The case addressing this question, Standard Chartered v FINRA, has been appealed to the highest court in our land. As such, one might think that most Americans would care to learn if our nation’s top financial regulator did, in fact, engage in a fraud which had a monetary value of between $175-$350 MILLION plus. Not exactly chicken feed.

Why hasn’t this case received more attention? 

For the very simple reason that our major financial media have spent little to no time focused on it. If you don’t think our media is controlled in this country, then you may want to ask why this case has not received more meaningful coverage.

I first addressed this case in the fall of 2009. I personally believe it belongs on the front page of every business section in our country. Why? This case addresses the core of what I have long defined as the Wall Street-Washington incest. The $175-350 million which FINRA retained — rather than having appropriately distributed to its member firms — allowed the major firms on Wall Street and selected FINRA executives to benefit at the expense of smaller broker-dealers. Sound a little incestuous perhaps? You think?

More importantly, this case addresses the fact that Ms. Schapiro and her fellow FINRA colleagues signed a proxy statement used for the merger of the NASD with the regulatory arm of the NYSE to form FINRA that included misinformation. If utilizing a proxy statement which includes misinformation is not an abuse of capitalism and a fraud, I do not know what is.

My link above references several angles in this case and other FINRA and assorted partners’ ‘incestuous’ follies. I strongly recommend you review this wealth of material. You will be busy, but you certainly will not be bored.

Are you sufficiently intrigued to learn a little more about this situation? Let’s navigate and review a recent commentary written by Dan Jamieson of Investment News. Dan writes, B-D Wants Supreme Court to Rule on FINRA Suit:

The high court this month is expected to decide whether to take up a lawsuit brought against NASD by Standard Investment Chartered Inc. over the self-regulator’s 2007 merger with the regulatory unit of the New York Stock Exchange.

Standard, an investment banking boutique, insists that the proxy used by the NASD in soliciting member approval for the merger was fraudulent.

NASD since has been renamed the Financial Industry Regulatory Authority Inc.

Government entities, including private organizations with government-delegated authority, generally enjoy absolute legal immunity in performing official duties. Court cases have granted protection specifically to securities self-regulatory organizations.

Absolute immunity covering a financial transaction? Sniff, sniff. Do you smell something? Me, too.

Standard argues that the merger was not a legally protected regulatory function of Finra.

The brokerage firm wants the Supreme Court justices to hear that case because it claims that lower courts have issued conflicting opinions on immunity for SROs and other state actors.

The Standard suit has already been thrown out twice by courts — in 2010 by a New York U.S. District Court judge and then again last year by the 2nd U.S. Circuit Court of Appeals.

But the Supreme Court could take a different view. In June 2010, it ruled that the Public Company Accounting Oversight Board, a private oversight body set up under the Sarbanes-Oxley law, was unconstitutional because its members were not sufficiently overseen by the executive branch.

The Standard appeal has attracted an unlikely assortment of allies among business and consumer groups.

“The case presents a situation where a quasi-governmental entity is abusing its power,” said Ilya Shapiro, a constitutional lawyer at the libertarian Cato Institute, which joined with the Competitive Enterprise Institute in filing an amicus brief on behalf of Standard.

“Our legal interest is really to make government accountable,” he said.

There’s a larger principle at stake: to what extent state actors can be held accountable, said William Anderson, one of Standard’s lawyers at Cuneo Gilbert & LaDuca LLP. “That’s why the various groups have weighed in” with amicus briefs, he said.

“We’re concerned about the court’s overextension of immunity” to private organizations, said Scott Michelman, a staff attorney at the Public Citizen Litigation Group, which, together with Consumer Action, The Project On Government Oversight and the U.S. Public Interest Research Group, also is urging the Supreme Court to take the case.

“In this case, immunity has been extended to private corporate actors … in a way that could prevent corporate accountability,” he said.

Standard and its supporters dispute the earlier court findings that NASD’s proxy and merger were “incident to” its regulatory activities and thus protected.

The Cato Institute argues that such a standard “would be the equivalent of shielding a judge who ran down a pedestrian on his way to the courthouse simply because his travel there eventually will lead to his exercising judicial power.”

Courts first gave SROs legal protection in 1985, and the breadth of that immunity has expanded ever since, according to Standard’s supporters.

“It seems to me that what [Finra was] doing was acting as a business entity rather than as a regulator,” Mr. Shapiro said.

Jack Norberg, chairman of Standard, did not return a call seeking comment.

For its part, Finra insists that there is no issue with immunity for SROs.

“Every court of appeals to consider the issue has agreed that SROs are absolutely immune from private lawsuits for money damages attacking conduct that falls within the scope of their regulatory functions,” Finra said in a filing with the Supreme Court.

While FINRA’s lawyers have continually embraced their position on immunity, NOT ONCE have I ever heard or seen these lawyers or Ms. Schapiro address and categorically deny the premise of a fraudulent proxy. What say you, Mary? Did you and your colleagues willingly and intentionally misrepresent, that is LIE, in regard to the facts presented in that proxy?

Finra spokeswoman Michelle Ong declined to comment.

No surprise there. No transparency there, either.

The 2007 merger required NASD members to approve bylaw changes that significantly reduced their voting power in the new organization.

NASD was able to get the changes approved with the help of a one-time $35,000 payment. Standard claims that NASD lied in its proxy and other communications when it claimed that $35,000 was the most it could pay under IRS rules.

An IRS opinion letter laying out permissible amounts that could be paid to broker-dealers to approve the merger has been subject to a court-ordered seal, but in a 2009 hearing, one of Standard’s attorneys said the letter indicated that member firms could have received an additional $35,000 to $76,000.

An additional $35-76k multiplied by 5100 member firms equates to a cool additional $175-350 MILLION plus!!

If the Supreme Court takes the case and rules for Standard, the dispute could go back to lower courts for rehearing, and member firms could possibly get a larger payout, Mr. Anderson said.

One would think a ruling for Standard would also expose Ms. Schapiro and the other defendants in this case for having perpetrated a fraud. What are the ramifications of that? Or is that potential too explosive and unseemly for our nation in its current state? Are we that weak and pathetic?

Where are America’s collective balls? Come on. How about we create some public pressure? Share this commentary as wide and far as possible. Our founding fathers would thank you.

