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HomeFINRA Must Play by Its Own Rules
Posted by Larry Doyle on August 19th, 2009 11:21 AM |
Will the pressure being applied on FINRA compel this Wall Street self-regulatory organization to open its books and records? I am heartened and hopeful that the complaint filed by Amerivet Securities against FINRA will do just that.
High five to RS for sharing this complaint, Amerivet Securities v. Financial Industry Regulatory Authority.
Amerivet requests FINRA open its books for purposes of reviewing FINRA’s (and the NASD’s) engagement, oversight, and investment activities broadly speaking.
My major axe with FINRA remains its liquidation of Auction-Rate Securities in 2007. I would ask the judge who is hearing the Amerivet complaint to review a September 2008 document produced by FINRA in regard to the Auction-Rate Securities debacle. I submit Testimony by Susan L. Merrill, Executive Vice-President, Chief of Enforcement, Concerning Auction-Rate Securities Markets to Committee on Financial Services U.S. House of Representatives September 18, 2008.
Ms. Merrill promotes that as part of FINRA’s investigation of the ARS market, it would also focus on:
possible conflicts of interest where a firm may have been in possession of knowledge about ARS failures and liquidated their proprietary ARS positions by selling those positions to customers or ahead of customer liquidations.
Ms. Merrill, Ms. Schapiro, Mr. Ketchum, and members of the House Committee on Financial Services, Sense on Cents calls on all of you to hold FINRA to the same standard you would apply to every bank, broker-dealer, and money manager involved in the Auction-Rate Securities market.
I can only hope the judge handling the Amerivet complaint is able to review Ms. Merrill’s testimony.
FINRA must release all information regarding the liquidation of ARS from its investment portfolio in 2007.
What is good for the goose is good for the gander.
LD
Keep Your Friends Close and Your Enemies Closer
Posted by Larry Doyle on August 19th, 2009 7:15 AM |
The twists and turns while looking into FINRA keep getting more interesting.
While reviewing some FINRA material, I came across an invitation to a SIFMA (Securities Industry and Financial Markets Association) Breakfast in Los Angeles in August 2008.
For those interested in attending, please respond to . . . well, I won’t spoil it. Please read on:
Dear Industry Colleague,
On behalf of the SIFMA Compliance and Legal Division, I would like to invite you to our Los Angeles Topical Breakfast Seminar. Do not miss this opportunity to hear firsthand the examination agendas and findings of the SEC, FINRA and state regulators. This complimentary breakfast seminar will be hosted by Morgan Stanley. Sign up now, space is extremely limited.
When: Wednesday, August 13th, 2008
8:30 am – 10:30 amWhere: Morgan Stanley
335 North Maple Drive, Suite 150
Beverly Hills, CA 90210.Speakers:
Michael G. Rufino
Senior Vice President, Member Regulation, Sales Practice Review
Financial Industry Regulatory Authority (FINRA)Susan Axelrod
Senior Vice President, Office of Regulatory Operations
Financial Industry Regulatory Authority (FINRA)David A. Greene
Director, District 2
Financial Industry Regulatory Authority (FINRA)
(Southern California that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo),
southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye) and the former U.S. Trust TerritoriesReservations:
If you are able to attend please RSVP to Shana Madoff at smadoff@madoff.com or call 212-230-2411. Space is limited so respond as soon as you can.Sincerely,
Shana Madoff
Executive Committee Member, SIFMA – Compliance & Legal Division
There is nothing here that is new news. That said, hearing how deeply ingrained the Madoff family was in the financial regulatory and trade organizatons is one thing, seeing it is quite another. Shana Madoff is Bernie’s niece.
No doubt that Bernie Madoff lived by the rule, “keep your friends close and your enemies closer.”
LD
Smoke and Mirrors Accounting Will Be Expensive for Our Kids
Posted by Larry Doyle on August 18th, 2009 2:31 PM |
Why will future generations be forced to pay an ever increasing cost for our current economic turmoils? Very simply, regulators and legislators have not only allowed but promoted the intentional mispricing of assets on financial company books.
