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HomeAn Open Letter to the Board of FINRA Regarding Auction-Rate Securities
Posted by Larry Doyle on July 27th, 2009 3:17 PM |
To: The Board of the Financial Industry Regulatory Authority (FINRA);
FINRA Investment Committee;
FINRA Audit Committee
From: Larry Doyle, Sense on Cents
Re: Auction-Rate Securities
I am a longstanding Wall Street veteran, a private investor, an avid supporter of free and fair markets, and a financial blogger at my site, Sense on Cents.
I launched my website/blog earlier this year specifically to help people more fully understand the economy and the markets during these challenging times.
In my opinion, the greatest challenge facing our markets and our country at this time is the question of confidence and integrity in the system. Little surprise why the topic of financial regulatory reform is receiving so much attention.
Against that backdrop, I am heartened by recent increased legal action taken primarily by selected attorneys general in pursuing entities involved in the fraudulent marketing and distribution of Auction-Rate Securities. We could debate at length why and how the ARS market failed, but there is no doubt these securities, sold as cash surrogates, were distributed in a fraudulent fashion. Thousands of investors and approximately $165 billion in ARS remain frozen.
I view the ARS market as having three legs — issuers, investors, and distributors (both primary Wall Street banks/brokers and downstream entities). Who was situated at the epicenter of this debacle charged with protecting investors? The SEC and FINRA.
FINRA specifically occupied a position not only as a regulator but also as an ARS investor. Whether FINRA representatives want to believe it or not, any semblance of rational and prudent thought would determine that FINRA was conflicted as a result.
Having written extensively on this topic and engaged FINRA spokesperson Herb Perone on this issue, I call upon you, the members of FINRA’s Board, Investment Committee, and Audit Committee, to release all pertinent details involved with FINRA’s liquidation of their ARS position in 2007.
Why is this necessary? Very simply, in order to regain total confidence in the markets it is of paramount importance that there be complete transparency and integrity on behalf of the regulators. To that end, for the benefit of all issuers, investors, and distributors of ARS, I believe it is incumbent on you to release the following information regarding FINRA’s liquidation of ARS:
1. Date of sale
2. To whom or through whom did the liquidation occur?
3. At what price did FINRA sell their ARS?
4. Why did FINRA decide to liquidate the entire $647 million ARS at that time?
5. Did FINRA possess material non-public information at the time of liquidation and act upon it?
6. Given that FINRA is charged with protecting investors, and given its position in the financial industry, how and why did they not post an investor warning about the freezing and subsequent failure of the ARS market prior to its complete failure in early 2008? How many investors and how many dollars could have been protected in the process?
I issue this letter publicly hoping that others may also be able to utilize the information contained herein and generate the release of this information.
In the spirit of full disclosure, I have never owned an Auction-Rate Security. I write merely as a private individual interested in helping the thousands of investors looking for a timely return of their capital.
I thank you.
Respectfully,
Larry Doyle
http://www.senseoncents.com/about/
Interview on The Rude Awakening
104.3FM Tampa Bay
Posted by Larry Doyle on July 13th, 2009 9:27 PM |
I am returning for a second interview on The Rude Awakening 104.3FM Tampa Bay Tuesday morning July 14 at 8:15am.
I look forward to my discussion with hosts John Busacca and Rogan LaBier about the markets, economy, and financial regulation, specifically in regard to FINRA. Always a lively discussion.
Click on the “Listen live” tab at StreetBiz.com.
LD
FINRA 2008 Annual Report: A Special Type of Hubris
Posted by Larry Doyle on June 29th, 2009 3:14 PM |
At first blush, I viewed the text of the Financial Industry Regulatory Authority’s (FINRA’s) 2008 Annual Report as nothing more than standard corporate fare. With the benefit of a few days to ponder FINRA’s delivery, I am actually amazed, although never surprised, by the gall of this regulatory organization. In fact, I can only describe FINRA as displaying a special type of hubris in addressing the fraud encompassing Auction-Rate Securities.
