It's Official - FINRA is the New Regulatory Organization

Effective today, the regulatory arms of the NASD and the NYSE are merged, and FINRA comes to life. The headline above links to the press release from this morning announcing the change.

Interesting side note - the entire NASD site is now in the domain finra.org, every document has a finra.org URL, and ever page uses the FINRA logo. You gotta admire the determination of the NASD and its web site developers. Unless they did a great deal of planning for a name change years ago, that was an enormous amount of work to get everything changed over to the new name.

Not bad for a quasi-governmental agency.

Now we will see how the merger affects firms and brokers. Lets keep our fingers crossed that the transition is as smooth in real life as it was on the web.

Manipulate Stocks, Go To Jail

For those of you who think that securities fraud is not a big deal, or who think it is "fun" to attempt to pump stocks on the Internet, here is a little lesson.

The "Vicemail" defendants are going to jail. You remember vicemail - the defendants left voicemail messages on thousands of answering machines, making it appear that the caller had reached a wrong number, but leaves a stock tip.

The husband and wife behind the scheme settled with the SEC, and last week pled guilty to securities fraud charges.

What's In A Name - Complaints About SIRA Leads To Complaints about FINRA

The NASD recently announced that they were changing the name of the new regulatory agency which will arise from the merger of the NASD and NYSE. Originally named SIRA, (Securities Industry Regulatory Authority) the acronym apparently sounds similar to an Arabic word referring to the biographies of the Prophet Muhammad and could be considered offensive to some people.

The new name, Financial Industry Regulatory Authority, or FINRA was just announced. And the Financial Planning Association, which has a particular problem with the NASD and the entire securities regulatory scheme in this country is now objecting, saying that the name implies that the self-regulatory organization will have jurisdiction over more than just the brokerage industry.

Thankfully, the NASD is not going to budge, based on this comment -

I would need a degree in psychology to comment on the level of paranoia in this press release," said NASD spokesman Howard Schloss

referring to the Financial Planning Associations press release announcing its objection to the new name.

Enough already. Get the merger approved.

Mackey's Defense and the WSJ Attack

Whole Foods has now added a section to the FAQ at its corporate website, "Who is "rahodeb" and why does the FTC quote this person?" The posting is apparently written by Mackey, and attempts to explain his actions in his Internet postings.

While Mackey's attempt to get his side of the story out is almost as questionable as his 8 year posting history, one has to wonder what the editorial board at the Wall Street Journal was thinking in its recent editorial. The editorial has an odd and almost juvenile tone, and downplays the entire episode. It also goes out of its way to take a shot at the SEC - "The SEC is now going to unleash its army of ambitious 27-year-old lawyers to read these blog posts to see if Mr. Mackey let slip any insider information."

First, the messages that we are discussing is Mackey's postings at a Yahoo! Finance Board, not at Mackey's blog. One would think that the editorial staff of a major newspaper would be aware of the difference. I suppose it is not an important mistake, but it is significant in the context of this discussion, since Mackey does have a blog, to which he posts using his own name.

Second, the SEC is looking at more than the leaking of inside information, as discussed here. There are a number of issues when the CEO of a corporation makes public statements - Reg FD comes to mind, as well as market manipulation; not to mention corporate stupidity. Releasing inside information is probably the least of the potential problems.

Third, an SEC inquiry is something that the WSJ should be applauding, not demeaning. We want the SEC to take a look and see if there was any inside information being leaked through those posts. While I have significant legal issues with the application of Reg FD to this posts, the SEC should look into it. And the concept that he is bashing a competitor while his company is planning to buy the stock is another topic that requires some investigation and review.

There are a number of posts at the board that warrant a second look. I am not saying throw an "army" at the issue, but no one should have a problem with the SEC putting one of its investigators to the task of reading the posts, making some independent judgments on their purpose and effect, and doing some followup investigation if warranted.

The snarky comment referencing the SEC's inability to hold onto staff members is simply inappropriate and lessens the impact...if any...of the entire editorial.

Mackey did make it to number 1 on TheStreet's Five Dumbest Things on Wall Street last week, with the title "Message Board Bandit"


UPDATE - Stockpickr has a collection of the Best of Mackey - selected quotes from his postings.

SEC Opens Informal Inquiry Of Whole Foods CEO Postings - WSJ.com

The WSJ and CNBC are reporting that the SEC has opened an informal inquiry into the online postings of Whole Foods CEO John Mackey about his company, and his competitor.

As mentioned earlier, Mackey has allegedly been posting comments on the Internet about his company and Wild Oats, a competitor, and he did so using a pseudonym. The postings have become important, as Whole Foods is attempting to purchase Wild Oats.

