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Truth, Transparency, and Accountability

Posted by Larry Doyle on August 31, 2010 1:44 PM |

Regular readers of Sense on Cents are more than well aware of the amount of focus and attention I have directed toward Wall Street’s self-regulatory organization, FINRA. That said, I am compelled to highlight a recent press release for the simple reason that if even one new person learns of this information then I deem that real and ongoing progress. Even for those somewhat familiar with FINRA and recent developments emanating from its Annual Meeting, this release paints a stark picture of the questions which America deserves to have answered.

Where is the general media and the financial media on this story? Is anybody home??


FINRA’s Board of Governors Should Act at September 20 Meeting

Led by a decorated former U.S. Army Green Beret and Iraqi War combat veteran who heads a small securities firm, member broker-dealers of the Financial Industry Regulatory Authority (FINRA) decisively overrode management opposition to approve proxy proposals to investigate alleged corporate wrongdoing and substantially reform governance at the Wall Street self-regulatory organization.

In an extraordinary repudiation of a securities industry self-regulator, at the August 12th Annual Meeting two-thirds or more of FINRA members approved these seven common sense reforms many of which similar organizations have in-place:

*  Compensation for FINRA’s top ten most highly paid employees should be reported regularly in the annual report (83 percent support);

* Management’s relationships with Bernie Madoff and his family should be independently investigated (68 percent support);
FINRA investment transactions should be disclosed to members and the public (76 percent support);

* FINRA Board of Governors meetings should be held in the “sunshine” open to the public (77 percent support);

*  Members should have a “say on pay” for the top five compensated FINRA employees (72 percent supported);

* An independent private inspector general for FINRA should be appointed (67 percent support);

* All IRS correspondence on management’s demonstrably false claims of a $35,000 ceiling on payments to NASD members related to its merger with NYSE to form FINRA should be released (70 percent supported).

“No objective observer can look at the performance of FINRA over the last few years and characterize it as an effective regulator or being operated in its members’ best interest,” wrote Lt. Col. Elton Johnson, Jr. (U.S. Army Reserve), a decorated Iraqi War veteran who is president of Amerivet Securities, Incorporated (Amerivet) of Moreno Valley, California.  Lt. Col. Johnson, who put forward the reform proposals collectively known as the “Truth, Transparency and Accountability initiative,” is currently on active duty assigned to the Combined Forces, Special Operations Command in Southwest Asia and was unable to attend the annual meeting.

In his July 29 letter to all other FINRA members urging them to approve the reforms, Lt. Col. Johnson said:

“FINRA pays its executives gigantic salaries out of our dues and Members’ Equity and has been asleep while major financial fraud has taken place on Wall Street . . . [and] is now looking out for the interests of its largest members and overcompensated, well entrenched executives (including former CEO Mary Schapiro who appears to have received from FINRA’s Board a ‘going away present’ reportedly in the neighborhood  of  $10 million), at the cost of small firms all over the country.”

Overwhelming member support of the proxy proposals reflects growing concerns that FINRA’s managers have been operating behind closed doors to benefit its most powerful members and staff at the expense of its broader membership and its role as a protector of the investing public.  Lt. Col. Johnson, whose repeated requests for access to FINRA’s books and records (to which he is entitled under governing corporate law) were denied by management, filed a lawsuit August 10, 2009 seeking access to FINRA’s records.  He believes the record will show that the leaders of FINRA and its predecessor (NASD) engaged in corporate wrongdoing, breached their fiduciary duties and may have violated laws as well as the public trust.  His lawsuit seeks no money.

Lt. Col. Johnson, who received a Bronze Star Medal and has another pending, is a former U.S. Army Green Beret who has completed two tours in Iraq and is currently deployed in Southwest Asia for the third time.  He is represented in this matter by his attorneys Jonathan W. Cuneo and William H. Anderson of Cuneo Gilbert & LaDuca, LLP, and Richard D. Greenfield of Greenfield and Goodman, LLC.