But some doubt that the Supreme Court will let that happen.

“SROs are immune — that’s the law,” said Jonathan Kord Lagemann, a veteran industry defense attorney and founder of the Lagemann Law Offices.

“Whether it should be that way is another story.”

Of course it SHOULD NOT be that way. Providing the cover of absolute immunity for misrepresentations within proxy statements by senior financial regulators is no way to run a country.

Remember, absolute immunity without total transparency is a license to steal . . . perhaps even as much as $175 million.

Larry Doyle

The first is in the State Department. This wasn’t just a wasteful decision, but an unethical, immoral, and I have to hope, illegal one. Within the State Department was a woman named Kathleen McGrade. The Daily Caller did some good, old-fashioned investigative reporting on her, and guess what they discovered? Ms. McGrade had funneled $52 MILLION of yours and my taxpaying dollars to her daughter, and her secret husband. I am not making this up, and neither is the Daily Caller:

[snip] Kathleen McGrade helped their company, Sterling Royale Group, win 43 federally funded contracts over the last few years.

McGrade acted as the Contracting Officer (CO) for awards to Sterling Royale Group. McGrade’s husband, Brian Collinsworth, serves as the company’s Vice President. McGrade’s daughter, J.L. (Jennifer) Herring, is its president and CEO.

When TheDC first reached Collinsworth for comment, he denied being married to McGrade. “She is the CO on our contracts, but we are not married in any way, shape or form. That’s kind of funny, but, okay,” Collinsworth said, adding that he and McGrade have no relationship “other than a professional one of a CO to a company.”

Collinsworth also denied that Herring is McGrade’s daughter, and his stepdaughter.[snip] (Click here to read the rest.)

Surprise, surprise, Collinsworth is a big liar. They are indeed married.

Fortunately, the State Department quickly did the right thing – they fired Ms. McGrade:

[snip] “Upon learning of the allegations, the Department immediately relieved Ms. McGrade of her responsibilities,” Laine said in an email. “Subsequently, the Department instructed her company that her employment at the Department is terminated.”

McGrade worked as a federal government contractor, handling the disbursement of taxpayer money for the State Department to other contractors. She worked on-site at the State Department in the office of Overseas Building Operations.[snip] (Click here to read the rest.)

Well, that’s just terrific, but, what about our money? And why hasn’t she been brought up on charges? Forced to pay restitution? Something? The State Department is being mum on any further action, according to the article. Oh, well, okay then. That’s fine – not.

Second, we have the ten year lease signed by representatives of the SEC. Oh, this is a doozy. The Wall Street Journal has the story:

[snip] Chairman Mary L. Schapiro has been under fire for the SEC’s decision last year to sign a 10-year lease valued at more than $500 million for 900,000 square feet of space in a D.C. office building known as the Constitution Center. A recent report on the lease by the SEC’s Office of Inspector General found that the SEC unnecessarily limited the locations it could consider because it overestimated the amount of space it needed. The report cited one employee who described the process used to calculate the space needs as a “`WAG,’ (wild-ass guess) and a ‘back of the envelope calculation.’”

The SEC made its projections based in part on the increased responsibilities related to the Dodd-Frank financial-overhaul law but also on budget projections that had not yet been approved. After the anticipated budget increase didn’t materialize, the SEC determined it would not need the space in the building, which is owned by David Nassif Associates.[snip]

Oops. Yep, they signed the lease, but then didn’t need the space after all, so…Good grief. These are the people running our government???

Now you see why they were called on the carpet:

In a hearing Wednesday before the Subcommittee on Economic Development, Public Buildings and Emergency Management to discuss the lease, Ms. Schapiro acknowledged missteps and said she wanted to SEC to cede its authority to lease space to the General Services Administration. U.S. Rep. Jeff Denham (R., Calif.), chairman of the subcommittee, also questioned why there was an urgency to get the deal done in spite of the “collapse of the real estate industry.”

Ms. Schapiro said she had heard there were few options for space. “It was presented to me…that if we were going to have any growth at all, we had to take this space,” Ms. Schapiro said.[snip] (Click here to read the rest.)

You’ll be glad to know that, according to the article, the Office of the Comptroller has been able to rent some of the space, but they are still looking for tenants for the other third of the sf available. Any takers? Oh, and they are considering whether to investigate this or not.

I’m sorry, but what’s the question there, exactly?? Sheesh.

And finally, last but definitely not least, is the third example of wasteful government spending I have heard of in just two days. If the second one was a doozy, this one is a wallop. It seems that two, not one, but two, Navy tankers which have yet to be completed, are now heading to the scrap heap. They only cost $300 million, so not as bad as the 10 year lease, but still, a mighty hefty amount of taxpaying dollars:

[snip] The Isherwood, stretching more than 660 feet, began its final journey this week, unceremoniously towed Tuesday from its mooring spot in the James River Reserve Fleet, also known as the “ghost fleet,” near Fort Eustis in Newport News.

Its destination: International Shipbreaking Limited in Brownsville, Texas, just above the Mexico border. There, the vessel will be cut up, its innards removed and disposed of, and its steel and other metals sold as recycled products.

The Eckford, of equal size, is scheduled to follow next Tuesday, leaving behind fewer than 20 junk ships in the ghost fleet, the smallest number since its inception during World War I.

Once the two Navy oilers have departed, “it will close one of the saddest chapters in American shipbuilding and for that matter, federal fiduciary folly,” wrote Joseph Keefe, a global maritime commentator, this week on the website MaritimeProfessional.com. [snip] {Click here to read the rest.)

This just begs the question: why were these tankers ever even authorized?

Someone asked recently what we are sending to countries that do not think highly of us, according to a recent Pew poll. We are going to give Egypt $1.3 billion this year for military aid; thanks to the Kerry-Lugar-Berman bill, $1.5 billion a year to Pakistan; and the list goes on. Since the Congress has failed to provide or pass a budget for the past couple of years, this CRS report on aid to East and South Asia should provide fairly up-to-date information.

But we cannot leave out the billions of US dollars in aid to Afghanistan that has been stolen, or “lost,” there. Holy crap.

