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FINRA Fraud Team Must Look in the Mirror

Posted by Larry Doyle on April 16, 2010 10:14 AM |

A report released yesterday by MarketWatch highlights the fact that the Wall Street self-regulator FINRA is launching a new initiative to target fraud within its purview of the financial industry. This initiative, designated the Office of Fraud Detection and Market Intelligence, will be headed by a longstanding FINRA employee, Cameron Funkhouser. Let’s navigate and offer insightful critique and analysis.

From the MarketWatch report entitled, Wall Street Watchdog Promises to Show More Teeth:

Wall Street’s self-regulatory body that self-admittedly failed to detect 2008’s major financial scandals has a plan to not miss the next one. The Financial Industry Regulatory Authority is touting its new fraud team as the key to spotting another Bernard Madoff.

“I’ve been encouraged to pursue anybody who’s engaged in fraud, with unfettered access to sources with industry connections,” Funkhouser said.

Would Mr.Funkhouser agree to inspect and pursue potential fraud within his own organization’s portfolio management group? I am referring specifically to FINRA’s ‘timely’ liquidation of its $647 million auction-rate securities position in 2007. Will Funkhouser agree to release all pertinent details of that liquidation so the public can determine if FINRA utilized material, non-public information for its own benefit and at the expense of the thousands of ARS investors who continue to be unable to access their $150 billion?

In the spirit of full disclosure, the reporter of the MarketWatch story contacted me for information while he was writing the article. I spoke to him for an hour, highlighting a number of issues within FINRA. I am extremely disappointed the reporter and/or the editors of MarketWatch chose not to highlight FINRA’s ARS liquidation. In my opinion, whoever decided to hold that topic out of this article did ARS investors and all investors an enormous disservice.

MarketWatch does provide some sense of balance to its reporting in highlighting that:

But at a time when the whole of the financial services industry is being questioned, from practitioners to regulators, FINRA has not been immune to the ire.

The Project on Government Oversight – a private non-profit group whose mission is to expose corruption in private business and federal government — harshly criticized FINRA in a seething February letter to Congress and subsequent blog posts for its failure to prevent and detect fraudulent activity and has urged action to fix or overhaul FINRA.

FINRA said POGO’s letter had “numerous inaccuracies and misperceptions” and said that the two organizations had never spoken.

Numerous inaccuracies? Like what? FINRA needs to realize it owes American investors total accountability and transparency if it wants to be viewed as a credible regulator. If there are inaccuracies, then FINRA should have the depth of character to address them one by one. In terms of not speaking to POGO, I have written most of what POGO reported. I requested more than once to speak to FINRA representatives. They refused to speak to me each and every time.

MarketWatch continues:

Sweeping financial regulatory reform legislation currently working its way through Capitol Hill addresses the issue of self-regulatory bodies like FINRA.

The House’s plan for financial reform passed in December and requires the SEC to evaluate the effectiveness of self-regulatory bodies.

In regard to the proposed financial regulatory reform in front of Congress currently, I highlighted for this reporter the fact that FINRA barely receives mention in the comprehensive legislation. The fact that Congress can propose Financial Regulatory Reform without serious attention paid to the Financial Industry Regulatory Authority is a virtual fraud unto itself. In my opinion, that reality is hard evidence of the power of the Wall Street lobby.

This article is the third time The Wall Street Journal or an affiliate has whiffed in terms of truly challenging FINRA on its ownership and liquidation of auction-rate securities. While FINRA, much like the SEC, would like to utilize the Mark McGwire (“I’m not here to talk about the past”) approach, America is wise to the fact that FINRA needs to fully address, expose, and clean up its past before it can begin to think it will be viewed as a credible regulator moving forward. If you do not believe me on this point, just look at all the ROTFLMAO-type comments left on the MarketWatch article.

If any FINRA reps read my blog (and I know you do!!), I repeat my open invitation to join me on No Quarter Radio’s Sense on Cents with Larry Doyle any Sunday evening.

LD

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  • Joe

    Interesting that FINRA would choose a longtime employee to head up this fraud unit. Not saying Mr. Funkhouser is not up to the job but from a pure image standpoint it does not inspire confidence. Is it more a reshuffling of deck chairs?

    If FINRA were truly monitored by an independent outside auditor might we have avoided some of the pitfalls throughout this crisis?

    • Always Learning

      In other words, do you mean a regulator for the regulator?

  • disenchanted

    This is a statment I have concerns with-“requires the SEC to evaluate the effectiveness of self-regulatory bodies.” Who is the head of the SEC and where did she just come from? If she is fighting to prevent Finra from opening the books to the public, do you really think the SEC is going to find anything wrong with the self-regulator? The right way to go about this is to get a committee from small firms to do this investigation.

    • LD

      Disenchanted and Always Learning,

      You both hit on a critically important point. We can not allow the SEC under current head Mary Schapiro to audit and investigate FINRA. Ms. Schapiro would have to recuse herself at the bare minimum if an investigation were to be undertaken by the SEC.

      I wrote as much last year when I penned, How Courageous is Mary Schapiro?

      The work continues!!

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