Sense on Cents

Will our chief financial regulators be allowed to operate above the law?

That plea of immunity is the foundation of the FINRA defense in the complaint filed against it by Standard Investment Chartered.  Recall that the very core of the Standard Investment Chartered vs. FINRA lawsuit is the premise that current SEC Chair Mary Schapiro and her then FINRA colleagues lied verbally and in a proxy statement about the details of a payment to FINRA member firms. FINRA paid 35k per firm and indicated that figure was the maximum allowed by the IRS.

I provided extensive details on this case in writing on October 22nd, NASDAQ Sale: Why Would Mary Schapiro and FINRA Execs Lie?

High five to Bloomberg’s Susan Antilla for doggedly pursuing this case. Susan reports on the hearing held yesterday on this case in United States Court in New York. Susan writes, Broker’s Lawyer Says FINRA Understated Offer to Firms,

A lawyer for securities firms suing the Financial Industry Regulatory Authority said sealed documents show its executives understated how much they could pay brokers in the 2007 merger that created the oversight body.

NASD, which became Finra after merging with the New York Stock Exchange’s oversight unit, could pay “something” from $70,000 to $111,000, Jonathan Cuneo, the lawyer for Benchmark Financial Services Inc. and Standard Investment Chartered Inc., said yesterday at a hearing, citing confidential Internal Revenue Service documents. NASD told brokerages in 2006 that IRS policy limited the payments to $35,000.

There is a “substantial difference between what NASD said” and what the IRS would have allowed, Cuneo, an attorney at Cuneo Gilbert & LaDuca LLP, said during the hearing in U.S. District Court in Manhattan.

The lawsuit filed last year says officials including former Finra Chief Executive Officer Mary Schapiro, now chairman of the Securities and Exchange Commission, misled brokers about payments in urging support for the merger. NASD officials told firms during so-called road shows and in documents that it couldn’t offer more than $35,000 because the IRS limits payments by tax-exempt organizations to members, according to the suit.

Schapiro, 54, became SEC chairman in January after President Barack Obama was inaugurated. SEC spokesman John Nester declined to comment on her behalf.

Cuneo’s estimate is based on information in a confidential ruling the IRS sent to NASD that Finra has sought to keep secret. He commented during a hearing in New York on Finra’s request to dismiss the lawsuit.

With the release of this information from Attorney Cuneo, we now learn that if his assertion is proved credible then Ms. Schapiro’s lie represented a $175-350 million transgression. How is that figured? FINRA paid 35k per firm. With 5100 FINRA member firms, FINRA’s total payment was $175 million.  Cuneo’s figures represent that FINRA could have paid two to three times that amount, or another $175-350 million, making for a total payment of $350-$525 million. Not exactly chump change.

Well, what will happen from here? Will Mary Schapiro and her fellow defendants have to face the music in court? Will Judge Jed Rakoff recommend this case go to trial? Or will defendant’s motion to dismiss be accepted and the financial regulatory system will fly above the law?

Could that happen? Anything is possible. Why might that happen? Would Judge Jed Rakoff deem the damage to market confidence and the market itself from exposing our current SEC Chair and FINRA as liars to actually exceed the potential proceeds and remuneration that FINRA member firms might recover from FINRA? Fair question deserving of an answer.

To be continued…

Thank you Susan for shedding light on this case.

LD

This entry was posted on Thursday, December 17th, 2009 at 2:55 PM and is filed under General. 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.