More SEC Excuses

“We use virtually all our resources to pursue fires,” the
Securities and Exchange Commission’s enforcement chief, Linda
Thomsen, said in draft testimony obtained by Bloomberg for a
Senate Banking Committee hearing today. “Additional resources
would give us the capacity to pursue smoke before it becomes a
fire.”

It's a great line. It's even true, but it has always been true. The SEC is always at the scene, late, when the building is engulfed in flames.

Will more money make them faster? Maybe. I have always said that they were understaffed and overworked. But maybe they should work smarter, reallocate resources and stop wasting weeks of resources on 10,000 bookkeeping errors.

More to the point - as right as Ms. Thompson might be, that is not an excuse for missing Madoff. SEC examiners were on site. FINRA examiners were on site. Multiple times. They just missed the fraud.

It had nothing to do with resources.

Wachovia employees whacked by Wells Fargo

Corporate retribution is an understatement. Changing firms is a fact of life in the brokerage industry. Firms offer their competitors' brokers bonuses as forgivable loans to leave, and they all do it. Now Wells Fargo has apparently decided to punish brokers and staff who left Wells Fargo to go to Wachovia.

Wells Fargo got the opportunity to smack its former employees when it purchased Wachovia. And retribution is tough - Wells fargo promptly fired 175 Wachovia employees who had previously left Wells Fargo to go to Wachovia.

They even have a list, called the "conflict employee summary" of the emploess when they wanted to can. And Investmentnews reports that brokers are among those being fired.

It will be interesting to see what happens with the U-5 and the forgivable loan repayments. I hope Wells Fargo has a decent reserve for litigation costs, but retribution can be costly.

FINRA Claims No Jurisdiction over Madoff Fraud?

FINRA defends its role in Madoff scandal | Reuters

"None of the fraudulent activities that have been alleged deal with the activities of the broker-dealer or come under the jurisdiction of FINRA."

Reuters provides this quote which it claims comes from an email from FINRA. Interesting timing, on the eve of Mary Shapiro's confirmation hearings.

Reuters is reporting that there is an email from FINRA floating around. There is nothing at FINRA's web site. I have never seen, nor heard, of FINRA or its predecessor, the NASD, sending out press releases by emails.

So, I don't have the email, but apparently Reuters does, and the Financial Times does. FT has the story completely backwards, claiming that there is a gap in regulatory coverage, which allowed the fraud to go on. FT is apparently drinking the FINRA cool aid, since the fraud was run through the broker-dealer, and if it wasn't run through the broker-dealer, the states and the SEC had jurisdiction over the operation.

It is true that FINRA does not have jurisdiction over investment advisers, but Madoff's firm was NOT a registered investment adviser. Madoff ran his entire operation from the broker-dealer. That puts his advisory business under the jurisdiction of FINRA - in fact, running an investment advisory business at a broker-dealer without registration as an investment advisor is a violation of FINRA rules!

He had his advisory clients mixed in with his broker-dealer client. Their money and investments were all in the broker-dealer.

This is not the case of there being two separate operations, one under SEC jurisdiction and one under FINRA jurisdiction. FINRA has jurisdiction over the broker-dealer. And to claim that the broker dealer was not involved is just plain wrong.

The broker-dealer was clearing the trades, it was executing the trades (to the extent any trades actually existed) and it was carrying the accounts for many of these customers. FINRA clearly had jurisdiction over the entity that was putting out the account statements, and holding the customer funds. FINRA was reviewing the entire operation's financial statements.

According to the SEC and the United States Attorney's office, and information that we have obtained during our investigation, Madoff only had one financial operation, his broker-dealer. He ran his investment advisory business through the broker-dealer. He gave investors account statements that were created by the broker-dealer. Investors funds were held at the broker-dealer.

The broker-dealer has been shut down because Madoff ran his scheme through it.

The SEC has alleged that Madoff and the broker-dealer, operated a Ponzi scheme, and violated the federal securities laws. They have shut down the broker-dealer because of this alleged fraud. The SEC has also alleged, quoting from their court papers in support of an injunction - "[t]hrough the investment adviser services of BMIS [Madoff's broker-dealer] Madoff has conducted a ponzi-scheme, whereby he has false [sic] represented to investors that returns were being earned on their accounts at BMIS..."

That alleged conduct is directly under FINRA's jurisdiction. FINRA is the primary regulator for the broker-dealer. FINRA is responsible for oversight of its account statements, which the SEC alleges were fraudulent. FINRA is also responsible for reviewing the firm's financial statements. If the customer account statements were fraudulent, the firm's financials were fraudulent, since they incorporate financial information from the customer accounts. In order to produce fraudulent account statements, the firm's back office and clearing operations had fraudulent information.

While it may be true that no one told FINRA that there was a Ponzi scheme going on at Madoff's broker-dealer, clearly the allegations "deal with the activities of the broker-dealer or come under the jurisdiction of FINRA."

If anyone has this email I would love to receive a copy. Either Reuters is misunderstanding, the SEC is wrong or FINRA is fibbing.

