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FINRA and ARS: Pot Calling Kettle Black

Posted by Larry Doyle on January 25, 2010 2:34 PM |

Thanks to a loyal Sense on Cents supporter for sharing the most recent copy of Compliance Reporter, a publication of Institutional Investor, Inc.. The lead article this week,  FINRA Readies Slug of Enforcement Cases, addresses the fact that FINRA:

is targeting a slew of enforcement actions across a range of areas, including reverse convertibles and auction-rate securities.

Oh boy, here we go again. FINRA talking tough about auction-rate securities. Additionally, FINRA further flexes its muscle by:

warning firms that strained layoffs and resources are no excuse to delay responses to FINRA’s request for document production requests.

This self-regulatory organization has truly got some set of balls talking about delayed responses to requests for documents and information. Do you think the thousands of investors with upwards of $150 billion in frozen ARS may like to see the documents and information relating to FINRA’s liquidation of its own $647 million ARS position in mid-2007? Yes, mid-2007 as the ARS market had started to fail. You think?

How about if FINRA releases its own trade tickets and details regarding that sale? Why won’t they turn the tables on themselves and release this information?

The Compliance Reporter continues and offers:

FINRA also has deepened its investigation of the ARS market. The SRO soon will issue settlements and formal complaints against firms that Merrill (FINRA’s chief of enforcement ) said engaged in self-dealing by dumping their ARS holdings when the market began to freeze but failing to change the way they marketed the product to retail customers.

Who was charged with protecting investors at that point and who is still charged with protecting investors now? Yes, FINRA, the Wall Street self-regulatory organization which did not post on its own website the fact that the ARS market was failing until it had totally frozen in early 2008. Some protection. Friends like this who needs enemies.

Who within FINRA is going to have a conscience and address the question Sense on Cents has been asking since last April? Who may have left FINRA but has details of this liquidation and is willing to share them? Let’s see the details of FINRA’s own sale of ARS in mid-2007.  Anybody at FINRA feeling a little anxious knowing that the organization liquidated $647 million of these supposed cash equivalents onto some unsuspecting investors? America is screaming for transparency and integrity. Who at FINRA has the courage to provide it?

FINRA has never provided one shred of meaningful evidence supporting the fact that it liquidated its ARS position without knowledge that the market was freezing. To think that FINRA did not know the market was freezing when it liquidated its bonds defies logic. The fact that FINRA has never provided any details about its sale speaks VOLUMES!!

Now it has the balls to issue complaints about self-dealing by other dealers. Who is to say that those dealers did not dump their ARS positions after having seen FINRA dump its bonds? Or perhaps more likely, FINRA dumped its bonds after seeing other dealers dump their bonds.

The stench surrounding FINRA’s ARS liquidation has not lessened with the passage of time. That stench has only gotten worse and is pervasive in the market. It will only be exterminated with the release of details by FINRA regarding its ARS liquidation in mid-2007.

When will FINRA release the details?

I’m going nowhere until they do.

Any institutional or individual investor still holding frozen ARS positions, I encourage you to join with me in calling for the release of this information.


For newer readers of Sense on Cents, access information on FINRA, auction-rate securities, FINRA’s Annual Reports, and lawsuits against FINRA via the search window on every page here at the site. America deserves to know the underside to Wall Street’s SRO.

  • Dave

    maybe FINRA will finally go after Oppenheimer for lying to and duping their clients. For the unitiated Oppenheimer sold $1 billion of this stuff which they called “floaters” to disguise the fact auctions even took place.

    If you’ve ever thought about investing through Oppenheimer – don’t.

  • phil trupp

    Yes, the stench lingers. Back door financial dealing has an unmistakable aroma. To your credit, you’ve followed the scent for a very long time. You certainly deserve praise for being the first to spot FINRA’s cover-up. Your subsequent reporting helped shine light into this murky Pandora’s box. Had the facts slipped by you, it’s doubtful the media (especially media outside the Beltway)would ever have broken this story. Stick with it, Larry. A great many ARS victims should be sending you roses. RE: former FINRA boss Mary Schapiro: We need her on the hot seat in front of the House Financial Services Committee. Keep pushing. Hopefully we’ll get to the bottom of this double-dealing farce.


    THANKS LARRY!!!!!!!!!!!

  • John Wallace

    I’ll visit your advertisers !

  • Bill

    As I’ve said, FINRA’s liquidation of its
    auction rates in 2007 was either the product
    of non public information or the most
    remarkable case of market timing in
    financial history.

    • Larry Doyle


      …and deserving of a more thorough analysis given the fact that $150 billion ARS remain frozen two years later.