There is no doubt that the regulators and legislators effectively forced the FASB to relax the mark-to-market accounting standard to alleviate pressure on capital ratios. Where, however, is the line drawn on this practice? How do we know that financial institutions are not utilizing this practice indiscriminately to support capital ratios and income statements?
I have little doubt we will see future frauds in the years ahead as a result of this practice. The Financial Times addresses the problems embedded in this practice by writing, Disclose the Fair Value of Complex Securities:
Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.
Healthy markets and vibrant economies do not rely on opaque and fictitious accounting practices.
Our kids deserve better.
LD
Is Arthur Levitt an Unbiased Defender of High Frequency Trading?
Posted by Larry Doyle on August 18th, 2009 11:12 AM |
Former SEC chairman Arthur Levitt writes an editorial in today’s Wall Street Journal in defense of high frequency trading. Levitt pens, Don’t Set Speed Limits on Trading.
I welcome Levitt or any other individual highlighting the issues surrounding high frequency trading. Discussion and debate will hopefully bring a healthier marketplace for all. While Levitt provides the standard defense of high frequency trading in terms of providing liquidity, he offers brief remarks against the predatory nature of flash orders. Aside from that, though, Levitt largely skips the debate over the reality of front-running employed by certain aspects of high frequency trading.
I believe, however, the largest hole in Levitt’s editorial actually rests upon the shoulders of the Wall Street Journal itself. How so? Levitt is not only a former chair of the SEC, but he also happens to have a number of paid consulting and advisory roles. With whom? I’m glad you asked. (more…)
What Are the Credit Markets Telling Us?
Posted by Larry Doyle on August 18th, 2009 7:59 AM |
Are the credit markets sending us a warning signal about our economic landscape?
Recall that in 2008 all but the safest assets (U.S. Treasuries) declined significantly in value. In a similar fashion in 2009 risk-based assets, both equities and bonds, have experienced a healthy rebound, albeit of varying degrees. Are we starting to witness a disconnect in this lock-step relationship?
I highlighted yesterday the recent significant downward move within the high yield bond space in writing “Everybody Out of the Pool.” I pointed out:
Within specific market segments, the one sector that has outpaced almost every other is the high yield space within the bond market. An ETF which I reference for market performance is COY. Prior to the recent selloff, this specific fund had risen almost 50% on the year. It has given back approximately 6-7% over the last few days.
The Wall Street Journal picks up on this theme this morning and reports, Some Wobbles for the Financial Markets’ Tandem Ride:
Since the nadir in March, U.S. stocks have gained close to 50% and investment-grade credit spreads have halved.
The two asset classes have rallied in tandem as panic over a financial collapse has dissipated. But with the focus now on economic recovery, despite Monday’s global stock-market selloff, a disconnect is developing.
Credit-default-swap indexes that usually move in line with equities have begun to follow their own tune, one with a more downbeat tone on the outlook. U.S. stocks hit new 2009 highs last week before losing some ground, while the investment-grade Markit CDX and iTraxx indexes underperformed sharply.
Even with a 0.6% decline on the week, the S&P 500 closed off the week’s lows, while the 0.12 percentage point widening in the CDX took the index back to a level unseen since July 24.
Equity investors appear focused on the surprising resilience of earnings and the potential for punchy profits if revenues rebound. Credit Suisse forecasts a 20% rise in 2010 S&P 500 operating earnings, giving the market a price/earnings multiple of just 14 times, below the long-run average.
Credit investors seem more concerned about how sustainable any recovery might prove, and are inclined to require more proof that demand is picking up. Cash bond spreads are now comparable to levels seen in the 1981-1982 and 2001 recessions, rather than at 1930s Depression levels. But defaults still are climbing and credit deterioration continuing.
Credit markets are concerned about consumer demand. A key driver for last week’s credit selloff was the disappointing U.S. retail sales number for July. Stocks seemed to shrug off that data when it emerged, focusing instead on strong corporate earnings, even though many results are being driven by cost-cutting exercises; witness Wal-Mart’s profits holding up while it missed sales targets.