SEC Approves FINRA Ban on Motions to Dismiss

Brokers and brokerage firms have lost additional rights today, as FINRA announced that the SEC has approved FINRA's rule change which will virtually ban all motions to dismiss in FINRA arbitrations.

No matter what your legal defense, unless it is eligibility or factual impossibility, you cannot make a motion to dismiss, and you must go to a hearing.

This a shame, Without any evidence of abuse, other than convenient antedotes, FINRA proposed this rule, which materially alters the playing field in arbitration. Now every respondent must defend himself in any arbitration where any claimant cares to name him.

It is amazing how much the industry will put up with. This rule change is going to codify the practice that FINRA has condoned for years - we do not grant motions to dismiss. The claimant gets to decide who is forced to spend money to defend themselves, and once a defendant decides to name a respondent in a case, he is financially committed to defend himself through the discovery process and a hearing regardless of the merit of his legal defenses.

Just wait - next up, a claimant's lawyer will name John Thain in the next Merrill suit, along with every other control person at Merrill. They cannot move to dismiss, they will be forced to participate in discovery.

It is truly a shame. First FINRA ignored the law of venue and jurisdiction, then they decided that they did not have to abide by the decisions of their own arbitrators, then they removed the statutory right of attorneys to issue subpoenas, and now they are guaranteeing that hundreds of thousands of dollars will unnecessarily be spent defending meritless claims.

And outsiders say that FINRA is in Wall Street's pocket? Only one who is completely uninformed could reach that opinion.

SEC Bashing Reality Check

Bruce Carton has a great article that examines the myth of the SEC being too cozy with the industry and reaping huge Wall Street jobs when they leave the Commisssion.

Time for a Brief Reality Check in the SEC Bashing

Shapiro to Face Tough Questions at Confirmation Hearing

With the mainstream press finally catching on that FINRA, not the SEC had primary responsibility for the oversight of Madoff's brokerage firm operations and financials, Shapiro is going to have a tough time with her confirmation hearings.

Let's hope that Schapiro doesn't decide that giving up her million dollar plus job for the $150,000 that the SEC Chair gets is not worth the aggravation. There are issues with her nomination, but none have anything to do with her directly.

SEC Nominee to Face Tough Questions at Confirmation Hearing

Two Views of Shapiro as SEC Chair

I am a bit ambivalent about Mary Shapiro becoming the SEC Chairman. On one hand, I think she has the experience and ability to do the job, and certainly did a great job as the head of the NASD and FINRA. An added plus is that she has successfully steered the NASD and the NYSE through their merger - and the new SEC Chairman is going to have to deal with something similar.

But what troubles me is the message that is being sent. Pundits can bash the SEC all day long for the Madoff Mess, but the reality is that the first line of regulation was FINRA, Mary Shapiro's organization. Shapiro and her executives give great speeches about their regulatory goals. They are all very impressive when you see them at a conference or read their speeches. But in practice, not so much. FINRA has some serious problems on the front lines.

Those problems are systemic, and troublesome, and made even more troublesom when one realizes that the FINRA Staff, who conducted at least 8 examinations of Madoff's brokerage firm, did not find any significant misconduct, dropping fines on him for $7,500 and $8,000 at a time.

The entire Madoff Mess will take years to shake out, but with FINRA in the middle of all of this, is Mary Shapiro the right one to take the helm at the SEC?

Steven Pearlstein at the Washington Post doesn't think so. In his column Obama's SEC Pick is No Joe Kennedy Perlstein argues that Shapiro would be a great pick at any other time, but not now. He argues that we need someone from the outside, to shake theing up, and to fix "the center of a failed regulatory process fo the past two decades." He makes a number of good points.

The Editors at TheCorporateCounsel.net blog diagree, and offer Incoming SEC Chair Shapiro: A Rebuttal. They point out Shapiro's experience, level-headedness, and even her "insider" status, as in "insider" in the regulatory world, rather than a Wall Street Insider, which she clearly is not.

The SEC needs an overhaul. While I have every confidence that Shapiro's experience will enable her to successfully orchestrate that overhaul, I fear that the Madoff Mess, and the yet to be publicized FINRA Failings, are going to overshadow, and undermine those efforts.

They should have lasted at least a month

Culture Clash: Broker Chief For Merrill Quits BofA - Thain, who wound up as president of the BofA/Merrill wealth management division, announced that Robert McCann, the head of brokerage at Merrill, and then to BofA, is leaving.

That raises a ton of questions about the acquisition. If BofA couldn't hold on to McCann, how does it expect to hold on to the rest of the field?

This was not unexpected. Despite what some outside the field might think, banks and brokerage do not mix well. Different mind sets, and there has been a clash at every brokerage-firm-owned-by-a-bank that I have ever been involved with.

How long does BofA have to keep Merrill before it annouces a spin-off of its "brokerage unit"?

Mixing Regulatory Failures is Wrong

In an effort to come up with a New Year angle, the LA Times calls 2008 the end of the Masters of the Universe era on Wall Street. Fortunately, the fact that the Bonfire went out in March of 2000, nearly 8 years ago does not undermine the real point of the article - Washington needs to fix this mess.