I personally believe it is very important for a financial self-regulatory organization, such as FINRA, to be totally transparent in every regard. Why? Very simply, transparency promotes confidence and FINRA’s position as a financial regulator should begin and end with that goal.
Against that backdrop, FINRA should not directly manage any of their own funds. To do so is an open invitation for conflicts of interest. FINRA’s own investment portfolio, managed by an Investment Committee, generated a negative 26% return in 2008. In April 2009, the FINRA portfolio shifted to a lower volatility approach but in 2008 it continued to have exposure to hedge funds, fund of funds, and private equity. As much as I believe this is a very big deal, it pales in comparison to the major issue I, and others, have with FINRA: their involvement with Auction-Rate Securities. Let’s dive into this part of the report and comment as appropriate.
FINRA sets the table:
Throughout the financial crisis, FINRA has worked closely with other regulators, particularly the Securities and Exchange Commission and the Federal Reserve, to examine firm activities for compliance with FINRA rules and federal securities laws, investigate wrongdoing and, when rules were broken, enforcing those rules.
As well they should. However, Finra obviously did not work too closely with the SEC to detect the fraud ongoing with Bernie Madoff. In fact, Finra’s only reference to the Madoff situation is one sentence highlighting the fact that the current financial regulatory structure does not overlap the efforts overseeing broker-dealers with those of investment advisors.
FINRA continues to make their case in stating:
The instability in the markets, and at a number of financial institutions, heightened investor fears. FINRA helped to allay those fears, and foster confidence, by working to ensure the protection of customer assets at troubled institutions.
How can they make this statement with a straight face knowing that thousands of investors and tens of billions of dollars remain frozen in Auction-Rate Securities? A number of Wall Street institutions continue to collect fees from these securities. Hubris? You think?
FINRA continues:
Vigorous enforcement of rules and regulations is a cornerstone of FINRA’s work to protect investors. In 2008, FINRA focused its efforts in several areas of investor harm—including excessive commissions, unsuitable mutual fund share class recommendations and sales, penny stock sales and auction rate securities recommendations and sales.
The hubris grows.
Let’s move forward. FINRA boldly and specifically addresses the Auction-Rate Securities market. I would have thought FINRA may have ducked this topic given the fact that they had sold $647 million ARS in 2007. The fact that they have willingly ‘opened this can of worms’ leaves them subject to fair and open questions. FINRA puts forth: (more…)
Finra Talking Tough on Fraud, but ‘Talk Is Cheap’
Posted by Larry Doyle on June 24th, 2009 2:01 PM |
We can’t live in the past. It is not healthy to overly dwell on the past. Life is about the landscape in front of us. That said, unless we address, expose, and expunge the errors and omissions of the past, can we truly achieve the full potential of our future?
Our recent financial past has been filled with pitfalls and frauds. Wall Street’s self-regulator Finra is fully cognizant of investor concerns on this front. Finra recently launched a marketing campaign to address investor concerns. From Finra’s own website, Finra Launches Enhanced Investor Protection and Education Programs:
“Informing and educating investors is an essential component of our investor protection mission,” said FINRA Chairman and CEO Richard G. Ketchum. “The recent market turmoil makes it more important than ever that investors be aware of FINRA and the tools and resources that we provide to help them plan their financial futures, protect their interests and make informed investment decisions.”
The video, “Tricks of the Trade: Outsmarting Investment Fraud,” is a 60-minute broadcast-quality presentation on preventing investment fraud. Using profiles of victims and perpetrators, the video highlights the persuasion tactics that con artists use to defraud their victims and the basic tools investors need to defend against fraud. A trailer of the video is available at www.saveandinvest.org/tricksofthetrade; the full video will be released in July, but can be pre-ordered. “Tricks of the Trade: Outsmarting Investment Fraud” will also be distributed in public libraries throughout the country and shown at movie premieres in selected states.
