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Joe Sciddurlo Drops Bombshells on FINRA

Posted by Larry Doyle on July 5, 2011 11:09 AM |

We do not often get an insider’s perspective into the world of Wall Street regulation. That reality should not be a surprise.

Wall Street and those charged with regulating it typically play their cards very close to the vest. Getting a peek ‘over the shoulder’ at the cards held by the banks, the SEC, FINRA, and other regulators is a real treat.

Longtime followers of Sense on Cents may recall the fabulous insights provided by former SEC attorney and Madoff investigator Genevievette Walker-Lightfoot on NQR’s Sense on Cents with Larry Doyle in October 2009.

Last week, longtime and highly regarded financial journalist John Crudele of The New York Post provided a fabulous look into FINRA as he wrote another in a recent series of scathing commentaries on Wall Street’s self-regulatory organization.

I found Crudele’s work to be particularly enlightening as it highlighted and connected two topics widely profiled here, those being FINRA and auction-rate securities.

Let’s navigate as John Crudele reports, This FINRA Whistleblower’s Reward? He Gets Fired:

Joseph Sciddurlo said he was fired recently as an investigator at Finra after he suggested that the financial regulatory agency start looking more carefully at the accounting of big Wall Street firms — and especially one in particular.

Sciddurlo was terminated by the Financial Industry Regulatory Authority (Finra) in May after four years as a principal regulatory coordinator, or an “RC” in the agency’s lingo. Before that he had spent nearly 20 years at Citigroup’s corporate and investment bank, mostly as a forensic accountant — meaning he took apart corporate books looking for mistakes and fraud.

His problems at Finra began around last Dec. 3, said Sciddurlo, when he suggested in an e-mail to superiors that “it would be a good idea to include a ‘quality of earnings’ check on the annual audit worksheet.”

This discussion had been going on for a few days before that e-mail.

The subject of that Dec. 3 e-mail was “Re: Oppenheimer’s $642 million ARS Liability — Quality of Earnings Check on the Annual Audit Worksheet.”

ARS stands for auction rate securities, one of the numerous derivatives that have been front and center in Wall Street’s troubles.

Sciddurlo tells me he believed the $642 million “should have been booked as a liability” by the broker/dealer operation of Oppenheimer and not allowed to be carried invisibly on the books of the firm’s holding company.

“That’s a blatant violation of GAAP (generally accepted accounting principles),” he said.

Wow!! What an indictment by Mr. Sciddurlo while connecting the FINRA, ARS, and Oppenheimer dots all at the same time.  Recall that Sense on Cents has continually called for FINRA to release the details of its own ARS liquidation from its internal investment portfolio mere months before the ARS market froze in February 2008. Those calls have never been fully answered by FINRA.

A blatant violation of GAAP? Not exactly consistent with solid financial ‘sense on cents’ principles. Let’s continue but first I need to blow into this paper bag.

“A ‘quality of earnings’ check coupled with an inquisitive RC should prevent a re-occurrence of Lehman as the tough questions emanating from this process should dissuade the member firm from employing aggressive accounting techniques,” Sciddurlo told his bosses in that e-mail.

The response, from Sheila Haney — who Sciddurlo said was his boss’s boss — was “thanks Joe. We will discuss and get back to you. You don’t need to spend any more time on this now. Thanks.”

Sciddurlo was placed on probation on April 13 after, he said, people started eavesdropping on his conversations and closely monitoring his actions.

In a note with the subject line “probation,” supervisor Barry Reinkraut told Sciddurlo that he was warned as early as Dec. 9 — just six days after the Oppenheimer e-mail — that “your performance and behavior are not meeting the expectations of a grade level 47.”

As of April 13, Reinkraut said “we have not observed any improvement.” His termination notice was dated May 17.

Needless to say, Sciddurlo is thinking of suing.

“I was a big contributor up to this point,” said Sciddurlo, who added that higher-ups asked its employees — including him — to come up with new auditing ideas in the wake of the Lehman Brothers debacle and the Bernie Madoff scandal that made Finra look incompetent.