The postings provide fodder for an interesting number of securities law questions, but those are merely questions, not necessarily violations. For example, the SEC is reportedly looking at potential violations of Reg FD, or whether Mackey's comments contradict public comments from the company, or disclosure of confidential information.

But all of this speculation about the investigation overlooks an important point in the story thus far - Mackey posted using a pseudonym. He did not say who he was, and apparently gave no indication that he was in any way connected with the company. To those reading the internet forum where he posted, he was simply another interested user of the board.

It is therefore going to be unimportant, and meaningless, if Mackey posted information that contradicted information released by teh company. No regulator is going to seriously argue that the fact that some guy named "rahodeb" contradicts a press release from the company on an Internet discussion forum. Even the most gullible Internet user knows, or should know, that "rahodeb" knows nothing more than they do about the stock or the business of the company.

Which raises the question - can glowing comments by an anonymous interest posters be the basis for liability for the poster, and how far does that liability reach?

We know the answer for those who attempt to manipulate the price of a security - the answer is yes. Using any device to manipulate the price of a security violates 10b-5. But Mackey is not (yet) accused of attempting to manipulate the stock, and thus far, no one has indicated that anything he said was false.

We will keep an eye on this, because the questions, and answers, will change as the facts come to light. For example, today the WSJ reports that "rahodeb" commented on the company's financial projections that has not been disclosed, saying that eh company projected 12 billion dollars in sales for 2010, and added that he wouldn't be surprised if the number ends up being closer to 14 billion dollars. Depending on what else was said, and if this was in fact the posting, there could be a violation of Reg FD, if readers could figure out who the poster was.

Or, was he simply attempting to manipulate the price of the stock?

Interesting case.

The WSJ has collected some of "rahodeb's" posts here. The posting are still available on the Yahoo! board where the topic has, predictably, caused a raging debate.

Alias-Using CEO Bashes Competitor and Praises Himself

Most corporations stay away from Internet chat rooms and discussion boards. The thought of a public company posting comments and responses on a financial board regarding the stock would send shivers down the spine of most CEOs; not to mention their counsel.

In that context it was very interesting to learn that the CEO of Whole Foods has taken corporate interaction with the internet to a whole new level. It was revealed today that John Mackey, the chief executive officer of Whole Foods Market has been posting messages on the Yahoo! financial message boad for Whoe Foods over the past 7 years.

Bashing competitors - he said of Wild Oats: "The CEO, Perry Odak, had no food retailing experience prior to becoming CEO. Almost all the old OATS management has either voluntarily left or been driven out." and defending himself - "John Mackey is a fellow Texan that I know and like and I deeply resent the bashing he frequently undergoes on this board!"; Mackey is said to have posted over 1,000 messages on the board during 1999 to 2006.

Press reports quote him as saying it was "fun". Pretty odd conduct for a CEO, but the reaction was summed up quite well by a professor of business ethics:

For the head of one company to be using an alias to criticize another in a fairly prominent posting site seems to me not worthy of someone at that level of trust. What is he up to?" asked Buie Seawell, a professor of business ethics and legal studies at the University of Denver. "Any jerk can post anything on the Internet. But for the jerk to be the head of a corporation and to say he did it just for fun, that is just (baloney).

The End of Mandatory Arbitration?

Every few years, some group or another starts up the "mandatory arbitration is unfair" argument, and it looks like it is that time again.

CCH Wall Street has a column today regarding Congressional interest in ending mandatory arbitration in the securities industry. I won't repeat the arguments, most of us know them by heart.

There is no doubt that arbitration is a faster and less expensive method of dispute resolution. And there should not be any doubt that faster and less expensive benefits the party with fewer resources and less experience in dispute resolution. In customer arbitrations, that would be the customer...not the brokerage firm.

Of course, there are many benefits to the brokerage firms from arbitration, but my point is that customers benefit as well.

Studies like the one prepared by Daniel Solin and Ed O'Neill (a claimant's attorney and a claimant's expert witness) do nothing to shed light on the issue of "fairness" since they ignore the fact that 70% of all securities arbitrations are resolved by the mutual agreement of the parties.

But the real issue is what is the alternative to mandatory arbitration? Arbitration is a creature of contract. Without the agreement of both sides to arbitrate, there can be no arbitration. If Congress forces the industry to abandon arbitration clauses in customer agreements, will it also force the NASD and the NYSE to abandon their requirements that firms arbitrate disputes at the request of the customer?

We can't have it both ways. Either arbitration is mandatory for all parties, or it is not. It seems to me that investor groups want it both ways. They want to arbitrate when it suits them, and they want to go to court when that suits their needs better.