Any legitimate initiatives to counteract fraudulent activities should be embraced. I welcome this initiative by Finra and hope it proves overwhelmingly successful. The Wall Street Journal expanded on this Finra initiative in writing, New Finra Ad Campaign Talks Tough On Fraud:
Do you think your broker a total fraudster? Afraid your retirement is in jeopardy?
Then meet Finra.
That still relatively unknown acronym stands for the Financial Industry Regulatory Authority, the self-funded watchdog for the brokerage industry. And in its new national advertising campaign, Finra is seeking to restore investor confidence by talking tough against the brokers that don’t “play by the rules.”
“If brokers don’t play by the rules, we can fine them, suspend them – even put them out of business,” a male voice says in one ad, which displays black and white images of ordinary Americans against the backdrop of solemn guitar music. “We believe the markets don’t work unless they work for everyone.”
Pretty tough talk!! We need some tough regulators in order to root out fraudulent activity. We also need regulators who will pursue total transparency and integrity at every turn. Will Finra carry this torch? If so, it will have to address its own reputation in the process. The WSJ offers more: (more…)
Business as Usual
Posted by Larry Doyle on June 19th, 2009 7:28 AM |
“That’s the way we’ve always done it!!”
How often have you heard a person answer in that fashion when asked why something is done a certain way? A lot, I’m sure. Why? Change is stressful. Adjusting to change is perhaps even more stressful.
As we are forced to adjust to the Brave New World of the Uncle Sam Economy, we will certainly witness many individuals, business units, and industries resist change. I’m seeing them all around me. Let me share a few with you:
1. FINRA: at a time when our economy is screaming for increased transparency and accountability, this Wall Street self-regulatory organization has not yet released its 2008 Annual Report. Why? I view it as unacceptable.
The facts, figures, and transactions for 2008 are in the books. A mere accounting should be simple and straightforward. With the exception of Bloomberg, do you even hear of FINRA from major media outlets?
Rest assured, I will review the FINRA Annual Report thoroughly, with particular focus on their investment activities, and question them as need be. At some point, perhaps, the mainstream media may want to engage them as well.
2. Wall Street: why do banks so badly want to pay back TARP funds? The primary reason is compensation. In fact, in recently speaking with a number of colleagues on the street, banks are again paying “guaranteed” contracts to recruit personnel. Certain of these banks remain flush with government funds.
What propels banks to do this? Because they can, meaning there is no transparency or accountability. Additionally, they do not want to “cede turf” to startup firms which can offer opportunity but no guarantees. In layman’s terms, the large banks are flexing their muscles to impede smaller organizations from gaining a foothold in their ‘hood.’ Fair and open competition is one thing, but using taxpayer funds to pay guaranteed contracts is an entirely different issue.
3. Banking: why do banking industry execs feel compelled to maintain the perks of prior years? Ego. The Wall Street Journal highlights CEOs of Bailed-Out Banks Flew to Resorts on Firm’s Jets.
Business is business and executives, whether working at firms flush with government aid or not, need to compete. That said, if the executives are at firms still in receipt of government assistance . . . “back of the bus, pal.”
LD
“Lehman Sued Over Conflict in Auction-Rate Securities”
Posted by Larry Doyle on June 10th, 2009 8:02 AM |
Why does a $190 million lawsuit receive scant coverage? Why does a $100 billion plus financial fraud pass below the radar screen? With the exception of Bloomberg News, the scandal surrounding Auction Rate Securities receives very limited serious coverage.
Well, with figures the magnitude of those mentioned above, Sense on Cents is highly energized to publicize the scandal and the embedded conflicts in this fraud.
Bloomberg reports, Lehman Sued Over Conflict in Auction-Rate Securities:
June 9 (Bloomberg) — Lehman Brothers Holdings Inc. was sued by two companies seeking more than $190 million over claims the bankrupt investment bank misrepresented the risk of auction- rate securities and had a conflict of interest in their sale.