“Waste not, want not” should be our mantra. This is especially true as our Congress and president fight over how much more in debt this nation is willing to go. And at what cost to us, our reputation, and our economy, they are willing to accept on our behalf. They can begin by being a helluva lot more careful as to how they spend our tax dollars, whether for programs at home, lack of oversight of personnel who have no authority to be signing contracts, and to those who do have the authority to sign away millions and millions without doing their freakin’ homework first.

These are just three examples in the past two days that have come to my attention. I am sure you can come up with a few more. Our Congress needs to remember they work for US, and when they waste money on programs or goods they are not going to use, they must answer to US. This isn’t Monopoly money after all, it’s for real. It is well past time they started acting like it.

I love that line. I first heard it on the trading desk at Bear Stearns in the early ’90s. For the last twenty years, I have used the line often to counter those who would bemoan an outcome with the standard, “If only . . .” My response typically generates a healthy chuckle and we then move on.

At this point, I feel comfortable amending the line from above to “If my aunt had balls, she’d be Mary Schapiro.” Too harsh, you say? I think not. How so?

Let’s review a recent Wall Street Journal article, Madoff’s Ghost Still Haunts SEC:

Financial executives aren’t the only folks lawmakers are pursuing. They also want to see more heads roll at the Securities and Exchange Commission.

Nearly 18 months after Bernie Madoff’s multibillion-dollar Ponzi scheme was exposed and almost a year after the SEC’s inspector general issued a blistering report, lawmakers are still questioning how the SEC staffers who reviewed the Madoff firm and investigated fraud allegations were being punished.

SEC Chairman Mary Schapiro told Congress during an oversight hearing that 15 of 20 enforcement attorneys and 19 of 36 examination staffers that dealt with the Madoff matter had left the agency. The SEC was still conducting a disciplinary process, she said, but it should be concluded soon.

Republican Rep. Bill Posey of Florida –- home to many Madoff victims -– said he wants to know if those SEC employees ended up at other regulatory agencies, working for companies they were supposed to regulate, or retired with government pensions.

“There’s a necessity to know where they went,” said Posey. “It’s like letting a pedophile slink out the door or change neighborhoods. We’re dealing with the same type of problem here.”

Wow!! Representative Posey is being aggressive here, but I commend him because the nation still deserves answers to so many Madoff questions that have been swept under the SEC’s and FINRA’s rugs. The WSJ continues:

Schapiro strongly disagreed. “These aren’t bad people. In some cases they were people who were very junior and not adequately trained or supervised.” In other cases, she said, they were pulled from one project to another.

‘Junior people’ logically implies that in other cases there were senior people. In fact, the people calling the shots on the Madoff investigation were certainly not junior.

Why were the investigators pulled from the Madoff case? Were some of them getting too close for comfort? Were they asking too many questions? Were they being frozen out by the SEC’s inner circle? I do not ask these questions in a rhetorical fashion. I ask them because those were the clear cut impressions left by an SEC attorney well trained in the school of options trading who was making real progress in deciphering the Madoff scam. To whom do I refer? Longtime readers of Sense on Cents and listeners to No Quarter Radio’s Sense on Cents with Larry Doyle may recall my interview in October 2009 with Genevievette Walker-Lightfoot, a former SEC attorney who investigated Madoff. Genevievette was not bashful in excoriating the senior laden ‘inner circle’ at the SEC. Perhaps Mary may want to listen to the interview or call on Ms. Walker-Lightfoot. Maybe she’ll learn something.

What does Mary Schapiro have to say now about the impact Mr. Madoff has made on current work at the SEC?

During examinations, Schapiro said, “We don’t rely on the word of somebody like Madoff.”

Wow!!!!

Mary has some set of cojones!! Industry insiders have shared with me that Mary kept close company with Mr. Madoff at industry conferences. Now she has the balls to let America know that SEC investigators do not currently rely on the word of somebody like Madoff.

You can’t make this stuff up.

Sense on cents compels me to inquire, “Mary, how would you even know? If you were not able to detect the likes of a scam artist such as Madoff for decades, what makes you think America believes you might be able to detect another scam artist now?”

Yes indeed. If my aunt truly did have balls, she would be Mary Schapiro.

LD

With the details provided in this story, Gary Aguirre clearly shows himself to be a great American and as such earns immediate induction into the Sense on Cents Hall of Fame. The General Accountability Project reports SEC Settles with Aguirre:

In what may be the largest settlement of its kind, the Securities and Exchange Commission (SEC) has agreed to pay $755,000 to settle the wrongful termination claim of Gary J. Aguirre, the attorney who headed the SEC’s insider trading investigation of Pequot Capital Management until his firing in September 2005.

A judge with the Merit Systems Protection Board (MSPB), the federal agency with jurisdiction over Aguirre’s termination claim, issued an order today finalizing the settlement. The settlement sum equals Aguirre’s pay for four years and ten months (the elapsed period since his September 2005 discharge), plus his attorneys’ fees. Aguirre agreed to dismiss two related cases against the SEC.

Government Accountability Project Legal Director Tom Devine stated “Unfortunately, this large settlement is the exception that proves the rule. Until Congress provides real protections for financial regulatory employees such as Aguirre, existing law will remain the best excuse for government regulators to turn a blind eye.”

The SEC’s settlement with Aguirre comes one month after the SEC filed insider trading charges against Pequot, its founder, Arthur Samberg, and David Zilkha, a former Pequot employee, based on facts uncovered by Aguirre. Pequot and Samberg paid the SEC $28 million to settle the charges against them. The case against Zilkha continues.

In August 2007, two Senate committees published a scathing 108-page report criticizing the SEC’s decision to fire Aguirre and close the Pequot investigation, which included Pequot’s suspected insider trading in securities of 20 publics companies.

The Senate report chronicles Aguirre’s promising career at the SEC, including management’s decision to give him a two-step pay raise at the end of his first year for “consistently [going] the extra mile, and then some.”

But the praise vanished when Aguirre tried to subpoena an elite Wall Street banker, John Mack. His supervisors blocked the subpoena, telling Aguirre that Mack had “juice” and “political clout.”

Spell that “Wall Street-Washington incest” at its finest!!

Aguirre’s July 27, 2005, email to his supervisors explained why the Mack subpoena was essential and expressed concern that “treating Mack differently is [not] consistent with the Commission’s mission.” The Senate Report tells what happened next: “Just days after Aguirre sent an e-mail to Associate Director Paul Berger detailing his allegations, his supervisors prepared a negative re-evaluation outside the SEC’s ordinary performance appraisal process.”

