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Posts Tagged ‘Alex Kirk of Lehman’

Who Protects Investors from Regulators?

Posted by Larry Doyle on June 19th, 2009 2:44 PM |

Is there anything worse than being violated by an individual in a position of trust? Crimes perpetrated by regular citizens are one thing, but crimes perpetrated by individuals in a position of public trust, in my opinion, are the most heinous. I am speaking of members of the clergy, teachers, law enforcement, and public servants.

When engaged in private business, individuals typically remain on guard from fraudulent and criminal behavior. That innate defense mechanism is usually relaxed when engaged with a public or quasi-public official. Given that vulnerability, the violation is far more painful due to the emotional damage even if the actual financial costs are minimal.

As I go down this path, let me emphasize the obvious – that is, the presumption of innocence and due process.

1. Today we learn that as part of the case against Allen Stanford, an indictment has also been handed down against Antiguan financial regulator Leroy King. Bloomberg reports that King not only took bribes from Stanford but also showed Stanford information relating to the government’s developing case.

If in fact these allegations are true, King aided and abetted the fraud which is speculated to be of a magnitude of $1-7 billion dollars.

2. In regard to the Bernie Madoff Ponzi scheme, we have no evidence to indicate criminal intent or activity on behalf of anybody at the SEC. That said, the SEC – by its own admission – failed to perform its duties. For those impacted by the Madoff fraud, the lack of accountability by the SEC is no less damaging than if there were criminal activity. Why is that? The length of time over which Madoff perpetrated the scheme along with the amount of evidence provided by Harry Markopolos was so overwhelming and should have minimized the damage, both financial and emotional.

3. We do have evidence of potential culpability on behalf of FINRA in the Auction-Rate Securities fraud. FINRA was headed by Mary Schapiro, current head of the SEC. This fraud is MANY MULTIPLES the size of the fraud perpetrated by Allen Stanford. Professionals, both inside and outside of the financial industry, have estimated that there are anywhere from $80 billion to $175 billion ARS (of a $330 billion market) still outstanding.

Let’s take the midpoint of those estimates, $125 billion, as a best guess of outstanding ARS positions. These securities do not actively trade, like government bonds, but in speaking with Kevin O’Connor of Second Market, he shared that bonds trade around 75 cents on the dollar. Thus, we are looking at approximately $30 billion in losses on a mark-to-market basis.

FINRA’s potential culpability stems from the fact that they liquidated their own ARS holdings in 2007. I have asked repeatedly and will put forth once again, for the benefit of those thousands of investors and billions of dollars:

-what was the exact trade date of FINRA’s ARS liquidation?
-through whom did they liquidate their ARS position?
-what price were they paid for their ARS position?
-did they possess material non-public information about the ARS market failing and act upon it?

The U.S. attorney and SEC are investigating executives from Lehman (Gia Rys, Alex Kirk) for potentially front running the ARS market in 2007. Will we ever find out if FINRA did the same? FINRA is charged with protecting investors. They certainly failed to protect investors in Auction-Rate Securities.

4. Given the fraud involved in the marketing and distribution of ARS, I am blown away by the fact that the SEC, now headed by Ms. Schapiro, blessed the marketing and distribution of the new version of municipal ARS, known as x-Tender, or henceforth called Porky Pig here at Sense on ¢ents. Please see my post earlier today, An Auction-Rate Pig by Any Other Name Is Still a Pig.

Sad but true, as we enter the Brave New World of the Uncle Sam economy, investors need to remain diligent and should not assume that regulators are necessarily protecting them.

LD

U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s

Posted by Larry Doyle on May 21st, 2009 11:34 AM |

The Wall Street Journal reports this morning Lehman Role Probed in Selling Securities:

The Justice Department has questioned several former executives at Lehman Brothers Holdings Inc. as part of its criminal investigation into whether they sold supposedly safe, liquid securities to clients while knowing that the market for the securities was drying up.

Prosecutors from the U.S. attorney’s office in Brooklyn and lawyers from the Securities and Exchange Commission in recent weeks interviewed several former executives who ran Lehman’s auction-rate-securities business, these people said. Auction-rate securities are short-term debt instruments in which the interest rates reset at periodic auctions.

The inquiry centers on whether Lehman employees defrauded customers as the market for these securities broke down in 2007. Authorities want to know if Lehman executives got these auction-rate securities off the firm’s books and into client accounts at a time in which the securities were becoming hard to sell, according to the people with knowledge of the matter.