The complaints against Lehman Brothers, which filed the biggest bankruptcy in U.S. history last September, were filed in federal bankruptcy court in Manhattan. Ceradyne Inc. and Western Digital Corp. claim Lehman had a conflict of interest serving as underwriter and seller of the securities.
Lehman Brothers wrongly asserted that interest rates on the securities were set through a well-established market, and that they were tradable, liquid, short-term investments, according to the complaint.
“The reality, well known to Lehman Brothers Holdings Inc. but undisclosed to Western Digital Corp., was that, in fact, auction rate securities was not supported by a broad, fully- functioning market and therefore could be subject to failed auctions and illiquidity,” according to the complaint.
The $330 billion auction-rate market collapsed in February, 2008, sparking a series of regulatory probes into how brokerages marketed the long-term securities. One year later investors were stuck with as much as $176 billion of the securities even after regulators have forced banks to buy back more than $50 billion of auction-rate debt that was marketed as safe, cash-like instruments.
Justice Department Probe
Last month, the Wall Street Journal, citing unnamed sources, reported that former Lehman executives have been questioned by U.S. Justice Department officials in an investigation of the company’s auction-rate securities sales.
Ceradyne is a Costa Mesa, California-based maker of ceramic body armor for U.S. soldiers, and Western Digital Corp., based in Lake Forest, California, manufactures hard-disk drives.
Lehman spokeswoman Kimberly Macleod didn’t immediately return a call seeking comment after business hours.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The key phrase in this story from my perspective is “conflict of interest.” The claimants are asserting that Lehman should have known and revealed the embedded risks in ARS and that they did not because they were benefitting both as issuer and underwriter.
Having written extensively about the ARS scandal here at Sense on Cents (newer readers can access all posts by writing Auction Rate Securities in the search window in the upper right hand corner of the home page), I would STRONGLY encourage Ceradyne Inc. and Western Digital Corp. to engage Finra in their suit. How so and why?
Would Finra need to be subpoenaed or merely interviewed? I am no lawyer so I will defer on that point. That said, if Lehman were conflicted, I believe every ARS investor would benefit from knowing if Finra also had a conflict of interest in the ARS market.
Recall that Finra’s mission is to protect investors. Finra was an ARS investor itself, and liquidated $647 million in Auction Rate Securities in Spring 2007. Finra did not publicly apprise investors of the ARS meltdown until the market had totally frozen in February 2008. Shortly thereafter, Finra posted a warning on its website. Thanks for very little!!
From my ARS archives, please check out: U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sale; They Should Also Investigate Finra’s.
$190 million lawsuit. $176 billion of ARS. That is “real” money and it spells one enormous conflict!!
LD
Where Is Finra’s 2008 Annual Report?
Posted by Larry Doyle on June 8th, 2009 10:33 AM |
Finra released its 2007 Annual Report in mid-April 2008. Here it is June 8, 2009 and Finra has yet to release its 2008 Annual Report. What is going on? Aside from speculating, I called Finra this morning to inquire.
A source from within Finra’s Media Source division informed me to call back in a month. I questioned how and why in a period of economic and market dislocation, and with a heightened sensitivity on increased regulatory transparency, that Finra is being less transparent. I received a healthy dose of red tape and little direction. I have a call into Finra spokesman Herb Perone. That said, June 8, 2009 and no Annual Report. “Call back in a month.”
Why do I want to review Finra’s 2008 Annual Report? I know that fines and sanctions collected by Finra diminished by approximately 30% over the last year. The WSJ highlighted that information and I expounded upon it in writing, How Courageous is Mary Schapiro? My specific area of interest is a review of Finra’s investments within their own internal portfolio.
Recall that from their investment portfolio, Finra sold $647 million (position as of year end 2006) of Auction Rate Securities in Spring 2007. What did Finra do with their investments in hedge funds, fund of funds, private equity, common equities, and fixed income? Would Finra be so forthcoming as to provide insight as to why they needed to raise all that cash from the Auction Rate Securities liquidation?