![[Markit CDX North American Investment Grade Index]](http://s.wsj.net/public/resources/images/MI-AY294_Credhe_NS_20090817183624.gif)
With all due respect to equity managers and investors, I have always viewed the credit markets as a better indicator of market health and direction. Why? The credit market operates on the premise of an entity’s ability to service debt. As such, the credit market puts a greater discount on the accounting smoke and mirrors that are utilized to raise equity capital.
Is the recent price action in the credit market forecasting a problem on our economic landscape?
Sense on Cents will be monitoring closely.
LD
Everybody Out of the Pool
Posted by Larry Doyle on August 17th, 2009 2:39 PM |
Were economists and market analysts realistic in thinking July retail sales were truly going to increase by .8%? The actual report came in last Thursday at -.1% and without the benefit of the promotions within the automotive space, the report would have generated an amazingly weak -.6% reading. Missing a piece of economic data of this importance by that magnitude is not only embarrassing, but also a statement on the current and future economic landscape.
Against the backdrop of this report, the equity markets have sold off approximately 3-4% over the course of the last few trading sessions. When working on a trading desk, we would often say on big down days in either the stock or bond markets, “everybody out of the pool.”
While the markets are down over the last few days, please do not forget the market has had close to a 15% run since early July. Based on what? Surprisingly strong earnings. Really? The earnings have been much more a function of expense reduction than increased sales. With the American consumer clearly ‘in the pain chamber’ in terms of economic outlook, sales will continue to lag. If sales lag, how can companies truly generate meaningful earnings? Smoke and mirrors only work for so long.
Within specific market segments, the one sector that has outpaced almost every other is the high yield space within the bond market. An ETF which I reference for market performance is COY. Prior to the recent selloff, this specific fund had risen almost 50% on the year. It has given back approximately 6-7% over the last few days.
Additionally, the bloom seems to be off the commodity index which is off approximately 5% over the last few days.
Add it all up and risks are very high with fundamental values seriously lacking. I believe investors should be very careful allocating money to the market at this level.
Perhaps I should also say, this entire period is an “Adult Swim Only.”
LD
Amerivet Securities Files Complaint vs. FINRA for Release of Investment Information and More
Posted by Larry Doyle on August 17th, 2009 11:53 AM |
The temperature is rising in the FINRA kitchen!!
Major high five to ARS investor ED for pointing out a breaking Bloomberg story that strikes right at the heart of our financial regulatory failings over the last number of years. Bloomberg reports Iraq Vet Asks Why Securities Overseers Can’t See.
This complaint encompasses a number of questions Sense on Cents has been asking over the last several months. As Bloomberg reports:
Amerivet Securities Inc. v. Financial Industry Regulatory Authority, a complaint filed in the District of Columbia Superior Court on Aug. 10 against Finra, the regulator whose Web site boasts of “proactively addressing emerging regulatory issues before they harm investors or the markets.”
If you can stifle your chortling over Finra’s psychotic break of a self-description and pay attention, the Amerivet complaint is example of regulators and those they regulate at their farcical finest.
Plaintiff Amerivet is run by Lieutenant Colonel Elton Johnson Jr., a one-time Special Forces soldier who served two tours of duty in Iraq in the U.S. Army Reserve, earning a bronze star and other decorations. Johnson has a long history with Finra — previously NASD — whose enforcement arm first went after him in 1997, censuring and fining him for violations of minimum capital requirements and for failing to file municipal securities offerings on a timely basis.
Complaining to Bush
Most recently, Finra suspended him as a supervisor from December 2006 to June 2008 because he didn’t properly manage an employee. Johnson says in his stockbroker records that the case was retaliation by Finra, which didn’t like it when he wrote to President George W. Bush to complain about how Finra was treating him.
While it does seem more than a little weird that Finra would bring a case in 2006 based on actions that happened a decade earlier, it’s hard not to wonder whether Johnson — with Army obligations, a real estate license, a firearms business and a private-detective operation — is a guy who might be a tad too busy to keep up with the details that a well-run brokerage firm should attend to.