One month later, the SEC fired him without warning. The Senate report concluded that Aguirre’s “termination appears to be merely the culmination of the process of reprisal that began with the August 1 re-evaluation.”

Approximately one year after the Senate report, SEC Inspector General H. David Kotz delivered his own report on Aguirre’s firing to then-SEC Chairman Christopher Cox. Kotz recommended that Aguirre’s supervisors be disciplined. To date, neither the current SEC Chairman, Mary Schapiro, nor Cox, has done so.

Why not? The smell of incest continues to reign. Where is the real leadership necessary at the head of the SEC?

The Pequot investigation appeared to have run its course when the SEC released its “Case Closing Report” in December 2006, explaining its decision to close the entire investigation, including Pequot’s trading in Microsoft options, without filing charges.

But Aguirre did not stop his Pequot investigation. He continued to collect and piece together the evidence that Samberg had used illegal tips to trade options on Microsoft stock. In April 2008, Aguirre obtained a court order forcing the SEC, over its objection, to turn over to him key records of its Pequot investigation.

Aguirre clearly embodies the drive and determination possessed by truly great Americans. I commend him.

In late 2008, Aguirre uncovered the last pieces of evidence necessary to prove an insider trading charge against Pequot, Samberg, and Zilkha. On January 2, 2009, Aguirre sent a letter to SEC Chairman Cox enclosing the new evidence.

Aguirre’s 16-page letter explained how this new evidence, when combined with the evidence uncovered by him in 2005, proved that Samberg had used illegal tips in directing trades in Microsoft options, generating $14.2 million in profits to Pequot hedge funds under his management. But still the SEC would not file a case.

On May 26, 2010, Aguirre filed papers in his FOIA case seeking an order directing the SEC to release additional Pequot records to him. He argued the SEC had to turn over the records under FOIA, because it had filed no case against Pequot or anyone else. Early the next morning, the SEC filed charges against Pequot, Samberg, and Zilkha. The allegations closely track the facts stated in Aguirre’s January 2, 2009 letter.

Asked how he feels about the settlement, Aguirre replied, “I think it’s fair to the public that the SEC pays for my work over the past four years and ten months, since it generated $28 million to the U.S. Treasury. But it’s a shame the team I worked with at the SEC did not get to complete the Pequot investigation. The filing of the case in 2005 or 2006, before the financial crisis, would have been exactly what Wall Street elite needed to hear at the perfect moment: the SEC goes after big fish too.”

Gary Aguirre, a great American!!

Mary Schapiro? Chris Cox? Washington establishment? John Mack? Art Samberg? ….gutless!!

LD

Our friends at the Project on Government Oversight (POGO) released a report just yesterday highlighting the pathetic disciplinary measures and massive double standard at the SEC in responding to recommendations from its own Office of Inspector General (OIG). POGO reports:

….this is not the first time the SEC has refused to follow an OIG recommendation for disciplinary action. A report recently released by House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) made note of the fact that the SEC has repeatedly failed to implement reforms or hold wrongdoers accountable. The report mentioned an investigation by POGO which revealed that the SEC has failed to act on hundreds of recommendations made by the OIG in recent years.

Following up on that investigation, we’ve prepared a new document summarizing the agency’s response to reports in which the OIG specifically recommended disciplinary action. This information mostly comes from the OIG’s semiannual reports to Congress and documents obtained through the Freedom of Information Act (FOIA). As you can see, the SEC has taken little to no action on many of these recommendations, especially when the individual cited is a senior official.

By failing to take disciplinary action against the two senior officers named in the OIG’s FWRO (Fort Worth Regional Office) report, the SEC continues to broadcast the message that senior management will not be held personally accountable for misconduct, no matter how egregious.

Just how egregious are some of the findings made by the OIG? Let’s navigate and review the report from POGO highlighting 18 separate instances in which the OIG recommended disciplinary action and in which ‘no action’ was taken. I found the following six to be the most outrageous. The OIG’s findings include (I recommend you take a deep breath first!!):

1. Disclosure of non-public information
2. Inappropriate conduct
3. Misuse of official position
4. Misuse of government computer resources to assist Ponzi scheme and violations of standards of ethical conduct. (Are you kidding me? This is not a major front page story? A Supervisor in the SEC’s Office of Administrative Services is found by the OIG to have engaged in these behaviors and is allowed to retire without disciplinary action being taken?? What a joke!!)
5. Suspicions of insider trading and appearances of impropriety in financial transactions. (In light of this reality, we should certainly not expect the SEC’s OCIE to pursue the insider trading and front running at FINRA in its liquidation of auction-rate securities in 2007!!)
6. Conflict of interest and improper solicitation of gifts.

For those interested in viewing the POGO report in its entirety, please click on the image:

Yes, boys and girls, that is your government and your tax dollars at work. Accountability? Transparency? Integrity? A ‘new’ SEC? Talk is cheap. This report is strong evidence that the senior inmates are running the asylum at the SEC.

In light of this report, is there truly any surprise how and why Wall Street has run roughshod over Main Street?

What happened to our country?

LD

P.S. Hats off to POGO for great work!!

Testimony Could Undercut SEC Charge Against Goldman

The government has testimony from a Paulson & Co. official that could contradict its own claims against Goldman Sachs, CNBC has learned.

Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

If true, the testimony would go directly against government claims that ACA did not know Paulson was hoping the collateralized debt obligations would fail, and subvert charges that Goldman breached its duty by not informing ACA of Paulson’s position.

CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson’s position in the portfolio, named Abacus 2007-AC1.

“Did you tell her that you were interested in taking a short position in Abacus?” a government official asked Pellegrini, referring to the name of the CDO portfolio.

“Yes, that was the purpose of the meeting,” Pellegrini responded.

Oops. I am guessing that is not the answer they anticipated:

The exchange is key in that the Securities and Exchange Commission is charging that the failure to disclose Paulson’s position was a “material” factor that could have caused both ACA and German Bank IKB to back out of the CDO investment. When the CDO failed, Paulson reaped a gain of more than $900 million, the government has said.

The SEC does not mention the exchange in its complaint against Goldman.

