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

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

Please join me this evening for NQR’s Sense on Cents with Larry Doyle as we dig deeper and work harder in navigating the economic landscape. My special guest will be Genevievette Walker-Lightfoot.

Ms. Walker-Lightfoot was previously employed as an attorney in the Office of Compliance Inspections and Examinations at the U.S. Securities and Exchange Commission in Washington, D.C. for almost five years, where she worked on policy matters and conducted field examinations and inspections of transfer agents, brokerage firms, hedge funds, trading exchanges, ATSs, SROs, credit rating agencies, mutual fund companies and investment advisers.

Genevievette Walker-Lightfoot

Genevievette was the lead attorney on the 2003-2004 Madoff examination conducted by OCIE and identified the substantial elements of his fraud in 2004, as detailed in a July 2, 2009, Washington Post article. However, despite her attempts to pursue her findings, her supervisors directed her efforts elsewhere, missing an opportunity to have caught Madoff’s Ponzi scheme four years prior to him turning himself in to authorities.

Ms. Walker-Lightfoot received the SEC’s Chairman’s Award for Excellence for her work on the Mutual Fund Reform Team, as well as the SEC’s Capital Markets Award for her work on the Research Analyst/Investment Banking Conflicts of Interest Team. Prior to the SEC, Genevievette was employed with the American Stock Exchange’s Member Firm Regulation Division in New York and the Dispute Resolution Department of the NASDR, now known as FINRA, in Washington, D.C.

She is a graduate of Georgetown University in Washington, D.C. where she received a Bachelor of Arts in government, with a concentration in international relations and a minor in French. She also holds a J.D. and International Law Certificate from the Columbus School of Law at the Catholic University of America in Washington, D.C. and an M.B.A. from the R.H. Smith School of Business at the University of Maryland at College Park, Maryland. She has been a member of the State Bar of Maryland for almost ten years.

Since January of 2006, Genevievette has been employed with the Federal Reserve Board in the Division of Banking Supervision and Regulation’s Large Institutions Group in Washington, D.C., where she has responsibility for the Bank of New York Mellon Corporation, the Depository Trust Corporation and ICE Trust. She was previously a member of the Market and Liquidity Risk Group where she was the SEC, brokerage firm and private equity and merchant banking activities risk specialist for banking organizations.

Share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins. Please join me tonight for this riveting discussion. **Note: the views expressed by Genevievette Walker-Lightfoot during this broadcast are her own personal views and do not in any way reflect her position as an employee of the Federal Reserve Board.

As a reminder, past episodes of No Quarter Radio shows are archived and can be played back at the BlogTalkRadio site. In addition, No Quarter Radio programming is available as a free podcast on iTunes. From the iTunes Store, type “NQR podcasts” in the search window.

Many thanks to Larry Johnson and the rest of the team at No Quarter for providing such a vibrant media vehicle as No Quarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!

LD

While President Obama and Congress may believe financial regulatory reform needs to focus on the SEC, the Federal Reserve and assorted other governmental agencies, I would remind the President and his Congressional colleagues that Wall Street is regulated not only by the SEC but to a great extent by the self-regulatory organization known as FINRA (Financial Industry Regulatory Authority).

This discussion on “America’s Nightly Scoreboard” is separated into two parts.

Highlights from the videos include:

1. Richard Greenfield, an attorney representing Amerivet Securities, makes the claim that FINRA under the leadership of Mary Schapiro failed to protect investors.

2. former SEC chair Harvey Pitt defends Shapiro and FINRA

3. Greenfield indicates that a FINRA insider claims FINRA invested in Madoff!!

4. I join the panel and provide details as to why FINRA, via its parent the NASD, did have responsibility to oversee Madoff. I also comment on the nature of the relationship between Wall Street and Washington, FINRA’s investment and timely liquidation of its Auction-Rate Securities position, and the need for total transparency at FINRA.

4. the head of the Madoff Victims Coalition for Investor Protection, Ronnie Sue Ambrosino, weighs in that the entire regulatory structure from the SEC to FINRA to SIPC (Securities Investor Protection Corporation) have failed to protect investors.

