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FINRA “Meter Maids” Top 25 Fines: “Ain’t No Party”

Posted by Larry Doyle on August 2, 2012 9:09 AM |

Wall Street’s self-regulator FINRA just celebrated its 5 year anniversary. Congratulations to them. Sympathies and condolences to the rest of us.

The Securities Technology Monitor highlights FINRA’s birthday with a grandiose slideshow presentation entitled, The First Five Years; FINRA’s Top 25 Enforcement Cases. While those at FINRA might be celebrating the anniversary with cookies, cupcakes, and lemonade, let’s take a more critical review of Wall Street’s industry-funded private police detail. 

In the five years since, the independent regulator of brokers has brought 6,291 disciplinary actions and levied fines totaling $254.1 million.

6,291 disciplinary actions brought over 5 years equates to 1,258 cases per year. With approximately 250 business days per year, FINRA has brought 5 cases for every business day during its existence. Strikes me as a busy organization.

$254.1 million in fines levied over the course of 5 years equates to $50.8 million per year. What do we think of that? $50 million in fines levied per year for Wall Street’s private police. Not exactly a significant number. In fact, for an industry the size and scope of Wall Street, $50 million in fines levied on an annual basis is little more than a rounding error. Could very well be the boys and girls on Wall Street make that as a donation in the ‘tip jar’ at the industry sponsored summer barbecue.

Not all fines levied are equal, though, so let’s take a harder look at FINRA’s biggest “tickets”.

1. UBS SECURITIES LLC – $12,000,000

The firm mismarked millions of sale orders in its trading systems at various times. Extrapolating from the quantified violations indicated that the firm likely mismarked tens of millions of sale orders during the Relevant Period. Many of these mismarked orders were short sales that were mismarked as “long,” resulting in additional significant violations of Reg SHO’s locate requirement.

This violation zeroes right in on the multi-billion dollar incredibly destructive practice known as naked short selling. FINRA’s #1 fine relative to revenues generated via this practice is little more than a small digit after many zeroes to the right of a decimal point. Not good. Additionally, UBS was not the only bank involved in the naked short selling practice.

2. GOLDMAN, SACHS & CO. – $11,000,000
The firm did not have adequate policies and procedures governing Trading Huddles between its analysts and clients, “despite the substantial risk that the Trading Huddle process could lead to the dissemination of material non-public information concerning the analysts’ published research to the firm’s clients.”

What is going on here? Goldman’s trading huddles were a core part of the firm’s business model to favor selected clients. In reality, the trading huddles were a vehicle for the promotion of front running and perhaps insider trading. $11 million fine? I would be willing to bet that Goldman made more than that on many individual transactions resulting from this practice.


“In prospectus supplements for six subprime securitizations worth approximately $2.2 billion that DBSI underwrote and sold in 2006, DBSI negligently underreported the delinquency rates, or the percentage of underlying loans that were delinquent at the time of the creation of the trust, for the loan pools which served as collateral for these securities. As a result, DBSI violated NASD Rule 2110.

DBSI also negligently underreported the historical delinquency data, or static pool information, in connection with 16 subprime RMBS securitizations that it underwrote and sold in 2007.”

A violation of NASD Rule 2110? This practice by Deutsche Bank strikes me as a clear violation of Rule 10b-5. At that point in time, Deutsche Bank was likely generating approximately 1 point on these transactions. That margin would equate to $22 million in revenue on these transactions alone. Thus, this fine equates to approximately a third of DBSI’s profit margin. WHAT a JOKE!! But this is FINRA’s 3rd largest fine levied.

Are you starting to appreciate why I have railed so hard on this organization over the last three plus years? Let’s continue as a real favorite of mine is next on the docket.

“Beginning in late summer 2007, SunTrust RH became aware of stresses in the auction-rate securities market that raised the risk that auctions might fail. As these stresses increased in the late Fall 2007 to early 2008, the Firm made misrepresentations and omissions of material facts relating to the safety and liquidity of ARS by inadequately disclosing to its sales representatives SunTrust RH’s increased concerns about its ability to support SunTrust RH-led ARS issues, or whether SunTrust RH could or would continue to support these SunTrust RH-led ARS issues, as it had in the past. As a result, certain sales representatives continued to sell these ARS as safe and liquid.”

If SunTrust RH became aware in late summer 2007 of stresses in the auction-rate securities market that raised the risk that auctions might fail and that these stresses increased in the late Fall 2007 to early 2008, are we supposed to believe that FINRA itself was not aware of the same stresses? STOP IT!!

Yet what did FINRA do during this time period?

We know that FINRA owned and liquidated ~$647 million in auction-rate securities from its own internally managed investment portfolio during that same mid-2007 time frame. Regular readers are well aware of how long and hard I have banged that drum. I highlighted FINRA’s liquidation in writing, “FINRA Is Supposed to Police the Market.” I believed then and more strongly believe now that the industry funded cops at FINRA themselves engaged in front running/insider trading within the ARS market.

Have you seen enough? I have.

FINRA likes to promote itself as Wall Street’s cops. If investors were to accept that description and believe they are truly protected, then they would also have to accept that the meter maids writing tickets along your local streets will be an appropriate line of defense against real criminal activity.

Do not take my word for that aggressive evaluation. Just look at FINRA’s record for the last 5 years.

If this situation were not so pathetic and destructive, it might be comical . . . BUT it is not.

Industry funded, self-regulation of Wall Street is filled with such massive conflicts of interest as to make the entire system little more than a charade. On that note . . . be very careful and navigate accordingly.

Related Sense on Cents Commentary
Sense on Cents/FINRA

Larry Doyle

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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 so that investor confidence and investor protection can be achieved.


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