“We look forward to presenting a complete and accurate evidentiary record in court,” SEC spokesman John Nester said in a statement to CNBC.

CNBC further learned that Pellegrini and Schwartz met at least three times to discuss the CDO and Paulson’s short position on Abacus.

Because of the deal’s structuring, Paulson stood to gain $900 million from the deal but lose only $20 million.

Here’s the thing. Couldn’t they have actually done a TAD more investigating before making these charges against Goldman Sachs? I mean, they make the charges just the other day, and voila, a few days later, this testimony comes out completely contradicting their charges. I’m just saying, maybe SOMEONE could have done a little more homework before leveling these charges, don’t you think?

And while I am at it, NQ reader Peggy Sue supplied this fascinating testimony from William Black on Lehman Brothers to the House Finance Committee. It is quite an indictment of a number of federal entities, especially the Fed, as well as the SEC:

Holy smokes. Mr. Black didn’t mince any words, did he? He is exactly the kind of straight talker we need to clear up this big, huge, mess. And he exposes the sheer incompetence of those who have been charged with oversight of financial institutions, especially continuing “business as usual” when that business was costing us millions and millions of dollars.

It sounds to me like there are a helluva lot of people running this show deserving of lawsuits, too – I’m not holding my breath that they will get their comeuppance, though. They’ll probably get promotions…

Harry Markopolos

Markopolos’ biggest bombshell this morning is his warning to America, “Don’t trust your government.” No surprise that Today host Matt Lauer did not probe deeper. I am not confident that other outlets will delve deeper into Harry’s statement, either. I wonder why Harry himself is reticent to specifically point out the individuals and the instances which lead him to make that statement.

Recall that a year ago Harry defined the SEC as merely incompetent while simultaneously defining FINRA (Financial Industry Regulatory Authority) as ‘in bed with the industry’ that is Wall Street. Well, it does not take an advanced degree to connect Harry’s grenade toss into FINRA’s backyard a year ago with his volley this morning.

Who is the central figure coarsing across the landscape of the NASD (FINRA’s predecessor), FINRA, and now the SEC?

Mary Schapiro.

Why doesn’t Harry get very specific in making these statements?

Why doesn’t the media probe deeper?

When will Mary Schapiro be compelled to answer questions not only about her relationship with Bernie Madoff, but about her tenure at the NASD and FINRA?

At that point, would Harry think we might be able to trust our government?

I certainly would like to get answers to a whole host of questions surrounding Ms. Schapiro. What questions? As I wrote last December and repeat today, “Mary Schapiro Owes America Some Answers”:

Mary Schapiro, the current SEC Chair and formerly the head of FINRA, possesses a wealth of information on a number of topics for which America would like greater detail. What are some of these topics?

1. Did FINRA possess material, non-public information and act upon it in the liquidation of its $671 million auction-rate securities position in mid-2007 as the ARS market was failing?

2. Did FINRA invest its own funds in Bernard Madoff, as alleged in the complaint Amerivet Securities vs. FINRA.

3. What was the nature and full depth of Mary Schapiro’s relationship with Bernie Madoff? Bernie himself characterized Mary as a ‘dear friend.’

4. Did Mary Schapiro and her fellow FINRA execs lie verbally and in a proxy statement regarding the merger of the NASD with NYSE Regulation to form FINRA?

Are these some of the questions leading Harry to make his statement this morning about not trusting our government? In my opinion, they are a good start. America deserves these answers.

(UPDATE: Late Monday afternoon, Judge Jed Rakoff issued a ruling on Question #4 above. He has dismissed a complaint regarding this allegation, believing that Schapiro and FINRA are entitled to absolute immunity. For the full story, please read here).

Now let’s listen to Harry’s 7-minute clip.

LD

Evidence of this dynamic on Wall Street is overwhelming. Yet, don’t think Wall Street has a monopoly on this incest. Bloomberg highlights incestuous activity has also played out in the disaster encompassing Toyota. Bloomberg reports, Regulators Hired by Toyota Helped Halt Investigations:

Former regulators hired by Toyota Motor Corp. helped end at least four U.S. investigations of unintended acceleration by company vehicles in the last decade, warding off possible recalls, court and government records show.

Christopher Tinto, vice president of regulatory affairs in Toyota’s Washington office, and Christopher Santucci, who works for Tinto, helped persuade the National Highway Traffic Safety Administration to end probes including those of 2002-2003 Toyota Camrys and Solaras, court documents show. Both men joined Toyota directly from NHTSA, Tinto in 1994 and Santucci in 2003.

While all automakers have employees who handle NHTSA issues, Toyota may be alone among the major companies in employing former agency staffers to do so. Spokesmen for General Motors Co., Ford Motor Co., Chrysler Group LLC and Honda Motor Co. all say their companies have no ex-NHTSA people who deal with the agency on defects.

Possible links between Toyota and NHTSA may fuel mounting criticism of their handling of defects in Toyota and Lexus models tied to 19 deaths between 2004 and 2009. Three congressional committees have scheduled hearings on the recalls.

While executives from Toyota will look to deflect blame and minimize their own overall culpability, think back to the bobbing and weaving and massive amount of bulls*%! we heard from Wall Street executives.

The fact is, Wall Street bought its own regulation. The allure of working in the industry had an enormous impact on regulatory efforts, or dare I say the lack thereof. That allure also served to destroy the lives of thousands. You think I embellish? Ask those who remain unable to access their cash still frozen in auction-rate securities. Ask those who lost their savings in the Madoff scam. Those situations are only the high profile cases.

Now we learn that Toyota played the same game. In this case, lives were literally lost.

How would I describe the money Toyota saved and the money these former regulators earned in the process?

Blood money!!

Are you pissed yet?

How much does America have to take before heads roll and people are truly held accountable?

LD

Who is Peter Sivere? A former compliance employee at JP Morgan.

Sivere crossed paths with Demos in 2004 while providing information related to an investigation of questionable mutual fund trading activity. In the midst of Sivere’s engagement with the SEC, his confidence was violated. I highlighted this reality when I wrote, “The SEC Pimped Peter Sivere.”

Who at the SEC blew Sivere’s cover? The other day, we learned it was George Demos.