That is not the law of arbitration, nor should it be. If we are going to do away with mandatory arbitration, we should do away with it completely.

Of course that leaves us with the problem of the investor with $100,000 in losses who is forced to bring a court case, and can't, because the court process is too expensive.

Alternative Fee Arrangements Come to BigLaw?

The hourly fee arrangement for attorneys has been the standard and traditional method for paying for legal services. In recent years, many small firms, including my firms, have offered alternative fee arrangements to our clients. Alternative fee arrangements can take a variety of forms, including fixed-fee arrangements, discounted fees with bonus provisions for identified goals, minimum-maximum fee arrangements, and even contingency-based defense fees.

Each of the alternative methods, as well as the hourly method, have their own issues and problems, and it sometimes takes a creative client, and a creative attorney, to create a fee arrangement that works for all concerned. Smaller law firms have always had the flexibility to offer such alternative arrangements to their clients, and have been doing so for years.

Apparently BigLaw is starting to feel the pressure of ever-increasing associate salaries and the resulting ever-increasing hourly rate. Law.com has an article published today, Are Big Firms Warming Up to Alternative Fee Deals? that examines the use of such fee arrangements at the nation's largest law firms, with some interesting anecdotes regarding the use of performance driven fees.

Hedge Funds Suspend Redemptions

According to the WSJ, the sub-prime woes of some hedge funds have caused them to stop investors from withdrawing funds. Galena Street Fund announced it was suspending redemptions until it can liquidate assets. United Capital Assets Management has stopped redemptions in four of its funds. All of the funds are apparently heavily invested in subprime mortgages.

The WSJ reports that more hedge fund troubles are expected in coming weeks, as second quarter performance reports are sent to investors.

Time to review those hedge fund holdings and subscription agreements...

Outrage Over Libby

Editor & Publisher collects quotes from the major newspapers. Incredibly, not all comdemn this flagrent disrespect for our judicial system and the rule of law. Some of the better quotes:

The New York Times' Tuesday editorial: "Mr. Bush’s assertion that he respected the verdict but considered the sentence excessive only underscored the way this president is tough on crime when it’s committed by common folk ...

"Within minutes of the Libby announcement, the same Republican commentators who fulminated when Paris Hilton got a few days knocked off her time in a county lockup were parroting Mr. Bush’s contention that a fine, probation and reputation damage were 'harsh punishment' enough for Mr. Libby.

"Presidents have the power to grant clemency and pardons. But in this case, Mr. Bush did not sound like a leader making tough decisions about justice. He sounded like a man worried about what a former loyalist might say when actually staring into a prison cell."

The Washington Post, which had often mocked the court case, declares today: "We agree that a pardon would have been inappropriate and that the prison sentence of 30 months was excessive. But reducing the sentence to no prison time at all, as Mr. Bush did -- to probation and a large fine -- is not defensible. ... Mr. Bush, while claiming to 'respect the jury's verdict,' failed to explain why he moved from 'excessive' to zero.

"It's true that the felony conviction that remains in place, the $250,000 fine and the reputational damage are far from trivial. But so is lying to a grand jury. To commute the entire prison sentence sends the wrong message about the seriousness of that offense."

Seattle Post-Intelligencer: "President Bush's commutation of a pal's prison sentence counts as a most shocking act of disrespect for the U.S. justice system. It's the latest sign of the huge repairs to American concepts of the rule of law that await the next president."

The Dallas Morning News: "Perhaps the president felt he had nothing left to lose, given his unpopularity. But considering how much trouble the White House faces in regard to congressional subpoenas, the last thing this president needed was to further antagonize Capitol Hill regarding abuse of executive power."


Editor and Publisher has more.

Miscarriage of Justice? - Bush Commutes Libby Sentence

President Bush commuted I. Lewis Libby Jr.'s prison sentence yesterday.

With some calling it a correction of a miscarriage of justice, the only miscarriage of justice I see here is the arrogant belief of the administration that it is above the law.

Mr. Bush is quoted in the Times as saying “I respect the jury’s verdict...But I have concluded that the prison sentence given to Mr. Libby is excessive.” Forget that an experienced federal judge considered all of the evidence and imposed a sentence that was consistent with the law, Mr. Bush knows better, and simply ignores our judicial process to benefit his friends.

But this does provide a great defense strategy for the next big case that comes along. Sidetrack the investigation by having a crony lie under oath, the prosecutor is unable to prove his case, the crony gets convicted of perjury and the president commutes the sentence. Perfect.

Next we can ignore statutes and rules, and when the agency charged with enforcing those rules seeks enforcement, we can attempt to have the agency disbanded.

Oh wait, they tried that already.