In my humble opinion, the conclusion of this show highlights the screaming need for FINRA to open its books and records for a full and thorough independent analysis and review. In so doing, hopefully investors specifically and the American public at large can regain a degree of confidence in the badly shattered Wall Street regulatory process.

If you care about the markets and our country, I beseech you to watch this 18 minute video in its entirety.

Thoughts, comments, questions always welcome and appreciated.

LD

PART I

PART II

A “failure” that you “continue to regret”? Uh, no shit, Sherlock! And how do you think all of those people who lost their LIFE SAVINGS feel? Do you think they “regret” your incompetence?? I mean, really – no freakin’ duh. That’s putting it so mildly as to be insulting (to say the least), especially given what people went through, are going through, WILL be going through as a result of this “botch”:

The Securities and Exchange Commission botched numerous opportunities to uncover Bernard Madoff’s Ponzi scheme, in part because of an inexperienced staff and delays in examinations, said an SEC inspector general report.

How did one of the largest financial scandals of our time go on for so long without being detected? WSJ reporters offer insight into Bernard Madoff’s alleged Ponzi scheme.

The report, an executive summary of which was released on Wednesday, provides the most-detailed, strongest criticism to date of the agency’s failure to uncover the multibillion-dollar scheme. The release of the findings comes as the SEC is seeking to rebuild its credibility.

According to the report, the SEC received six warnings about Mr. Madoff’s trading business over 16 years, but failure of staff to follow up adequately — including to determine whether trades were executed when Mr. Madoff said they were — and poor communication within the agency’s divisions enabled him to continue his scheme.

Mr. Madoff confessed to the scheme in December and is serving a 150-year prison sentence.

So, that’s 6 warnings over 16 years, with “poor communication” and inept staff (okay, that wasn’t their word for their staff, but really – that’s the bottom line, is it not?) allowed this man to continue stealing the life savings of numerous people. It boggles the mind, especially that they think this will help rebuild their credibility. Oh, yeah – sure thing. At least there is this one positive that came out in the report:

The investigation found no evidence that the SEC staff had been influenced by Mr. Madoff or any of his family members. A senior SEC examinations official was dating Mr. Madoff’s niece during part of that period and is currently married to her, sparking speculation that Mr. Madoff’s firm may have gotten a break.

SEC Chairman (sic)Mary Schapiro said on Wednesday that missing the fraud “is a failure that we continue to regret.” She has taken some steps to address the SEC’s problems, including recruiting a new enforcement director, who is implementing substantial changes to how the agency operates. Ms. Schapiro has also proposed rules aimed at tightening regulatory holes that Mr. Madoff had taken advantage of.

Oh, whew, that’s a relief. Between the family not being involved and Chairwoman Schapiro’s acknowledgment that this was a “failure that we continue to regret.”

Good grief, how do these people SLEEP at night?? Seriously! Sheesh.

Perhaps some oversight over those who are supposed to be overseeing is in order:

Sen. Charles Grassley (R., Iowa) called the SEC’s failures “further evidence of a culture of deference toward the Wall Street elite at the SEC.” He said, “Until that culture is transformed, the SEC will not be the tough cop on the beat that the public needs.”

Ms. Schapiro said in a letter to Sen. Grassley that she expected to have approval from the full commission to distribute the full, 450-page inspector general report on Friday. She said she wouldn’t permit redacting the substance of the findings but sought to “safeguard” the names of junior employees who didn’t play central roles in the reviews.

The warnings and tips about Mr. Madoff’s operation ran the gamut. Some were based on hunches, others on analysis of his firm’s purported trading strategy. One self-described “concerned citizen” offered specific information alleging that Mr. Madoff combined customer accounts with those of the firm and that he kept two sets of records, one real, one phony.

The 22-page executive summary said agency staff was too inexperienced or too narrowly focused, and missed opportunities to uncover the fraud. It said the SEC’s structure hampered its effectiveness, with two groups of examiners looking separately into Mr. Madoff’s business at one point without knowing about the other.