Kudos to the Project on Government Oversight (POGO) for investigating this case and kudos to Politics Daily for highlighting it today in writing, Long Island Congressional Candidate Cited for Giving up J.P. Morgan Whistleblower:

George Demos is a Republican Congressional candidate from Eastern Long Island whose Web site bears the slogan “Fighting for Freedom,” and touts his service as an enforcement lawyer in the New York office of the Securities and Exchange Commission. A bio says that he “handled some of the SEC’s most significant investigations,” including that of Ponzi scheme artist Bernard Madoff, and “worked tirelessly on the cases that never made the headlines.”

But one case that never made headlines was his own: Demos’ campaign Web site and public statements omit any reference to a report last March of the SEC’s Inspector General (IG), which found he had improperly disclosed protected, nonpublic information about a whistleblower to the counsel for that whistleblower’s employer, a major Wall Street bank, JPMorgan Chase. The IG’s charges of misconduct grew out of an SEC probe that began in 2003 of JPMorgan and other big financial institutions suspected of illegal market practices.

Demos has denied he did anything improper, and his campaign declined to comment on the matter. But documents obtained by the Project On Government Oversight (POGO) — a non-partisan non-profit based in Washington — confirm that Demos was the staff attorney who was cited in the IG report for violating SEC rules. The IG referred the case to the agency’s management for possible disciplinary action, but the SEC took no action. Soon after that, Demos quietly resigned from his job and launched his bid for a seat in the House of Representatives.

I am not writing about this case because I have any sort of axe with George Demos. If he proves himself to be the best candidate for the Congressional seat and wins the election, I hope he serves our country well. That said, voters should be aware of everything in a candidate’s professional background. The fact that Demos is promoting his involvement in the massive SEC failure of the Madoff scam is reason all by itself to doubt his intellect. (Thank you hongloan)

Nor am I writing this piece in defense of Peter Sivere. Even though our tenure at JP Morgan overlapped, I didn’t know him nor do I have any sort of personal or professional relationship with him.

I am writing to shed further light on what I deem to be the incestuous nature of the Wall Street-Washington relationship.

To whom did Demos report at the SEC? Was that individual held accountable for a failure to supervise? America deserves to know.

When financial regulatory improprieties at both the SEC and FINRA are neither exposed nor properly adjudicated, a culture of negligence and incompetence develops . . . and perpetuates. Ample evidence is readily apparent that this culture is deeply ingrained within these organizations. While SEC Chair Mary Schapiro would maintain that she and her new team at the SEC are addressing this culture, I believe strongly Schapiro is the wrong person for the job because she is a product of that culture herself.

As for George Demos, he made his bed and now he needs to sleep in it. I would recommend he lift the covers and show America what transpired – not only in this case, but within the SEC as a whole.

Now that would be a real public service.

LD

Mark McGwire, the steroid-abusing home run hitting phoney, may have issued a massive mea culpa this week, but his career will forever be defined by his March 2005 Congressional obfuscation.

In my strong opinion, Mary Schapiro is the financial industry’s equivalent of Mark McGwire. How so? In McGwire’s 2005 testimony, he very much wanted to position himself as a positive influence for future developments regarding the use and abuse of steroids in baseball. Fast forward to January 14, 2010 and we witness Mary Schapiro very much trying to assume the same positive position in her testimony and answers to the Financial Crisis Inquiry Commission. In Schapiro’s opening statement, Testimony Concerning the Financial Crisis, she states as much:

To assist the Commission in its efforts, my testimony will outline many of the lessons we have learned in our role as a securities and market regulator, how we are working to address them, and where additional efforts are needed. I look forward to working with the FCIC to identify the many causes of this crisis.

Oh, how kind.

Recall that the charge of the FCIC is to look into the past in order to determine the root causes of our economic crisis. What is Ms. Schapiro’s past? From 1996 until her appointment a year ago as SEC Chair, Ms. Schapiro was affiliated with the NASD (now FINRA). Does she address her past and that of FINRA in her testimony? Swing and a miss.

Schapiro makes reference to the SEC approximately 110 times in her opening statement. She references the NASD (FINRA) once, and that being a comment regarding the ‘uptick rule’ in 1994.

What about your past, Mary? You present yourself as a fan of greater transparency and disclosure. You reference disclosure or the need for greater disclosure approximately 25 times in your statement. You reference transparency or the need for greater transparency approximately 15 times in your statement.

What about greater disclosure and transparency of activities that occurred on your watch at FINRA? You have the gall to address the work the SEC has done since December 2008 in regard to auction-rate securities. Why won’t you disclose the details regarding FINRA’s liquidation of $647 million auction-rate securities in mid-2007?

Not here to talk about the past, perhaps?

You have the gall to promote yourself as a big fan of transparency. Why won’t you call off your lawyers who made an impassioned plea just yesterday in front of Judge Jed Rakoff to keep documents relating to the formation of FINRA sealed? (Judge Rakoff will issue a ruling on the media’s request to unseal these documents by February 15th). Where’s the transparency in that?

Not here to talk about the past, perhaps?

You concluded your opening testimony yesterday by stating:

We cannot hesitate to admit mistakes, learn from them and make the changes needed to address the identified shortcomings and reduce the likelihood that such crises reoccur.

I would maintain that these words are empty and meaningless if you do not fully open the books and records of FINRA so the disclosure and transparency you seemingly support can be laid out for all America to see.

Then and only then can our country truly move forward.

The ball is in your court, Mary. Who are you? Will you talk about your past at FINRA or are you Mark McGwire?

For those interested in hearing Ms. Schapiro’s proclamation as a champion of greater transparency, fast forward this video clip below (from yesterday’s FCIC session) to the 145:50 mark.

LD

Rackets operate best in the dark. Well, let’s get that flashlight out again. First a little background on SIPC, then two riveting video clips after the fold.

For those unaware, SIPC (the Securities Investor Protection Corporation) is an insurance fund in which member firms pay premiums to cover losses. From SIPC’s own website, we learn:

What SIPC Covers . . . What it Does Not

The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC.

Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

It is important to recognize that SIPC does not work the same way as the Federal Deposit Insurance Corporation in terms of blanket protection of losses.

