections to he very cliques of Wall Street,FINRA and ‘securities’ scamsters she would have to confront to come close to her stated goals.
    Also Douglas Shulman’s appointment by W Bush to head the IRS of all things seems like planting another securities cover up artist in an all too sensitive position to cover up for and protect well heeled securities con artists who
    often use offshore accounts to do their dirty business that
    actually comes down to ripping off small American investors and taking their money offshore where those small investors besides suffering much grief and hard times from the loss of that capital,will never pay taxes on it again to the detriment of the U.S.government itself.Douglas Shulman,if I understand correctly is simply providing people whose offshore accounts whether in the Carribean, Lichtenstein, Isle Of Man r London,Asia or Pacific,Dubai or Israel,etc., probably contain money made on stock scams against Americans on the U.S. stock markets,the equivalent of a papal pardon that is good for no one except the crooks.
    On another related matter Mary Schapiro was persuing what I believe a valid and neccessary enqiry(before Carl Levin distracted her with a demand to look for non existent ‘naked shorts’),a short while ago called ‘black pool’ trading I believe,(meaning private trading that is hidden from small investors),- even through the Dubai Sheikh Mohamed’s NASDAQ or OMX or whatever it is now called.
    This Sheikh whose country sent at least $100,000 and I believe at at $175,000 to Mohamed Atta in Venice,Florida pre 9/11 and whose is more suspect than ever in ongoing money laundering activities,(even though or because the likes of Haliburton is now headquartered there) now controls the U.S.NASDAQ as well as Sweden’s OMX and some part or all of Finland’s stock market and Iceland I believe and yet at the same time is doing some sort of ‘dark trading’ or whatever more akin to the old Arab Hawala system on steroids.In fact in the hands of those with such a ‘philosophy’ where share movements can be so useful to mask money flows the NASDAQ and other markets potentials for money laundering is outright terrifying.
    Furthermore the SEC or FINRA or whoever or whatever body or group,including our monopolized ‘news’ media ,that had the responsibilty to inform the American public that much or all of the NASDAQ was being tranfered to the Sheikh Mohamed of Dubai failed in its or their obligations.As you know when CNN and Fox and CNBC,informed the American public about the planned takeover by Dubai of U.S.Port security up to 95% of Americans objected vehemently.I have mentioned to some Americans recently that if they buy any shares of a company on the NASDAQ they are now putting money in the pocket of the very Sheikh of Dubai whose country sent money to Mohamed Atta in Venice,Florida just prior to 9/11/01.I now believe Americans’ ignorance of this fact(that Sheikh Mohamed profits everytime they buy or sell a NASDAQ stock) is the result of a planned news black out because the elite who control our news media approved the Sheikh’s control of MASDAQ and knew average Americans would strongly object if they were made aware of this fact.So they simply failed to report it.Am I wrong ?

  • Dear Larry,
    Thank you for your right-on and comprehensive presentation of the FINRA/SEC misses in the Stanford Case. I am a founder of the Louisiana Stanford Victims Group. It might interest you to know (in addition to all you already know), that the Stanford Trust Company flew totally under the radar in my state. It was an entity that took in billions of IRA accounts, from victims in 35 states, whose money was rolled over by Stanford FINRA licensed brokers, as these older folks retired.
    Another point of interest is that forensic accountants have now uncovered the fact that none of the money invested in CD’s, left the USA banking system. Whether liquidated from a stock portfolio or invested in the form of a check handed directly to our brokers, the cash never went to Antigua. It was deposited directly into US national banks such as Trustmark and Bank of Houston. These banks are audited annually by the OCC. So we ask, where was the OCC and how did they miss these bank accounts, clearly in the name of Allen Stanford, through which billions flowed every year to fuel and perpetuate the Stanford Ponzi scheme? All opeartaing expenses, including the brokers’ commissions were paid from these accounts. Yes, Antigua was a decoy. There never were any CD’s, it was all a paper chase. But it took place here in the USA, not offshore.