Authorities also want to know if executives knew the market was in trouble and sold their own personal holdings of auction-rate securities, which could constitute insider trading, according to the people. (LD’s highlight)

I wrote on January 16th, “Let’s Really Question Ms. Schapiro.” In that post, I was raising the same questions about FINRA that the U.S. Attorney is now raising about the Lehman executives. I wrote:

Additionally, as of the end of 2006, FINRA acknowledged that the assumed portfolio held a cool $647 million dollars in Auction Rate Securities!!!

For those not familiar with Auction Rate Securities, this sector of the market totally imploded last Spring leaving institutional and individual investors holding the bag. While many institutional investors were made somewhat whole via settlements from the larger broker-dealers, many individual investors remain holding the bag as smaller broker-dealers, who did not necessarily underwrite these securities but did distribute them, have not been forced to make clients whole. WOW!!!

Are you kidding me!!?? The main regulator of the financial industry happens to be an investor in securities which virtually every Attorney General in the country is going after every Wall Street institution for improper marketing and distribution!! Are we looking at gross negligence, ignorance, incompetence or all of the above?? The question that MUST be answered is what has FINRA done with these Auction Rate Securities. Do they still own them? Did they liquidate them? If so, when and at what price? How was the sale negotiated? So many questions.

Over and above that, given that Ms. Schapiro is the chief executive of FINRA, don’t you think it would have been appropriate for her to address which hedge funds, fund of funds, and private equity shops were in FINRA’s portfolio? FINRA’s Annual Report categorically states its’ investment committee addresses any potential conflicts of interest. The public deserved to have this topic openly addressed during Ms. Schapiro’s hearing. WHY? For the simple reason that FINRA is feeding from the very same trough it is supposed to be regulating.

I followed this post up with numerous other posts raising the same questions. On March 31st, I wrote “Before Any Fraud Ensued,” in which I aggressively put forth:

Given that there is public acknowledgement by a federal judge that a fraud had ensued in the marketing and distribution of ARPS, let us return to the case Sense on Cents has been highlighting. FINRA’s Annual Report for 2007 publicy records that FINRA owned $647 million ARPS at year end 2006.

The questions that need to be answered:

1. Was FINRA defrauded in the purchase and sale of their bonds?

Note from LD: I have subsequently unearthed, in reading NASD Annual Reports from 2003-2005, that FINRA assumed the ownership of their ARS holdings from NASD. I highlighted as much in my post, “NASD Knew Auction Rate Securities Weren’t Cash”

2. If FINRA has sold their bonds subsequent to the publishing of that report in April 2008, to whom did they sell them? at what price? on what date?

Note from LD: The Bloomberg article from April 30th, FINRA Oversees Auction-Rate Arbitrations After Exit offered the following color addressing FINRA’s sale of their ARS holdings:

Finra, responsible for educating and protecting investors, owned as much as $862.2 million of the debt before exiting the market in the spring of 2007, less than six months before auctions began to fail, according to spokesman Herb Perone.

3. Did FINRA have material non-public information at the time of sale, if in fact they sold them? Did they act on that information?

Note from LD:  Today’s WSJ article is further acknowledgment that the Auction Rate Securities market was failing in 2007. FINRA first apprised investors of concerns in the ARS sector in Spring 2008. If in fact the ARS market was failing in 2007, the pressure on FINRA needs to increase. FINRA must release the trade information on their sale of ARS. Without that information, how can the investing public have any confidence in the integrity of FINRA and its procedures. Returning to my March 31st post:

Let’s put this into layman’s terms. FINRA was supposed to be overseeing and regulating the casino on Wall Street. In the process of regulating the casino, it appears that they put some of their own chips into one of the games. That game, ARPS, turned out to be a fraud, as publicly acknowledged by U.S. District Judge Lawrence McKenna in this case with UBS.

DID THE SECURITY GUARD, FINRA, PROTECT THE OTHER PATRONS AS REQUIRED OR DID THE SECURITY GUARD PROTECT HIS OWN INTERESTS TO THE DETRIMENT OF THE OTHER PATRONS?

Now here we are on May 21st, 2009. The questions that the U.S. Attorney is looking to get answered by Lehman executives are the EXACT questions that FINRA executives also should be compelled to answer.

Do you think representatives from the U.S. Attorney’s Office, the SEC, and defense counsel may also want to know the answers to these questions as well?

LD






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