“I was trouble. I was ethical and competent.” Sciddurlo denies any justification for the firing.

Finra was asked for a comment about Sciddurlo but didn’t get back to me. Oppenheimer was asked to address the issue of its ARS liability but also didn’t get back.

Where is the transparency that former FINRA head and current SEC chair Mary Schapiro believes is so important?

Sciddurlo said he was asked to contribute thoughts on weeding out Finra members destined to fail because he had spotted Lehman’s troubles before others.

In an e-mail to his bosses on Aug. 29, 2008, Sciddurlo wrote, “Lehman is the entity that most closely resembles Bear (Stearns).” He gives a seven-paragraph analysis of his thinking.

Bear Stearns had failed earlier in 2008, and experts were wondering who’d be next.

Lehman, which reported a bigger than expected loss that June, kicked the bucket in mid-September and set off a global financial crisis.

I’ve been writing about Finra for a couple of weeks now. To be clear, this is a regulatory agency that is set up and paid for by Wall Street firms themselves.

It is not a government agency and is non-profit, even though the people who run it seem to get rich from bonuses.

Mary Schapiro, who ran Finra until being put in charge of the Securities & Exchange Commission, was paid millions in bonuses while at Finra. Her reported net worth is between $11 million and $42 million, which included a reported $7 million in severance from Finra.

Small broker dealers have been accusing Finra of nitpicking them for what are essentially jaywalking violations while permitting bigger firms to get away with murder.

Finra has denied this, but it gave me misleading data to prove its point.

Perhaps FINRA may care to make this data fully public. I would welcome running any and all information FINRA may care to provide. Transparency promotes accountability. Accountability generates greater investor confidence.

Sciddurlo likes to quote Harry Markopolos — the guy who tried unsuccessfully to blow the whistle on Madoff. Markopolos has said Finra is “corrupt.” The SEC, in Markopolos’ view, is merely incompetent.

“I agree with Madoff whistle blower Harry Markopolos’ claim that Finra is corrupt and incompetent (and) in cahoots with the large broker-dealers at the expense of the investing public,” Sciddurlo wrote to me when he was introducing himself. (LD’s highlight edit)


This statement by Mr. Sciddurlo is the singularly most damning comment on Wall Street regulation I have witnessed since launching this blog in January 2009. One would think those at the SEC and in Congress may want to have a little chat with Mr. Sciddurlo. You think? I think!!

Sciddurlo said he doesn’t remember any direct order to go after small firms harder than big ones while working at Finra. But, he said, that was the “mindset.”

“They (screw) the small firms. They don’t give a (crap) about the small firms. What pays their salaries? It’s the big firms,” he said.

In the spirit of being fair, there are always two sides to every story. Assessing the merits of both sides requires a commitment to pursuing the truth and promoting transparency. Will FINRA stand idly by at this time? Will they respond in kind?

Many questions raised about FINRA here at Sense on Cents remain unanswered.

Who else has raised questions and/or dropped bombshells about this organization over the last thirty months? Amongst others: Harry Markopolos; an overwhelming percentage of FINRA’s member firms led by Colonel Elton Johnson of Amerivet Securities; the Project on Government Oversight; the Broker-Dealer Exchange; Joe Sciddurlo; and John Crudele.

Just today, departing head of the FDIC Sheila Bair speaks up on “why regulators should speak out”!!

Why hasn’t Congress aggressively addressed this organization as proposed by POGO? I asked as much and highlighted POGO’s letter in a February 2010 commentary.

Isn’t it time FINRA truly open its doors and its books? I strongly believe a greater degree of investor confidence and investor protection would be achieved if FINRA were truly transparent.  Those goals are worthy and more than justify Sense on Cents’ continued pursuit on this front.

I welcome any and all parties from both sides of this topic to weigh in with their thoughts and opinions. I encourage John Crudele and The New York Post to continue to carry this torch and bang this drum.

Navigate accordingly.

Larry Doyle

Isn’t it time to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?

Please get your friends, family, and colleagues to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.



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