      Why won’t FINRA release details as to its liquidation? Any other entity would and should be under a microscope.

      FINRA proves itself to be a paper tiger if it will not turn the scope onto itself and release details. Given the fact that more than two years have passed it is not likley that FINRA will release details willingly.

      Where is the SEC? Where are the state attorneys general? They all show themselves to be ‘partners’ in the incestuous relationship between our financial and regulatory structures.

      Somebody please tell me and more importantly SHOW ME why I am wrong.

  • ARS

    Why is it that this story has not gotten extensive coverage by the media? The American public is pissed because of the lack of transparency and the media won’t take this story on and call FINRA out for these details? I don’t get it.

  • Kathy

    Finra is guilty of al least two things:
    1. Failing to police itself, which is what it is supposed to do. Who was the genius in financial services who allowed them such power?
    2. Covering up its massive sale of its own ARS just as the market was failing – around the same time top investment bank executives were selling THEIR holdings of the rotten securities they were pushing onto unsuspecting small investors.

    Finra has done nothing, NOTHING, to help the victims of this massive ARS fraud. Where is Finra’s outrage against Oppenheimer? Against E-Trade? Schwab? Where is Finra’s statement about their own obvious, hypocritical self-dealing?

    Finra is a perfect example of everything that is rotten in the financial services industry. It should be closed, and real watchdogs put in place.

    While we’re at it, how about not letting the hypocritical foxes at Finra guard the forced arbitration henhouse? Get the financial industry out of the role of policing itself.

    Stay with it, Larry. Thanks.

  • John Wallace

    I have suggest express our concerns about FINRA by writing
    Office of the Ombudsman

    The Ombudsman’s Office provides a neutral and confidential forum for member firms and their employees, public investors, and any other business or individual who interacts with FINRA to voice their concerns about operations, enforcement, or other FINRA activities or staff. Individuals who are unsure of the proper channel for addressing a concern or feel that the issue cannot be resolved through other channels should contact the Ombudsman’s Office.

    Upon receiving a concern, the Ombudsman’s Office conducts an independent review of the situation and works toward the identification and evaluation of positive solutions for all parties involved.

    Please note that the Office of the Ombudsman is not meant to replace other channels—such as the Investor Complaint Center, the Office of the Whistleblower or BrokerCheck—for addressing issues related to other organizations. Rather, the Ombudsman’s Office can help resolve concerns about FINRA or its staff in a fair, impartial and confidential manner. If staff from the Ombudsman’s Office is unable to assist you with your concern, we will gladly direct you to FINRA personnel who can help you.

    Contact the Ombudsman:

    Call toll-free at (888) 700-0028, weekdays from 9 a.m. to 5 p.m., ET
    Write to:
    FINRA Ombudsman
    P.O. Box 9492
    Gaithersburg, MD 20898-9492

    Lets see how they do at investigating complaints about FINRA, as they suggest. Tell them we want to know about FINR’s activities in selling Auction Rates in their own account in 2007.

    • LD


      Fabulous idea. I strongly encourage anybody reading this who has an interest in FINRA’s liquidation of its own ARS position ($647 million) in mid-2007 to contact the Ombudsman’s Office.

      Please keep us informed of any and all feedback and developments.

      John, thanks again!!

  • John Wallace

    DJ Hearing Delayed On Oppenheimer’s Auction-Rate Share Sales
    By Daisy Maxey, DOW JONES NEWSWIRES,
    The Fraudsters get another delay, will there ever be justice ?

    NEW YORK (Dow Jones)–An administrative hearing on fraud charges filed in Massachusetts against Oppenheimer & Co. over the sale of auction-rate securities has been postponed until March 1.

    To the exasperation of shareholders, it’s at least the fourth time the hearing has been postponed. Once set for Nov. 4, it was pushed back to Nov. 16, then delayed again until Dec. 8, then postponed until Jan. 25.

    The latest delay occurred because one of the parties requested it, according to a spokesman for the office of Secretary of the Commonwealth William Galvin. The spokesman declined to elaborate.

    The Massachusetts complaint, filed in November 2008 by Galvin’s office, charges that Oppenheimer “significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients.”

    Oppenheimer did not immediately return a call seeking comment Thursday.

    The company has previously said that the allegations have no basis in fact or law, and that it intends to vigorously defend itself.

    Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.

    In a January update that some Oppenheimer clients received, it said it has been actively seeking a solution, including pressing issuers of the shares to redeem or otherwise liquidate the shares, which has met with limited success.