“FINRA members have overwhelming spoken and now the Board of Governors must act,” said Jonathan Cuneo, an Amerivet attorney.  “As a self-regulatory organization, FINRA should be a leader in operational transparency and fully disclose its administrative practices and records to members and the investing public it was formed to protect.”

“Publicly-owned companies disclose material developments, financial policies and executive compensation in their annual reports and through other means on a timely basis,” Richard Greenfield, another Amerivet attorney explained.  “It poses no particular burden for FINRA to follow the transparency and disclosure practices of well-managed private corporations, and FINRA should begin doing so immediately.”

Yet, in an August 13 letter to its membership following the stunning proxy defeat, FINRA’s chairman and chief executive officer, Richard Ketchum, and lead governor, Richard Brueckner, said the proposals are non-binding, but would be reviewed by the Board of Governors beginning at its next meeting.  A FINRA Board of Governors meeting is scheduled for September 20.

Allegations of Management Wrongdoing and Self-enrichment

Many have questioned senior managers’ alleged close relations with the Madoff family  during the period in which “Bernie” Madoff was operating his multi-billion dollar Ponzi scheme that eluded FINRA’s notice.  Some FINRA members also question the propriety of FINRA’s purchases “behind closed doors” of hundreds of millions of dollars in securities for its own account from the broker-dealers it regulates.  In 2008, FINRA lost in excess of $565 million (or 26 percent of invested assets).  And, its transactions and investment policies remain largely hidden from its membership and the public.

During that same year in which FINRA, a regulatory organization, was losing half a billion dollars, its then chair/CEO Mary Schapiro was paid more than $3.2 million – a substantial increase over 2007 — according to FINRA’s federal tax returns.  Additionally, during 2008, eight other FINRA executives each received more than $1 million in compensation and benefits and, in total, the top twelve most compensated employees received more than $24.8 million.  Again, these compensation packages were given to senior executives during a year in which the self-regulator’s investments lost 26 percent of its total assets and members’ equity was badly depleted.

False Statements by NASD Managers about Transaction that Created FINRA

Among other troubling matters is the closing of the transaction that resulted in FINRA’s creation in which NASD members were paid $35,000 each.  NASD members were told in writing and at “roadshows” put on by senior NASD executives (including former NASD CEO Mary Schapiro) in 26 cities that $35,000 was the absolute limit on the payment to members for the merger and that the payment was limited to such amount by the IRS.

In fact, the IRS did not issue its opinion concerning the ceiling on such payments until months after the statements regarding the $35,000 limit were made by NASD management.  As disclosed in Court, the actual limit on the payment to NASD members was substantially higher than the false ceiling represented by NASD and its merger partner NYSE.  (For more, see documents produced in Standard Investment Chartered Inc. v. NASD, et al, Case No. 07-cv-2014) in the Southern District of New York in which the presiding judge was the Honorable Jed S. Rakoff.)

Clearly, NASD management’s statements to its members about the $35,000 compensation ceiling were false.  Interestingly, the results of the proxy vote concerning disclosure of IRS correspondence on this matter reveals an apparent division between FINRA’s largest members and smaller members.  While more than 70 percent of large member firms, such as Goldman Sachs and Morgan Stanley, oppose releasing the IRS correspondence, about 73 percent of small broker dealers and 50 percent of mid-size  firms support releasing the documents. Lt Col. Johnson and others believe FINRA’s management has been “in bed” with its largest members, to the detriment of smaller members and the investing public.

To Move Forward FINRA Should Reveal the Truth about its Past

“If FINRA is to move forward and put past mistakes behind it, members and the investing public must finally learn the whole truth about these $35,000 payments,” Attorney Cuneo said. “What do they have to hide?”

“To avoid the appearance of concealing facts and obstructionism on all the matters addressed by the members’ proxy votes, FINRA’s Board of Governors should immediately adopt the recommendations overwhelmingly approved by its membership,” Mr. Cuneo asserted.

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