His lawsuit against Finra, though, provides a funhouse window into what’s wrong with securities regulation. (more…)
A Ponzi Scheme by Any Other Name
Posted by Larry Doyle on August 17th, 2009 8:26 AM |
What investor does not want to allocate some portion of his portfolio to safe, liquid investments? Who hasn’t said to his broker or financial planner exactly what The Wall Street Journal reports this morning, ‘I Just Wanted to Play It Safe,’ in regard to the Wall Street Ponzi scheme designated as auction-rate securities?
The WSJ provides these conversations as evidence collected by New York Attorney General Andrew Cuomo in his case against Charles Schwab. As you read these conversations, I am sure it is easy to picture yourself as one of these customers:
Customer from Massapequa, New York
Customer: “You know, I’m not trying to make a ton of money. I just want to play it safe.”
Broker: “Understood.”
…
Broker: “When you go to get out of this, even though you tell the rep sell it that means you want to stop the auction. The hardest part of this auction is getting into it. That is the tough part. Getting out of it is easy as just selling.” (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle Interviews Head of Bernard Madoff Victims Coalition, Sunday Night at 8PM
Posted by Larry Doyle on August 15th, 2009 5:04 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can forward or rewind to any portion of the show by clicking at any point along the play bar. My interview with Ronnie Sue Ambrosino was extremely interesting, touching upon elements of investor protection that concern us all. For your reference, I’d like to provide two important websites that my guest mentioned: Bernie Madoff Victims Coalition and an online petition to show a unified support for investors to receive fair and legal treatment by the Securities Investor Protection Corp (SIPC).
************************
Has our government ever failed us to the extent involved in the regulatory oversight connected to the Bernard Madoff Ponzi scheme? How could these failures have perpetuated for such an extended period? How are these failures and their impact on the victims being handled? Is insult being added to injury?
Can the victims possibly receive real justice in terms of restitution and retribution? Where did the system falter? How are the victims of this travesty being treated by the powers that be on Wall Street, Washington, and in the media?
I am thrilled to address all these issues on my weekly program, No Quarter Radio’s Sense on Cents with Larry Doyle, this Sunday evening August 16th from 8-9pm as I welcome Ronnie Sue Ambrosino, head of the Bernard Madoff Victims Coalition.
As a sneak preview, Ms. Ambrosino was interviewed by Charlie Rose on June 29th, the day Bernard Madoff was sentenced to 150 years in prison. Ms. Ambrosino appears in the video clip at the 3 minute, 5 second mark.
The issues I will address with Ms. Ambrosino run well beyond the immediate concerns of the Madoff victims. The integrity and transparency of our financial regulatory system and legal process remain very much in question.
Don’t miss this important discussion Sunday evening on NQR’s Sense on Cents with Larry Doyle.
LD
Related Sense on Cents Commentary:
Madoff Victim Makes Impassioned Plea (August 12, 2009)
SEC Complaint vs. Frank DiPascali, Jr. (August 13, 2009)
Weekend Reading Roundup: ‘Sure Looks Good on the Outside’
Posted by Larry Doyle on August 15th, 2009 9:33 AM |
“Sure looks good on the outside, but my lips are sealed.”
The things a 15-year old kid remembers. I distinctly recall a number of graduating students at Boston Latin School in the mid- 1970s utilizing this phrase to describe their high school experience.
In so many words, those graduates were saying their Boston Latin School experience was not as it may have appeared.
Could the same be said for some of the games being played in Washington and on Wall Street? In an attempt to ‘unseal the lips and get people talking,’ I submit the following recommended reading.
My lips are most definitely NOT sealed!!
Fair-Value Accounting Is ‘Horror-Flick’ Monster
by Brendan Moynihan and Tom Contiliano
Bloomberg
Treasury Bailout’s Limits on Lobbyists Still Haven’t Taken Effect
by Meena Thiruvengadam
Wall Street Journal
Investment Potions: August 2009 Investment Outlook
by Bill Gross
Pimco
The Confidence Game
by Kenneth Rogoff (Harvard University)
Project Syndicate
Lessons of History Point to Short-Lived Rally
by John Authers
Financial Times
Enjoy!!
LD
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