Blaming the Fed for the losses at the investment banks makes no sense, since there is a difference between a bank and an investment bank. A huge difference, not the least of which the identity of the regulator. Banks are regulated by the Federal Reserve. Investment banks are regulated by the SEC and FINRA.

And calling the piece Wall Street Follies when the main point of the article is subprime lending in the housing market, only demonstrates a misunderstanding of our financial system. Banks made those loans, not Wall Street.

Of course, Wall Street repackaged those loans into securities, and this may all be a distinction without a difference. However, pushing the blame onto the wrong entities clouds the enormous nature of our current problem - it was a failure of Treasury, the Fed and the SEC that leads us to where we are, and a failure that lasted for many years.

We find ourselves where we are because of the Four Horsemen of the Apocalypse - Paulson, Bernanke, Cox and Bush, so the distinctions probably don't matter. They all failed at their mission.

Cox's Damage to the SEC

We didn't need Reuters to tell us that the SEC has had a rough time during Chairman Cox's reign, but their article yesterday also provides a very detailed examination of the Commission's failings during the last few years.

While the problems at any agency or corporation are often placed on the leader of that entity, too much is blamed on Cox, who was not the Chairman during most of Madoff's Mess. Nor was he the Chairman while Enron was cooking the books.

So, blaming Cox many not be justified, but a closer examination of the SEC, what it does, and how it does it, is certainly in order. The SEC has always been the agency that closes the barn door after the horses are long gone, but to have missed so many frauds, so much misconduct over the years is inexcusable.

And I don't agree with the WSJ op ed column that blames the SEC-Wall Street revolving door as the issue. As Bruce Carlton properly points out in Compliance Week, there is no such door. Sure, some SEC executives go to Wall Street when the leave the Commission. No doubt. But the rest of the Staff isn't looking to slack off in order to get a big job. The Enforcement Staff that I have dealt with over the years were zealous - and usually accused of trying to make a name for themselves as a securities litigator, not as a patsy for the securities industry.

The End of the Financial World as We Know It

Great roundup of the current financial crisis by Michael Lewis in the NYT. I have minor disagreements with minor portions of this op-ed piece, but overall a great summary of what went wrong, and why. Madoff, Freddie and Fannie, Lehman, the SEC, and more.

The End of the Financial World as We Know It

One Thing BigLaw Gets Right

I don't want to be marked as a BigLaw Basher. Well, I am, but it is the business model as it applies to most work, not the people. Here is something that BigLaw does better than most; pro bono. The National Law Journal's varied pieces on "Pro Bono Awards" points to the pro bono work of BigLaw, and they certainly do a good job in that area.

Congratulations to Holland & Knight, Mayer Brown, Proskauer Rose, Manatt Phelps, Pillsbury Winthrop, and Howard Rice Nemerovski, the firms and projects profiled in NLJ's Pro Bono Awards.

SEC Investigates More Ponzi Schemes

The SEC is investigating two other potential Ponzi schemes, according to Bloomberg.com

On case may involve as much as a billion dollars in losses.

Thanks to Securities Docket for the heads up.

Margin Debt Down - ETrade's Doing?

Margin debt in retail investors' accounts has declined 37% from 2007 through the end of November, 2008.

The WSJ is attributing it to an intentional move by investors, to reduce margin obligations in light of the recession.

I am not so sure. A significant part of that decline must have been caused by the overly aggressive margin liquidations by ETrade, Ameritrade and some of the other online brokers, which wiped out a significant amount of investor assets.

Still, debit balances in margin accounts for customers of NYSE-member securities firms fell to $201.48 billion in November, the most recent data available, from $322.78 billion at the end of 2007.

How much does the Madoff Mess add to that decline?

SEC Investigates More Ponzi Schemes

The SEC is investigating two other potential Ponzi schemes, according to Bloomberg.com

On case may involve as much as a billion dollars in losses.

Thanks to Securities Docket for the heads up.

Madoff Trustee Seeks Broad Subpoena Power

With his 28 million dollar warchest, it looks like Madoff's SIPC Trustee is going to be spending it. According to this article in the NYT, he is asking for extremely broad subpoena power from the court, and given the scope of the fraud, I don't doubt that he will get it.

We already have the FBI, the US Attorney and the SEC conducting investigations. Along with the SIPC Trustee, they will be tripping over themselves.

And a word to the wise - regardless of what your involvement is in this Madoff Mess, consult counsel before speaking to anyone about any of this. This is not a game, and the Trustee will be actively seeking to EXCLUDE claims, since he is not going to have enough money to go around.

Updated Madoff Investor List

There is stil a lot of double counting in the list, but the WSJ has updated it. And, they are calculating damages from the high point, not the amount of money originally invested.

I am not saying that is wrong, but it is. If you invested $500,000, and Madoff told you in account statements that there was 2 million dollars in your account, and now there is zero, you lost two million dollars.

However, legally, you lost $500,000 plus interest or a reasonable rate of return.

Not that it makes a difference to the investor, since he still feels a 2 million dollar loss, but it will make a difference to the courts, and arbitration panels, and SIPC.