For this insurance coverage, SIPC charged its member firms an annual premium of $150 from 1996 until April 2009. That is no joke. Wall Street firms paid a token $150 a year to promote the idea that your investments were protected. While SIPC did have a $1 billion reserve fund, that was woefully insufficient to cover the losses incurred in the Madoff scam. Make no mistake, though, the SIPC annual premium of $150 should also be looked upon as a scam.

Think of it. Individuals pay far more for auto insurance than Goldman Sachs paid for investor insurance for over 12 years.

Are you getting increasingly pissed off? America should be extremely pissed off. The SIPC coverage has been a critical part of the Wall Street racket.

What follows are two video clips from last week’s Congressional hearing on securities investor protection reform. The first 7-minute video clip highlights Rep. Paul Kanjorski (D-PA) undressing the SEC’s Mike Conley and SIPC’s Stephen Harbeck for the massive failure of the governmental and non-governmental financial regulatory system.

Kanjorski certainly hits on America’s rage at the dysfunctional financial regulatory system. My only concern with Kanjorski’s delivery was his very deferential comments directed toward SEC Chair Mary Schapiro. I can only guess he is not aware of the outstanding lawsuits against FINRA, including the Standard Investment Chartered vs. FINRA which alleges Schapiro and other FINRA executives of lying.

This next video clip is Rep. Gary Ackerman’s (D-NY) undressing of SIPC’s Stephen Harbeck. Ackerman rails on Harbeck and SIPC for the token $150 annual insurance premium paid by SIPC member firms. While we can watch Rep. Ackerman confront SIPC Chief Harbeck, how did we get here in the first place? Why haven’t heads rolled? Who is truly protecting American investors?

America deserves to know the full extent of the Wall Street racket that was and to a large extent still is facilitated by the regulatory incest between Wall Street and Washington. Will this hearing be a start, a finish, or merely a pit stop along the way?

LD

High five to JD for tipping me off to a segment about Bernie Madoff that just aired on CNBC. While little is truly new in this segment, Bernie’s assessment of his relationship with former FINRA head and current SEC chief Mary Schapiro is startling. While Ms. Schapiro and her colleagues at FINRA have downplayed any sort of relationship with Madoff, Bernie has a different take.

There’s something about Mary as Bernie calls her “a dear friend.”

Will the government powers have the cojones to more fully explore this relationship? Or, are they already aware of it? As I wrote in my commentary of October 22nd, “Nasdaq Sale: Why Would Schapiro and FINRA Execs Lie?”:

Did Ms. Schapiro receive the “E-Z Pass” to the SEC from FINRA with the support of the powers that be on Wall Street? Was the chair of the SEC the ultimate payoff to Ms. Schapiro for the successful completion of the merger between NASD and NYSE Regulation to form FINRA?

What does Bernie have to say? Let’s review the CNBC segment, Madoff: It’s ‘Amazing’ I Didn’t Get Caught Sooner. . . (video clip after the fold).

Jailed swindler Bernie Madoff said it was “amazing” that he didn’t get caught sooner in his multi-billion-dollar Ponzi scheme, and that everything the SEC did to investigate him prior to 2006 was a waste of time, according to a jailhouse interview he gave to SEC Inspector General H. David Kotz.

Madoff also told Kotz that SEC Chairwoman Mary Schapiro was a “dear friend,” although she “probably thinks, ‘I wish I never knew this guy.’”

• For a Full Text of the Interview, Click Here

Madoff gave the interview to Kotz in June while awaiting sentencing for one of the largest financial frauds in history. At the time, Madoff was being held at the Metropolitan Correctional Center in New York. He agreed to speak to Kotz, who was investigating the SEC’s decades-long failure to uncover the scheme. The SEC released notes of the interview along with hundreds of other exhibits in the investigation following a request by CNBC under the Freedom of Information Act.

US Department of Justice Bernie Madoff mugshot

Madoff tells Kotz he feels “misunderstood” by prosecutors in his case, and that there is ” a lot of misinformation” circulating about the scandal as a result. However, he adds, “I’m not saying I’m not guilty.”

Madoff says that in multiple encounters with SEC investigators over the years, he never had to tell them about his role in the industry because “they already knew.”

The Inspector General’s report, released in early September, found multiple lapses at the SEC, but said there was no evidence of improper influence by Madoff.

Kotz told CNBC in a statement Friday that he found no evidence to support Madoff’s claim of a close relationship with Mary Schapiro.

Perhaps Mr. Kotz might be interested in the allegation embedded in the lawsuit brought by Amerivet Securities. Yes, that suit alleges that FINRA, the organization headed by Ms. Schapiro, had an investment in Madoff. For more info on that claim, I submit “Attorney Claims Wall Street’s Cop, FINRA, Invested in Madoff.”

Did Mary protect Bernie unwittingly or unknowingly? “A dear friend.”

Who in Washington has the guts to dig deeper into this story and reveal the full extent of the relationship between Ms. Schapiro and Mr. Madoff?

The American public and especially those who invested in Madoff deserve nothing less.

LD

Fully appreciating that merely asking these questions is aggressive by its very nature, I do not ask them in a derisive fashion. The fact is, the answer to those questions in the eyes of Richard Greenfield is an unequivocal, “Yes!”

Who is Richard Greenfield? I had the distinct pleasure of chatting with Richard last evening on my weekly Sunday evening radio program. Richard Greenfield of Greenfield & Goodman is an attorney with over 40 years of experience in banking, securities, and consumer litigation. Amongst other legal venues, Attorney Greenfield has been admitted to practice before the Supreme Court of the United States.

Our conversation last evening was riveting. If you have an interest in the markets, our economy, developments on Wall Street and in Washington, I strongly encourage you to listen to the interview in its entirety. I will share with you some of the highlights which Richard provided. (The timing I provide for these highlights can be used in the audio player provided here.)

> 16:40: FINRA’s mindset has never been on major league enforcement, but rather relatively picayune broker-dealer violations and even then the violations are more technical than they are real. Greenfield said, “the big boys always seem to get away with murder.”

> 18:30: The NASD coming out of the 1930s initially did a good job, but over time it became less and less concerned with enforcement and more concerned with the appearance of enforcement.

> 20:00: Most state attorneys general don’t have resources to devote to securities regulations. It’s the rare state, California and New York for example, which undertakes real enforcement activities. (LD’s comment: I would add that Massachusetts has also aggressively undertaken serious enforcement of securities regulation.)

