RSS Feed
Twitter
Facebook
Email
HomeFINRA and ARS: Pot Calling Kettle Black
Posted by Larry Doyle on January 25th, 2010 2:34 PM |
Thanks to a loyal Sense on Cents supporter for sharing the most recent copy of Compliance Reporter, a publication of Institutional Investor, Inc.. The lead article this week, FINRA Readies Slug of Enforcement Cases, addresses the fact that FINRA:
is targeting a slew of enforcement actions across a range of areas, including reverse convertibles and auction-rate securities.
Oh boy, here we go again. FINRA talking tough about auction-rate securities. Additionally, FINRA further flexes its muscle by:
warning firms that strained layoffs and resources are no excuse to delay responses to FINRA’s request for document production requests.
This self-regulatory organization has truly got some set of balls talking about delayed responses to requests for documents and information. (more…)
An 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/
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…)
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