Our markets and economy are screaming for increased transparency and regulation in an attempt to reinstill a measure of investor confidence.
Finra is prominently situated as a Wall Street regulatory body. Finra is currently being less transparent than a year ago. Why? Ms. Schapiro at the SEC and Richard Ketchum, new head of Finra, can TALK all they want about increased transparency and stiffer regulations. Talk is cheap. Information is everything.
“Call back in a month…” does NOT get it done.
LD
How Courageous Is Mary Schapiro?
Posted by Larry Doyle on June 4th, 2009 11:57 AM |
Does SEC chair Mary Schapiro have the personal courage to lead a new and emboldened financial regulatory regime?
Ms. Schapiro has always been viewed as being far too cozy with the financial industry. Sense on Cents first crossed paths with current SEC chair Mary Schapiro this past January at the time of her exceptionally easy confirmation hearing. At that point and since, the Wall Street Journal, Bloomberg and others have weighed in that Ms. Schapiro is “no regulatory heavyweight.”
Let’s check back and see if Ms. Schapiro is breaking off the Wall Street shackles. The Washington Post does us the favor of reporting this morning, SEC Chief Strives to Rebuild Regulator:
Schapiro is working to step up enforcement efforts, pushing cases linked to the financial crisis and freeing investigators to more vigorously pursue financial wrongdoing. She is also pursuing regulations to govern hedge funds, derivatives, short-selling, money managers, corporate disclosures and governance.
I am heartened by Ms. Schapiro’s aggressive posture. That said, I am not about to accept purely on face value that Ms. Schapiro is “changing her game.”
On the heels of the financial fiasco on Wall Street, there is doubtless lots to clean up. However, Ms. Schapiro has to appreciate that many question her courage in taking on this task. Why? Very simply, her track record as head of Finra saw an unprecedented drop in sanctions and fines. As the WSJ highlighted this past January:
Fines collected and sanctions assessed by Finra under Ms. Schapiro’s leadership dropped by 73% (in 2005, prior to Ms. Schapiro assuming leadership, Finra collected $150 million in fines. In 2006, Schapiro assumed the leadership reins and that number moved to $75mm. It dropped further to $50mm in 2007, and $35-40mm in 2008).
Against that backdrop, Ms. Schapiro has a lot of work to do to change her own image along with that of the SEC. The WaPo reports that Schapiro is aware of this fact. Schapiro states as much:
“I wanted to be very clear almost from my first day — not just with words, which are pretty easy to string together, but with actions — that this is a new SEC that is moving in a decidedly different direction and at a decidedly different pace,”
Additionally, Schapiro comments,
“Our markets are vulnerable if we’re not able to restore confidence,” Schapiro said. What investors “need to see is that the rules that are in place and will be in the future are enforced and aggressively enforced. If they don’t see that, their reluctance to engage the capital markets will be pretty significant.”
The media continues to rail on Schapiro, the SEC, and Finra for having missed the Madoff scam. Those protests are totally justified. It has been almost 7 months since Bernie turned himself in to authorities and little progress is provided to the public on the investigation.
In my opinion, though, Ms. Schapiro has other dirty laundry that needs a full and public airing.
The U.S. attorney in Brooklyn along with the SEC are currently investigating former executives from Lehman for potentially front running the Auction Rate Securities market in 2007. I call upon Ms. Schapiro to release information regarding Finra’s liquidation of its own Auction Rate Securities holdings in the same time period. Full details on this story are included in U.S. Attorney and SEC Investigate Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s.
Ms. Schapiro may have to recuse herself in the process of a full and thorough investigation of Finra and its ARS sale. As with any real leader, if she has absolutely nothing to hide, then she should have no problem recusing herself. As she herself said, “our markets are vulnerable if we’re not able to restore confidence.”
Does Ms. Schapiro have the courage to investigate Finra and her own tenure in an attempt to restore that confidence?
LD