That is just pathetic. I’m sorry – it just is. I mean, c’mon – did they have to see it up in lights or something? Oh, wait – I should save some of my ire for this:

SEC Inspector General David Kotz said “perhaps the most egregious failure” was that the SEC failed to corroborate Mr. Madoff’s trading records with those held by the Depository Trust & Clearing Corp., the clearinghouse for stocks, even after Mr. Madoff handed them his account number.

Sputter, sputter, #*%&*&*&# – say whaaaa? Perhaps “inept” is too kind a word:

The summary described how the SEC staff at times didn’t follow through on leads, failing to seek information from a third party because reviewing such information could be too time-consuming. In another instance, an SEC examiner looked into an institution that Mr. Madoff had said he used to clear his trades. The examiner learned from the institution that there was no trading activity by Mr. Madoff during the period under review but never followed up or informed the rest of the staff, according to the executive summary.

Despite three examinations and two enforcement investigations into Madoff, “at no time did the SEC ever verify Madoff’s trading through an independent third-party, and in fact, never actually conducted a Ponzi scheme examination or investigation,” the summary said.

The SEC, during two of the examinations, caught Mr. Madoff in inconsistencies or contradictions, the report said, but the staff only questioned him and took his answers, even those that were “seemingly implausible,” at face value.

Well, golly gee – what could be problematic about that, huh? Just some glaring inconsistencies, and downright fabrications – whaddya want from them anyway??

Oh, you know there’s more:

The IG report found that Mr. Madoff attempted to intimidate SEC staff during an examination in 2005 by dropping names of senior SEC officials, but the report didn’t conclude whether he was successful. It said Mr. Madoff told prospective investors that he had been reviewed by the SEC, as a way to attract business.

The report confirmed the agency had received three tips from Harry Markopolos, a former rival to Mr. Madoff, from 2000 through October 2005, who urged the SEC to investigate Mr. Madoff’s trading operation, saying it was “too good to be true.”

The SEC received another complaint in 2003 from “a respected” hedge-fund manager who wasn’t identified in the executive summary. The report said the manager questioned whether Mr. Madoff was trading options at the volume he claimed, arguing that his strategy and returns weren’t duplicated by anyone else. He said these factors were “indicia of Ponzi scheme.”

That tip, which wasn’t pursued for seven months, was ultimately picked up by the SEC examination group focused on broker-dealers, which the report said lacked intimate knowledge of the investment-advisory business. The group only looked into allegations of potential front-running, or trading ahead of client orders, because that was the group’s expertise, the report said.

Aren’t you glad to know that Madoff’s intimidation apparently WORKED?? Good grief. And I don’t know about you, but I firmly suspect if these kinds of complaints and allegations came up against a regular ol’ person, they would have been treated pretty differently. As in, it would not have taken them SIXTEEN YEARS to figure it out!! Ahem. So how did they finally clue in? Like this:

During a review of another firm, the SEC discovered internal emails questioning the firm’s investment in Mr. Madoff’s business. One email provided a “step-by-step analysis of why Madoff must be misrepresenting his options trading,” according to the report. The email said Mr. Madoff couldn’t have been trading over an options exchange since the volume of trades he would need to execute to match his strategy couldn’t be supported in the market.

The SEC exam staff in New York said the emails indicated “some suspicion as to whether Madoff is trading at all.” It was eight months before a team was in place to look into the issue.

One SEC examiner said of Mr. Madoff during the examination that “veins were popping out of his neck.” When examiners reported Mr. Madoff’s aggressively pushback tactics to higher-ups, they didn’t get any support and were “actively discouraged from forcing the issue,” the report said (emphasis mine). (Write to Kara Scannell at kara.scannell@wsj.com )

Well, thank heavens for email, huh? Though it STILL took them 8 months to get off their duffs and do something about it. So many complaints, over so long, and only when they basically get it all spelled out for them are they able to make a move. When they got around to it, that is.

And what is the deal with the lack of support, no, check that, the discouragement from “forcing the issue”?? From where did that come, I wonder? Hmmm. Curious.

Isn’t it so big of the SEC to admit it completely botched the inquiries into Madoff’s shenanigans? After sixteen years? At the expense of BILLIONS of dollars of other people’s money? I reckon we can all rest easy now that the SEC has admitted its failures, make that numerous failures, over a number of years, right? I mean, really – lightning can’t strike twice in the same place, can it? Can it?

