Is Wall Street on the Up and Up?

The core of that question resides within the regulatory oversight of our financial industry.  The American public is beginning to learn a lot about this financial regulatory oversight. How so? A month ago, SEC Inspector General David Kotz released a report, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (embedded here). Yesterday, the Wall Street self-regulatory organization, FINRA, released: Report of the 2009 Special Review Committee on FINRA’s Examination Program In Light of the Stanford and Madoff Schemes.

What did we learn from yesterday’s report? Plenty. For that, I commend all those involved in this effort. With all due respect to FINRA employees who have legitimately tried to fulfill their obligations to the best of their abilities, yesterday’s report is nothing short of a massive indictment of FINRA’s management, FINRA’s board, and the SEC which is charged to oversee FINRA. Why? Having read this report twice and studied critical components of it, FINRA is exposed as nothing more than a collection of crossing guards . . . said with all due respect to crossing guards. Have the supervisors of the crossing guards been so heavily influenced by Wall Street so as to render large parts of the FINRA mission ineffective? Many believe this to be true, including me.

Why so harsh? Let’s navigate and be a little more aggressive than the mainstream financial media in analyzing this report. In the process, I think you will appreciate my assessment and also realize there are many more questions which need to be answered.

The FINRA report is largely divided into the organization’s dealings with the financial frauds encompassing Allen Stanford and Bernard Madoff. Referencing the massive regulatory failings on FINRA’s behalf in these two cases, the authors provide recommendations which FINRA’s management will present for approval or ratification at the December 2009 Board meeting.

For purposes here, I will not regurgitate the numerous individual failings of FINRA examiners and management in each of these cases. Rather, I will highlight those failings which I find most egregious. In turn, I want to focus on highlighting the recommendations so the American public can truly understand how woefully inept, incompetent, and ill-prepared this financial self-regulatory organization has been and currently is to uphold its mission to protect investors. Against that backdrop, I will then lay out questions which I deem to be critically important for FINRA to answer if the American public can ever regain a degree of confidence in the oversight of Wall Street.

Stanford Case

1. In 2003, the Stanford broker-dealer generated 68% of its revenues from the sale of Stanford International Bank CD’s. Are you kidding me? Red Flag!! That finding did not prompt the examiner to dig deeper?!

2. A 2003 Anonymous Tip Letter laid out the Stanford scheme in detail.

3. In 2005, a FINRA examiner learned that the Stanford broker-dealer is paid an annual fee of 3% of the deposit sum for every CD. Another red flag! Standard practice would have bankers or securities salespeople earning a one-time fee of maximum .25%.

At this point, Stanford International Bank had raised approximately $1.5 billion in what would grow to a $7.2 billion scam.

With all due respect to FINRA employees who may have continued to look into Stanford over the 2005-2008 time period, truth be told FINRA did not further aggressively pursue this case until the Madoff situation broke in December 2008.

Madoff Case

1. FINRA largely limits its review of the Madoff scam to the 2003-present time period. Why not go back further? FINRA had longstanding oversight of the Madoff enterprise.

2. FINRA largely reduces the extensive relationships between Bernie Madoff and family members with FINRA to nothing more than a footnote. That footnote on page 46 provides a cursory approval of FINRA’s relationship with the Madoff firm and family. Why aren’t these relationships more deeply explored?

3. The report acknowledges what we always knew about FINRA having oversight of Madoff’s operation. FINRA representatives, including Mary Schapiro, have willingly and intentionally misrepresented the fact that FINRA had oversight of Madoff’s enterprise. Did Mary Schapiro perjure herself on this topic during her confirmation hearings to be Head of the SEC? Well, she may not have perjured herself, but she and others have willingly misrepresented FINRA’s required oversight of Madoff over the long time period when Madoff was strictly a registered broker-dealer and ran this massive Ponzi scheme within that framework.

4. FINRA failed to detect the full breadth of the relationship between Cohmad Securities and Madoff.  Bernie Madoff and his brother Peter owned 24% of Cohmad, and the Cohmad broker-dealer operated within the same office space as Bernard Madoff Investment Securities. Cohmad was largely a front for feeding customers into Madoff’s scam. The report provides:

Cohmad was registered as a broker-dealer and reported having approximately 750 to 850 customer accounts, which were held by and cleared through Bear Stearns Securities Corporation. These accounts usually generated roughly 300 transactions per month, mostly in equities and, to a lesser extent, municipal bonds.

I would very much like to know more details about these municipal bonds. Were they municipal auction rate securities?

5. How did FINRA miss the Madoff scam? This report acknowledges the fact that FINRA examiners merely took Madoff and his representatives at their word that Madoff was running nothing more than a broker-dealer. Are you kidding me? It was common knowledge that Madoff had a money management business. FINRA maintains that the FINRA ‘crossing guards’ checked the little boxes on their Madoff review sheets and went on their way.


