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Posts Tagged ‘Auction Rate Securities scandal’

Auction Rate Security Anxiety Continues

Posted by Larry Doyle on December 29th, 2009 10:03 AM |

Still they wait.

$150 billion dollars.

Thousands of investors unable to access THEIR funds frozen in Wall Street’s greatest fraud, that is the world of auction-rate securities.

While an initial court ruling against Union Bank of Switzerland defined the sales and distribution of auction-rate securities as a fraud, recent court rulings have shifted the burden of responsibility onto investors.

When I worked on Wall Street, I was never involved directly or indirectly with the sales or trading of auction-rate securities. That said, I understand full well the explicit and implicit guarantees that brokers and salespeople made in distributing this product. The fact that those entities which distributed ARS have not been held to full and total account is an unspeakable travesty. The lives of investors who have been dramatically impacted get little to no attention from the media. Shame on them.

Our federal financial regulators housed within the SEC are nowhere to be found. FINRA remains in bed with the industry and would just as soon not draw attention to its own liquidation of $647 million ARS in mid-2007 as the market was failing.

Days, weeks, months, and now years pass. Where is the justice and retribution for those ARS investors still frozen and unable to access that $150 BILLION!!! (more…)

Attorney Representing Amerivet Securities Makes Claim FINRA Insider Confirms Investment in Madoff

Posted by Larry Doyle on September 4th, 2009 1:20 PM |

Did we just find the smoking gun which indicates that FINRA (Financial Industry Regulatory Authority) actually invested in the Madoff Ponzi scheme?

I was on a panel last evening on America’s Nightly Scoreboard on Fox Business News (the entire transcript can be found at this link). The topic was one which regular readers of Sense on Cents are most familiar, that being FINRA.

The show is hosted by David Asman. Panelists included Richard Greenfield, an attorney representing Amerivet Securities in its suit against FINRA; former SEC chair Harvey Pitt; Madoff Victims Coalition head Ronnie Sue Ambrosino and her husband Dominic; and yours truly.

I commend the host of the show, David Asman, for being thorough, professional, balanced, and aggressive in addressing the topic. We covered a number of angles including:

1. Amerivet Securities complaint vs. FINRA

2. Mary Schapiro’s tenure and compensation at FINRA

3. FINRA’s investment portfolio, including its sale of auction-rate securities.

4. Did FINRA invest in Bernard Madoff’s Ponzi scheme?

There were a few bombshells that came out of our discussion, including a claim by Mr. Greenfield, the Amerivet Securities attorney, that “somebody well-placed within the organization (FINRA) that told us, in no uncertain terms, there was an investment with Madoff.”

Additionally, former SEC chairman Harvey Pitt provided a qualified endorsement of FINRA opening its books and records in an acknowledgement of the need for greater transparency.

I am happy to provide the transcript of the dialogue which encompassed these two momentous statements:

ASMAN: Harvey, for example, I used to work at the “Wall Street Journal” and we had very strict restrictions about what we could buy, how long we could hold stocks if we bought it, and how we had to disclose it and that sort of thing. It doesn’t seem at least that those disclosure policies apply to FINRA, at least in the case finding out whether they invested with Madoff.

PITT: I don’t — there has been a fair amount of, shall we say, opacity with respect to what the investment activities are and the like. In a real sense, I think that’s probably ill-advised for an enterprise that has regulatory responsibilities.

But so putting that to one side, I do think that people are entitled to know where their money is coming from, where their money is going, what it is being spent and the like. The fact of the matter is the SEC does oversee all these operations. It does overlook all these things. FINRA has been under the microscope at the SEC for many, many years, long before Mary Schapiro got to the SEC.

ASMAN: I want to bring in other parties. But I want to go back to Counselor Greenfield.

Richard Greenfield, how did you get information suggesting that indeed FINRA was investing with Madoff?

GREENFIELD: Well, we got the information, number one, in two different ways. Number one, it has been rumored through many people on Wall Street that there was an investment either through a feeder fund or some other means. Secondly, we also got information from somebody well-placed within the organization that told us, in no uncertain terms, there was an investment with Madoff.

ASMAN: OK. All right. So I think it’s fair to say that FINRA owes the public some answers here.

So joining us now with — are some people who are demanding answers. Larry Doyle, a Wall Street veteran, 23 years, who currently operates his own web site, Sense on Cents — “sense” with an “S” and “cents” with a “C” — which is geared to help people navigate the landscape.

Ronnie Sue and Dominic Ambrosino, good friends of “Scoreboard”, they are Madoff victims who are mobilizing a campaign for greater transparency.

Thanks for coming in.

RONNIE SUE AMBROSINO: Thank you.

