Sense on Cents

Mary Schapiro

Big money makes for a very strange bedfellow. Is FINRA sleeping well these days? A pending lawsuit against FINRA would like to pull back the covers and check to see if the money in the FINRA mattress was allocated appropriately. Let’s enter the sitting room and take a peek into this corner of the FINRA household.

In the process of consolidating the NASD with NYSE Regulation to form FINRA, the NASD allocated capital proceeds to its member firms. This capital was generated via the initial public offering of the Nasdaq. Did the NASD, now known as FINRA, significantly underallocate capital proceeds to its member firms? This alleged underallocation, known as being ‘picked off’ on Wall Street, is the basis for a lawsuit brought by two FINRA member firms, Benchmark and Standard Investment Chartered.

Why am I concerned about the arcane inner workings and legal issues of a Wall Street self-regulatory organization? For the very same reason that I’m concerned about that regulator’s internal investment portfolio activities. Transparency or the lack thereof and the resulting confidence or lack thereof that the American public has in our entire financial regulatory system. Those goals strike me as worthy especially in light of the systemic risks embedded in an array of organizations which this regulator was charged to oversee. Yes, a large amount of exposure and transparency is badly needed at this point in our economic history. Against this backdrop, let’s navigate and see what we can learn about this lawsuit.

The law firms of Cuneo, Gilbert & LaDuca along with Greenfield and Goodman are representing the plaintiffs. From the former’s website we learn:

Along with our co-counsel Greenfield & Goodman, LLC, we currently represent members of the Financial Industry Regulatory Authority (“FINRA”) (formerly known as the National Association of Securities Dealers or “NASD”) in United States District Court and Court of Appeals litigation.  The complaints, which are based on state law, allege that defendants, among other things, obtained the NASD members’ vote in support of the consolidation of NASD and NYSE Regulation through an inaccurate and deceptive proxy statement and solicitation process. (LD’s highlight) At issue in the suit is whether NASD could have distributed to its members a larger share of the approximately $1.5 billion of NASD members’ equity.  As members will recall, NASD repeatedly asserted that the IRS imposed a $35,000 “hard cap” on what the NASD could pay its members.

Wow. With a $1.5 billion pie, we are talking big money. In light of that, a charge labeled as ‘inaccurate and deceptive proxy statement and solicitation process’ is aggressive especially for an industry’s regulatory organization. Whatever happened to embracing accuracy and clarity? Let’s continue.

Some documents from the litigation that shed light on the truth of these statements are now public.  However, FINRA has insisted that the key fact – the amount the Internal Revenue Service (“IRS”) told NASD it could distribute – remain secret, that is, under seal.

Secret? Under seal? Those terms aren’t synonymous with transparent. I thought under the ‘change’ being promoted by the Obama administration transparency would be embraced. What this looks like is more ‘business as usual’ on Wall Street. Navigating further we learn,

>The IRS did not limit the payment to member firms to $35,000 as NASD and its officials insisted.

>The IRS did not issue a formal ruling on the payment to members until March 13, 2007 – approximately two months after the member vote on the bylaws occurred.November 21, 2006.

>NASD Board Minutes demonstrate that the NASD Board discussed the $35,000 limit stating, “regardless of the amount agreed upon, it was paramount that the figure not be subject to negotiation.”

At this juncture, if I could be so bold as to steal a line from Ricky Ricardo in engaging Lucy, I would say to Mary Schapiro who headed FINRA, “you got some ‘splainin to do.”

For any legal beagles and overachievers in the audience, I am happy to submit the following legal documents pertaining to this case:

Communications between NASD and the IRS

NASD Board Materials

Proxy Materials

Internal NASD Emails

Internal NASD Memoranda

Communications Between NASD and NYSE

Rest assured, I will be monitoring developments in this case closely.

LD

This entry was posted on Thursday, October 8th, 2009 at 4:03 PM and is filed under FINRA, General, Mary Schapiro. 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.