    “We have made a claim against several of these lead underwriters in a legal proceeding in which we allege and believe, that the underwriter, as opposed to Oppenheimer, should be the entity required to make any restitution required since they (along with the issuers) artificially supported the auctions,” Oppenheimer said in its update.

    Oppenheimer has been subject to ongoing investigations in connection with the securities, with which it is fully cooperating, by the Financial Industry Regulatory Authority and various state regulators, it said.

    At present, Oppenheimer does not have the financial capacity to repurchase, within Securities and Exchange Commission capital requirements, a significant amount of its clients’ ARS without access to a lending facility or pool of liquidity, it said in its January update.

    Oppenheimer began in June 2009 to build a government securities trading business to qualify as a primary dealer with the Federal Reserve Bank of New York in the hopes of attaining a liquidity facility from that institution, the company said. However, despite spending a significant amount of time, effort and money to build that business, it has not yet been successful in being appointed a primary dealer.

    Two developments may affect its ability to become a dealer and access a liquidity pool to buy back the securities, it said. In December, the Federal Reserve Board said it will begin in February removing programs that were instituted to deal with the emergency conditions associated with the credit crisis, and mentioned the Term Asset-Backed Securities Loan Facility, the primary dealer credit facility and others, the company said.

    In addition, on Jan. 11, the Federal Reserve Bank of New York published a revised policy for the administration of primary dealers. Foremost among the requirements for eligibility to be appointed a primary dealer are a minimum net capital standard, which was raised to $150 million from $50 million and a “seasoning” requirement that was increased to a minimum of one year, Oppenheimer said. Based on the fact that its participation in Treasury auctions began in June 2009, Oppenheimer believes the new requirements may mean that its application to be a primary dealer won’t be considered until at least June 2010, it said.

  • John Wallace

    Just received a letter in today’s mail from Carolyn Mendelson of the Pennsylvania Securities Division basically stating the same garbage as the 4 prior letter I’ve received from them EXCEPT for one short, one sentence paragraph slid in…… “We would appreciate it at this time if you would advise us as to whether you currently hold ARS through E*Trade and/or if you continue to have a complaint against E*Trade.”

    At first this extra verbage lifted my spirits and gave me a feeling that maybe, just maybe, they are nearing a settlement with E*Trade or one of their possible buy-out suitors. But after thinking about it a bit more, I think their just trying to determine if they can close their investigation into E*Trade and move on. Now that most of the companies which were going to settle without a serious fight have settled, there are no more fees and penalties for the PA Securities Division to scavenge. I say scavenge since PA hasn’t done shit to get anyone to settle. They simply sit in the tree branches and watch while more effective regulators actually force settlements. Then they swoop down to assess fees on the carcasses. Freaking buzzards!!

    I’m going to call Mendelson this week. In writing she won’t do anything but recite disclaimers like a robot attorney. But sometimes, she’ll say a bit more on the phone when she knows there’s no record of what she’s said.

  • John Wallace



    Office of the Whistleblower

    Dedicated Team to Handle High-Risk Tips

    FINRA’s Office of the Whistleblower expedites the review of high-risk tips by FINRA senior staff and ensures a rapid response for tips believed to have merit.

    Through the Office of the Whistleblower, individuals with evidence of, or material information about, potentially illegal or unethical activity can reach senior staff, who can quickly assess the level of risk involved and make sure that each tip is properly evaluated. Those tips warranting additional review and investigation will be subject to an expedited regulatory response.

    FINRA will refer any whistleblower tips that fall outside its jurisdictional reach to the appropriate regulatory or law enforcement agencies.

    FINRA’s whistleblower initiative does not replace longstanding processes for handling thousands of routine regulatory tips and customer complaints each year.

    Submit a Tip
    1-866-96-FINRA (1-866-963-4672)

  • Hurt by the system

    Please look into why Finra, will betrayed client information. They have people working in the Boca Raton, office of Finra,
    To make a case for the lawyers . Finra will give them the broker dealer clients. These clients have nothing todo with any case This is wrong please look into this

    • LD


      I am intrigued by what you are inferring here but I am not able to fully grasp. Are you stating that FINRA is willingly exposing client information and documents without probable reason or cause for doing so?

      Any further specifics that you can share would be very much appreciated.

      • Hurt by the system

        What I’m saying Finra to help the lawfrim would give information to them about the clients of the broker dealer. The clients expect privacy. To help the lawyers Finra, would volate the clients privacy.

  • Hurt by the system

    I can’t give anymore information. We need the SEC or the congress to look into this matter. I worried they will close the company I work for down. If they find out who we are. When you go against them they come after you for any reason. Have them give up all the


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