ASMAN: Larry, first to you. What do you think about Harvey’s description of the situation?

LARRY DOYLE, WALL STREET VETERAN & SENSE ON CENTS WEB SITE OWNER: I would say two things in regard to the former chairman’s statement. First and foremost, Madoff did not become a registered investment advisor until 2006. FINRA obviously wasn’t formed until 2007. FINRA’s parent, that being, FINRA was formed from the regulatory arms of the New York Stock Exchange, and the NASD.

ASMAN: Right.

DOYLE: The fact is, the NASD did have oversight of Madoff, and so there is an obligation by, to look into the NASD’s activities because, at that point, it was just a broker-dealer.

ASMAN: Have you formulated your own opinion whether there was a conflict of interest here?

DOYLE: Without a doubt. Without a doubt. The fact of the matter is FINRA is a big-money organization. We know they invested in hedge funds, fund of funds, private equity. And they also had a significant investment in auction rate securities, which is sector of the market that has been designated as a fraud by federal judges. The fact of the matter is we know, and have learned from FINRA, that FINRA exited their auction rates securities position, $647 million worth, in mid 2007, as the market was failing, and when they were supposed to be protecting investors.

Further along in the dialogue, we engage in the need for FINRA to open its books and records:

ASMAN: That is great point, Ronnie Sue.

And, Larry, it goes to the point that a lot of people are looking from the outside at what goes on inside in Wall Street and Washington. It’s that Wall Street, Washington nexus. They see all these folks kind of related with each other. The SEC related with FINRA, and related with NASD. You look at Mary Schapiro’s career and you see that. They can miss things because they’re only talking to each other.

DOYLE: I think the term there is incestuous. So the fact of the matter is Washington has an opportunity through this financial regulatory reform to bring total transparency.

ASMAN: How would you do that? Open the records of FINRA?

DOYLE: Open the books. What — what individual in America right now wouldn’t make — doesn’t it make sense for FINRA to be forced to open their books and records, full and total transparency? The markets demand it. The economy demands it. Ronnie Sue and Dominic demand it. For market confidence.

ASMAN: Harvey, if we demand it of banks, why not FINRA or for that matter, why not the Fed? We have a lot of people in Congress saying everybody needs to open the books, everybody needs to be transparent?

PITT: Well I think there’s no question that we need far more transparency throughout the regulatory environment, both for those regulated and those doing the regulation. That, I think, is a very clear proposition, and one that I’m hopeful will be addressed in whatever new legislation comes about.

ASMAN: So we have to leave.

But, Harvey, does that mean you’re in favor of FINRA opening the books so we can find out if they invested in Madoff?

PITT: I’m in favor of there being far more transparency, permitting privacy concerns to allow certain information to be withheld, as long as somebody is overseeing what they’re doing.

I am thrilled that these issues which Sense on Cents has been focused on for the last 8 months are coming into the public light. That said, there remains plenty of work left to do to generate the truth, transparency, and integrity that our markets, economy, and country so badly need.

You can help by spreading this story amongst friends and colleagues. While the Amerivet complaint vs. FINRA will be addressed in the Washington D.C. courts, the fact is the issues revolving around FINRA and regulatory transparency need to be highlighted in the court of public opinion.

What do you think?

LD

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Related Sense on Cents Commentary

Madoff Victims Call Out FINRA (September 3, 2009)

Amerivet Complaint Against FINRA Alleges Madoff Investment (August 25, 2009)

How Courageous is Mary Schapiro? (June 4, 2009)

U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s (May 21, 2009)

FINRA Is Supposed to Police the Market (April 29, 2009)

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

Does the Palace Guard Have No Clothes?

Posted by Larry Doyle on April 14th, 2009 5:30 AM |

I eagerly await the soon to be released 2008 Annual Report of the Financial Industry Regulatory Authority (FINRA). Prior to its release and in light of all the turmoil on Wall Street over the last 24 months, I thought it may be timely to review the mission and some recent history of the “palace guard,” known as FINRA.  From the FINRA website, we learn:

The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 656,000 registered securities representatives.

Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.

While FINRA promotes investor protection and market integrity, the simple fact is there are still thousands of investors with an estimated hundred  BILLION dollars locked up in Auction Rate Securities. The ARS market has been designated as a fraud. FINRA not only did not protect the ARS investors, but participated in the ARS market as an investor themselves.  At year end 2006, FINRA had a $647 million position in ARS. Did they sell them? When? To whom? What price? If they did sell their ARS position, did they possess material non-public information and act upon it?  Will the 2008 FINRA Annual Report provide answers? I can only hope.  Aside from a few state attorneys general, who is truly looking to help these investors?

FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. It also performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange. (more…)






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