    • Larry Doyle


      Thank you for these comments which further enlighten all of us reading this commentary. The fact that the OCC was also negligent only adds fuel to the fire. Why hasn’t that fact been more widely disseminated and broadcast? Given that failure, the lack of oversight and protection of investor interests now incorporate the SEC, FINRA, and the OCC. Where does it end?

      To think that a systemic failure of this sort is due to a lack of communication and other protocols is hard to swallow…and believe.

      As I think this through, if our regulators were this bad, the more I am convinced there must be many more frauds out there.

      I am glad you found Sense on Cents. Please visit and comment often so we can all be that much more enlightened…as it seems we need to protect ourselves given that regulators have not protected us.


  • Mikaele

    Thanks Larry!
    I am an ARS victim w/ Oppenheimer and see how the SEC and FINRA have not done much to prevent this and as you stated Finra sold their own holdings before the crash. What to do? Would there be a better shot of getting things done by grouping Maddof/Sanford/ARS together? We all end up in little groups that seem to be flying under the media radar. Just a thought.

    • Larry Doyle


      First things first, hopefully FINRA will be compelled to provide total transparency. In the process, hopefully those who invested in Stanford, Madoff, and ARS are privy to ALL the information so they can proceed towards a just outcome.

      I do agree with you that if the investors across these groups were to be organized, then the pressure applied could be enormous.

      The numbers of investors certainly run into the tens of thousands.

      Hopefully they can all find their way to Sense on Cents to learn more about this story!!

      I do like the way you think.

  • Larry – – –

    Excellent article.

    FINRA is the successor to the NASD (National Association of Security Dealers), and, as such, is an industry self-regulatory group. Their primary objective is to protect the interests of broker-dealers and their agents. In protecting those interests, they will, with great fanfare, reveal disciplinary actions from time to time. The most effective actions are taken against brokers (Registered Reps) when they, as individuals, are found to have commited fraud. When action is announced against broker-dealers, it is often token wrist slapping.

    The CFP Board, with their associated industry professional association, the FPA, have long taken a position that financial planners have a fiduciary responsibility. (CFP is Certified Financial Planner and FPA is Financial Planning Association.) The NASD, and now FINRA, has taken the position that Registered Reps who are CFPs, even when they offer financial planning advice, should be exempt from fiduciary responsibility under the code of ethics provisions (of the CFP Board) and the SEC requirements for investment advisors under The Investmanr Advisors Act of 1940. In other words, Registered Reps should have no more responsibility to their clients than a used car salesman. If they blatantly misrepresent something, that is wrong. If they are subtly misleading, well, caveat emptor.

    FINRA is on one side of this fiduciary responsibility argument and the FPA and the CFP Board are on the other. This conflict has been going on for many years. Having observed this debate, originally being in both houses (a CFP who was a Registered Rep), and for the past eight years as only a CFP registrant, I have come to a very low opinion of FINRA when it comes to customer protection. The litany of details you have outlined in this article are no surprise to me, even though a couple of them are new news.

    • Larry Doyle


      Thanks for the technical insights from one ‘in the trenches.’ What investor would not prefer the fiduciary standard from his investment advisors?

      Thanks for adding this very helpful perspective.

  • Kathy

    Well argued, and yes, the American public deserves the truth. Finra has no business regulating the industry that feeds it. Sham regulation of this type undermines the entire financial structure.

  • James

    If you google Former Stanford brokers you will find many have found new jobs with other brokerage companies. I submit, that these former Stanford brokers knew, the returns were to high, the Stanford CDs uninsured, and their brokerage commission were 1200 percent higher than normal. Find the name of the company that hired you former broker, the SEC, and Finra, and write a complaint to all. It won’t get your money back, but it will make you feel better.

  • Pat

    The willful blindness in these cases is absolutely astonishing, and it is difficilt to believe that it was not all done with government complicity as an intentional or inadvertent aider and abettor. Either way, logic and legitimacy of law and government is at stake and should be pursued.

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