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HomeHow Big Was Mary Schapiro’s Lie?
Posted by Larry Doyle on December 17th, 2009 2:55 PM |
Will our chief financial regulators be allowed to operate above the law?
That plea of immunity is the foundation of the FINRA defense in the complaint filed against it by Standard Investment Chartered. Recall that the very core of the Standard Investment Chartered vs. FINRA lawsuit is the premise that current SEC Chair Mary Schapiro and her then FINRA colleagues lied verbally and in a proxy statement about the details of a payment to FINRA member firms. FINRA paid 35k per firm and indicated that figure was the maximum allowed by the IRS.
I provided extensive details on this case in writing on October 22nd, NASDAQ Sale: Why Would Mary Schapiro and FINRA Execs Lie?
High five to Bloomberg’s Susan Antilla for doggedly pursuing this case. Susan reports on the hearing held yesterday on this case in United States Court in New York. Susan writes, Broker’s Lawyer Says FINRA Understated Offer to Firms,
A lawyer for securities firms suing the Financial Industry Regulatory Authority said sealed documents show its executives understated how much they could pay brokers in the 2007 merger that created the oversight body.
NASD, which became Finra after merging with the New York Stock Exchange’s oversight unit, could pay “something” from $70,000 to $111,000, Jonathan Cuneo, the lawyer for Benchmark Financial Services Inc. and Standard Investment Chartered Inc., said yesterday at a hearing, citing confidential Internal Revenue Service documents. NASD told brokerages in 2006 that IRS policy limited the payments to $35,000. (more…)
Mary Schapiro Has Some ‘Splainin To Do…
Posted by Larry Doyle on October 8th, 2009 4:03 PM |
Mary Schapiro
Big money makes for a very strange bedfellow. Is FINRA sleeping well these days? A pending lawsuit against FINRA would like to pull back the covers and check to see if the money in the FINRA mattress was allocated appropriately. Let’s enter the sitting room and take a peek into this corner of the FINRA household.
In the process of consolidating the NASD with NYSE Regulation to form FINRA, the NASD allocated capital proceeds to its member firms. This capital was generated via the initial public offering of the Nasdaq. Did the NASD, now known as FINRA, significantly underallocate capital proceeds to its member firms? This alleged underallocation, known as being ‘picked off’ on Wall Street, is the basis for a lawsuit brought by two FINRA member firms, Benchmark and Standard Investment Chartered.
Why am I concerned about the arcane inner workings and legal issues of a Wall Street self-regulatory organization? For the very same reason that I’m concerned about that regulator’s internal investment portfolio activities. Transparency or the lack thereof and the resulting confidence or lack thereof that the American public has in our entire financial regulatory system. Those goals strike me as worthy especially in light of the systemic risks embedded in an array of organizations which this regulator was charged to oversee. Yes, a large amount of exposure and transparency is badly needed at this point in our economic history. Against this backdrop, let’s navigate and see what we can learn about this lawsuit.
The law firms of Cuneo, Gilbert & LaDuca along with Greenfield and Goodman are representing the plaintiffs. From the former’s website we learn:
Along with our co-counsel Greenfield & Goodman, LLC, we currently represent members of the Financial Industry Regulatory Authority (“FINRA”) (formerly known as the National Association of Securities Dealers or “NASD”) in United States District Court and Court of Appeals litigation. The complaints, which are based on state law, allege that defendants, among other things, obtained the NASD members’ vote in support of the consolidation of NASD and NYSE Regulation through an inaccurate and deceptive proxy statement and solicitation process. (LD’s highlight) At issue in the suit is whether NASD could have distributed to its members a larger share of the approximately $1.5 billion of NASD members’ equity. As members will recall, NASD repeatedly asserted that the IRS imposed a $35,000 “hard cap” on what the NASD could pay its members.
Wow. With a $1.5 billion pie, we are talking big money. In light of that, a charge labeled as ‘inaccurate and deceptive proxy statement and solicitation process’ is aggressive especially for an industry’s regulatory organization. Whatever happened to embracing accuracy and clarity? Let’s continue.
Some documents from the litigation that shed light on the truth of these statements are now public. However, FINRA has insisted that the key fact – the amount the Internal Revenue Service (“IRS”) told NASD it could distribute – remain secret, that is, under seal.