1. FINRA is currently lobbying to gain regulatory oversight of the investment advisory industry. Representatives of the Investment Advisors Assocation are working diligently to remain under the purview of the SEC. FINRA makes the case in this report that if it had oversight of investment advisors it may have detected the Madoff scam. That argument runs very shallow. FINRA has not displayed the capabilities of managing its current jurisdiction. Why should it be charged with greater oversight responsibilities?

FINRA has clearly been incompetent. We know that not only from reviewing the analysis provided in the Madoff and Stanford cases, but moreso in the recommendations proposed by the authors of this report. I highlight these recommendations not to embarass but to further publicize just how poorly managed this organization is currently and has been for a LONG time. The recommendations are:

2. Establish a Fraud Detection Unit . . . are you kidding me? How is it that a financial self-regulatory organization charged with protecting investors does not have a unit like this to this point? The lack of a fraud unit is clearly a ‘failure of management.’

3. Prioritize Examinations and Resources According to the Seriousness of Misconduct. I repeat my question and assertion from above: another gross ‘failure of management.’

4. Strengthen the Cause Examination Program; Revise the Cycle Examination Program . . . this initiative entails shifting resources from lower risk ‘cycle’ (perfunctory) exams to higher risk ’cause’ exams. A tremendous grasp of the obvious here is another gross ‘failure of management.’

5. Assess Structure and Management of District Offices . . . focus on quality of exams rather than the quantity. Another gross ‘failure of management.’

6. Improve Documentation and Tracking of Enforcement Referrals to and from the SEC and Other Authorities . . . the lack of communication and ability to record and track referrals between FINRA, the SEC and other regulatory authorities is another gross ‘failure of management.’

7. Improve Procedures to Assure Legal and Regulatory Issues Are Properly Escalated, Addressed and Documented . . . yes, the fact that FINRA has fallen woefully short on this front is another gross ‘failure of management.’

8. Increase Use of Examination Staff with Specialized Qualifications . . . crossing guards are not typically qualified to undertake and pursue simple frauds such as Stanford’s and Madoff’s let alone the complicated frauds on Wall Street.

9. Enhance FINRA’s Information Technology and Systems . . . FINRA has not had the technical wherewithal to collect and process member firms information in a timely and effective fashion. Yes, the lack of this capability is another gross ‘failure of management.’

10. Confirm Member-Provided Information with Independent Third Parties; Cross Check Data Provided by Member Firms . . .the fact that FINRA has utilized the ‘trust’ method rather than the ‘trust but verify’ method in its collection and processing of member firm information is . . . another gross ‘failure of management.’

While I can appreciate that readers may be exhausted, exasperated and bewildered at this point, I would ask you to stick with me because the questions I raise for FINRA remain critically important.

Our Questions

1. Nowhere in this report is there a reference to Mary Schapiro. How can a report of this magnitude be put forth without referencing the head of FINRA? Given her tenure at FINRA, is she really the right person to be running the SEC?

2. When will the authors of this report call for and work to produce a report of similar depth in the study of FINRA’s interactions with its major member firms which brought our financial industry and economy to its knees? I speak of Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, Morgan Stanley et al.

3. Will the authors of this report support that FINRA provide full and total transparency across all of its investment activities in its internal investment portfolio? FINRA should provide all details on its investments across EVERY hedge fund, fund of fund, and private equity position. Additionally, FINRA should provide EVERY detail involved in its liquidation of its $647 million auction rate securities position in mid-2007.

4. How do FINRA and the authors of this report in good conscience promote the messages embedded in FINRA’s Annual Reports along with the messages promoted in its massive national advertising campaign? This report provides an expose of the enormous holes in this organization, not only from a structural standpoint but clearly from a cultural standpoint as well.

While this report focuses on the Stanford and Madoff frauds, against the backdrop provided I am now more convinced that there have been and likely still are other massive frauds perpetrated on the American public.

I write this commentary strictly in an attempt to get to the total truth so real market confidence can be restored. Perhaps more of this truth will be revealed in the adjudication of the three lawsuits (Amerivet, Benchmark, Standard Investment Chartered) currently facing FINRA.

The American public deserves the truth.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

3 Comments on Is Wall Street on the Up and Up?

  1. Thanks for writing something that needs to be said. Finra is the fox guarding the henhouse, nothing more. It should oversee NOTHING — including the arbitrations that victims of fraud — like auction rate securities victims — must pursue to seek justice.

  2. In particular, FINRA’s Special Review Committee report of 10/2/09 failed to identify the Dallas District office’s directors responsible for watching over the Stanford scheme and catching it… which they both failed to do. Unfortunately, one of these directors is still employed there and holds a higher position in SFC despite his negligence.

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