> 22:00: Too Much Wall Street money finds its way into campaign warchests with the result that its special interests rival those of the insurance and defense industries and as a result Congress and many state government initiatives have been subverted.

> 25:00: Every major financial institution has ‘cooked their books’ for the last five years.

At the 29 minute mark or thereabouts, our conversation truly elevates from the general nature of financial regulation to the very specific details of the cases Richard Greenfield and colleagues from the Washington D.C. based firm of Cuneo, Gilbert, and LaDuca are bringing against FINRA. I STRONGLY encourage you to listen to the next twenty minutes.

> 29:30: Greenfield provides background information on the complaint filed on behalf of the California based FINRA member firm, Standard Investment Chartered against FINRA.

> 32:00-44:00:
- Greenfield comments on some interesting connections between Bernie Madoff and Mary Schapiro, former head of FINRA and current head of the SEC.

- Documents provided by the NASD (now known as FINRA) to Greenfield and his colleagues show unequivocally that the NASD defendants lied to the NASD member firms regarding distribution of funds from the sale of the Nasdaq. Greenfield reiterates that these individuals lied blatantly and unequivocally. They intentionally lied. The lies are repeated over and over in a proxy statement provided to the member firms. The lies were repeated at roadshows which took place all around the country.

Who is they? Who lied? Who repeated the lies?

Mary Schapiro and senior officers in the NASD (FINRA)!!!

> The primary lie is the misrepresentation of the maximum proceeds that could have been paid to the NASD member firms. That figure was represented as being $35k when in fact it could have been much, much higher.

> Greenfield also highlights the fact that FINRA failed to perform in protecting investors from the Auction-Rate Securities scandal while liquidating its own ARS investment position in 2007.

> Greenfield sheds some light that he believes New York AG Andrew Cuomo is investigating FINRA’s liquidation of its Auction-Rate Securities investment.

>47:00

- Greenfield repeats his assertion initially made on September 3rd while appearing on America’s Nightly Scoreboard on Fox Business News (video clips can be seen here) that, based upon information and belief obtained from a source which Greenfield and colleagues believe to be reliable, FINRA had made investments with Bernie Madoff!!

- Greenfield believes that FINRA may have to be disbanded and the self-regulation of Wall Street may have to be scrapped because the self-regulatory model for this industry has failed.

- Greenfield concludes that Mary Schapiro talks a tough game, but is truly a non-regulator.

While Greenfield makes some serious allegations and charges in the course of this interview, he has unquestioned credibility and experience which comes from 40 years of fighting these battles.

Will the truth and transparency being sought in these complaints and which the American public so badly needs at this time come out? Do not discount the power of information. Please share this information which Richard Greenfield so descriptively and professionally detailed last evening with your friends and colleagues.

I thank you.

Questions, comments, constructive criticisms always appreciated.

LD

Our financial regulators, both the SEC and FINRA, certainly failed American investors. The structural failures of these regulators have been highlighted by their own internal reviews authored by David Kotz for the SEC and Charles Bowsher for FINRA.

Over and above the structural failures of these regulators, both the SEC and FINRA have major image problems. What is at the core of those image problems? The following:

> A strong perception that their relationships with Wall Street are far too cozy. Additionally, Uncle Sam has gotten slammed for the depth of relationships and number of hires specifically from Goldman Sachs.

> A strong perception of a general lack of experience throughout these organizations.

Against these widely held perceptions, I am left dumbstruck by news of a very senior hire by the SEC. The SEC announced this morning the hiring of Adam Storch as Chief Operating Officer for its Enforcement Division. I do not know Adam Storch nor would I besmirch his capabilities. That said, for SEC Head Mary Schapiro and SEC Director of Enforcement Robert Khuzami to hire Mr. Storch as COO within this division raises serious questions that deserve to be addressed. What are those questions?

1. If the SEC is in need of experienced people, how does a 29 year old fit that bill?

2. If Uncle Sam in general has been tainted by a perceived cozy relationship with Goldman Sachs, how is it that one of the first key senior hires at the SEC comes from Goldman Sachs?

Bloomberg sheds light on Mr. Storch’s hiring in writing, SEC Said to Hire Goldman’s Storch for Enforcement Job:

The U.S. Securities and Exchange Commission hired Adam Storch, a 29-year-old former employee in Goldman Sachs Group Inc.’s business intelligence unit, as the enforcement division’s first chief operating officer, according to people familiar with the decision.

The COO, who started Oct. 13, has “a great deal of background” in technology and managing processes and the pace of work, Robert Khuzami, head of enforcement, said yesterday in Washington. Storch, who worked since 2004 in a unit at Goldman Sachs that reviewed contracts and transactions for signs of fraud, will be charged with making the unit more efficient. Storch, reached by telephone at the SEC, declined to comment.

I would ask Mr. Khuzami when five years became generally accepted as ‘a great deal’ of experience. What has Mr. Storch done to distinguish himself? His experience includes:

Storch holds degrees in accounting and finance from the State University of New York at Buffalo and studied at New York University’s Leonard N. Stern School of Business. He has certifications in accounting, fraud examination and auditing.

Prior to joining Goldman Sachs, Storch was a senior analyst at accounting firm Deloitte & Touche and an intern at Neuberger Berman LLC, a New York-based asset management firm.

I could understand if Mr. Storch were hired as an examiner or perhaps even a senior examiner if he is particularly strong. But COO? Are you kidding?

A COO is not a rank and file examiner. A COO is one of the senior most individuals in any organization. I have a very hard time believing that Mr. Storch is the ABSOLUTE best candidate for this role. What does his hiring indicate about Mary Schapiro’s and Robert Khuzami’s understanding and appreciation of the SEC’s problems?

The question has been asked previously whether Mary Schapiro is the right person to run the SEC. With all due respect to Mr. Storch, his hiring should increase the intensity of those questioning Ms. Schapiro’s capabilities.

LD

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 oversight of Madoff from the time of his launching his firm in 1960.

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.

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.

>> Request and Recommendations

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. These recommendations include:

1. 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.’

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

3. 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.’

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

5. 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.’

6. 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.’

7. 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.

8. 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.’

9. 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.’

>> LD’s Questions:
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. I ask the following:

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?

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.

Comments, questions, constructive criticisms always appreciated.

LD