Secret? Under seal? Those terms aren’t synonymous with transparent. I thought under the ‘change’ being promoted by the Obama administration transparency would be embraced. What this looks like is more ‘business as usual’ on Wall Street. Navigating further we learn,
>The IRS did not limit the payment to member firms to $35,000 as NASD and its officials insisted.
>The IRS did not issue a formal ruling on the payment to members until March 13, 2007 – approximately two months after the member vote on the bylaws occurred.November 21, 2006.
>NASD Board Minutes demonstrate that the NASD Board discussed the $35,000 limit stating, “regardless of the amount agreed upon, it was paramount that the figure not be subject to negotiation.”
At this juncture, if I could be so bold as to steal a line from Ricky Ricardo in engaging Lucy, I would say to Mary Schapiro who headed FINRA, “you got some ‘splainin to do.”
For any legal beagles and overachievers in the audience, I am happy to submit the following legal documents pertaining to this case:
Communications between NASD and the IRS
Communications Between NASD and NYSE
Rest assured, I will be monitoring developments in this case closely.
LD
NASD Knew Auction Rate Securities Weren’t Cash
Posted by Larry Doyle on May 11th, 2009 10:45 AM |
Everybody knows Auction Rate Securities (ARS) were cash or cash-like, correct? FINRA certainly did NOTHING to protect investors from the ARS sales and marketing scam perpetrated on investors.
FINRA spokesman Herb Perone would like to wash his hands and those of FINRA of any negligence or incompetence in regard to FINRA’s investments in Auction Rate Securities. The easiest manner of washing one’s hands is to point the finger at the entity which initially made the investment, in this case the NASD (National Association of Securities Dealers). If you recall, FINRA was formed in mid-2007 from the regulatory arms of the NYSE and NASD. In any event, Perone tries to deflect culpability on FINRA’s part in the recently reported Bloomberg story (FINRA Oversees Auction-Rate Arbitrations After Exit) highlighting FINRA’s sale of their Auction Rate Securities prior to the market’s implosion leaving thousands of investors and billions of dollars frozen. Bloomberg reports:
“The market was functioning normally when NASD was investing in these securities,” Perone said. At the time, auction-rate securities “were viewed as high-quality cash equivalents and as acceptable investment for institutions,” he said.
Perone further offers:
“It was for cash that we needed to have parked for a temporary period of time,” Perone said. “It was common to take cash you needed to hold and put it in auction-rate securities.”
If ARS were viewed as high-quality cash equivalents, why didn’t the NASD actually account for them in that manner? The NASD goes out of its way in its Annual Reports for 2003-2005 to highlight the fact that ARS were not cash or cash-like.
From page 38 of the NASD’s 2005 Annual Report, published on May 10, 2006:
Available-for-sale investments also include investments in auction rate securities, which are either preferred stock or bonds with interest rates that reset periodically, typically less than every 90 days, based on a Dutch auction process. Given the longer-term maturities of these securities, they are classified as available-for-sale investments, rather than cash and cash equivalents.
From page 30 of the NASD’s 2004 Annual Report, published on April 29, 2005:
Available-for-sale investments also include investments in auction rate securities, which are either preferred stock or bonds with interest rates that reset periodically, typically less than every 90 days, based on a Dutch auction process. Given the longer-term maturities of these securities, they are classified as available-for-sale investments, rather than cash and cash equivalents.
From page 27 of the NASD’s 2003 Annual Report published on June 7, 2004:
Available-for-sale investments also include investments in auction rate securities, which are either preferred stock or bonds with interest rates that reset periodically, typically less than every 90 days, based on a Dutch auction process. Given the longer-term maturities of these securities, they are classified as available-for-sale investments.
I have been questioning whether FINRA was negligent, incompetent or both in regard to their investment in ARS. FINRA could not have been negligent. Their parent organization, the NASD, lays it out in three separate Annual Reports that ARS were not cash or cash equivalents.
Thus, FINRA was merely incompetent in not protecting investors, as is its mandate!!
How may this be adjudicated? It is now speculated that Uncle Sam may establish a liquidity facility which investors can tap to get their money. This liquidity facility may be part of a larger government entity. I do hope this facility is enacted and that ARS investors can receive a timely return of their funds.
However, to whom does the obligation and cost shift? The American taxpayer. Once again, the taxpayer may pick up the tab for an activity (the sales and marketing of ARS by banks and investment managers) deemed a fraud by federal judges.
LD