The American public learned very little with the release of the SEC Inspector General David Kotz’s review of the SEC’s failure to expose the Bernard Madoff Ponzi scheme. In fact, having just finished reading the Executive Summary of his investigation, I would maintain it is largely an extended regurgitation of much of what Harry Markopolos provided in his Congressional testimony last February.

What was Harry’s conclusion of his exhaustive pursuit to expose the Madoff scam? The SEC is incompetent.

What was the Inspector General’s conclusion from his investigation? In so many words, Kotz lays out the same results. The SEC was incompetent on so many fronts from the early 1990s until Madoff was exposed last December.

For those who would like to read Kotz’s 22-page summary of his investigation, just click on the image below.

Is this all the public gets? Is this all the public can expect from our regulators? Nothing more than a mea maxima culpa? How about a real pursuit of the total truth? This Madoff affair has many more legs. Let’s navigate.

Ronnie Sue Ambrosino, head of the Madoff Victims Coalition for Investor Protection (my guest on NQR’s Sense on Cents with Larry Doyle on August 16th), and her husband Dominic comment on the Inspector General’s report and simultaneously call out FINRA last evening during an interview on Fox Business News.

Ronnie Sue and Dominic effectively connect the dots while highlighting the following:

1. Current head of the SEC Mary Schapiro formerly headed FINRA

2. Harry Markopolos defined FINRA as being “in bed” with the industry when he provided Congressional testimony this past February detailing his decade-long pursuit to expose the Madoff Ponzi scam.

3. FINRA had an internal investment portfolio (Sense on Cents would add that the portfolio was invested in hedge funds, fund of funds, and also had hundreds of millions in Auction-Rate Securities).

4. Amerivet Securities has recently filed a complaint against FINRA. The complaint indicates it has information and reason to believe that FINRA’s investment portfolio invested in Madoff.

Sense on Cents would add that the Amerivet complaint looks to have FINRA provide a full and thorough review of the following:

>> interactions with the major Wall Street banks

>> its compensation practices

>> its liquidation of its auction-rate securities position in 2007

>> all investment activities

Sense on Cents would further add that the Madoff family had extensive relationships with the NASD, Nasdaq (Bernie helped establish this exchange) and FINRA.

Let’s listen to Ronnie Sue and Dominic Ambrosino:

Is the Madoff investigation over? Any rational individual can understand there are many more regulatory questions needing answers. Where do those questions lead us? Inside FINRA and specifically to its investment portfolio. Why shouldn’t a Wall Street self-regulatory organization mandated to protect investors be obligated, and if need be compelled, to provide total transparency of all its business dealings?

I can only hope major media outlets and Washington pick up this story and understand the need to fully investigate FINRA.

I ask you again . . . is the Madoff investigation over? Not by a long shot!

What do you think?

LD

Related Sense on Cents Commentary:
“Amerivet Complaint Against FINRA Alleges Madoff Investment” (August 25, 2009)
NoQuarter Radio’s Sense on Cents with Larry Doyle Interviews Head of Bernard Madoff Victims Coalition (August 16, 2009)
“FINRA Is Supposed to Police the Market” (April 29, 2009)
“Riveting Testimony from a Great American, Harry Markopolos” (February 4, 2009)

Two weeks ago, Amerivet Securities filed a complaint against FINRA (Financial Industry Regulatory Authority), the Wall Street self-regulatory organization. This morning, Donna Mitchell of Financial Planning provides further insight on this complaint. Ms. Mitchell writes FINRA Rebuffs Amerivet’s Demand to Inspect Records. She reports:

The Financial Industry Regulatory Authority (FINRA) says it will not open its books and records to inspection by Amerivet Securities, the California brokerage firm which recently sued the regulator.

“We disclose a great deal of public information in our annual reports, far more than we are required to do,” says Herb Perone, a spokesman for FINRA. “Our records are not open for public examination.”

Sense on Cents questions why any financial self-regulatory organization mandated to protect investors would not be required to fully open all of its books and records for public review. Additionally, having extensively studied all of FINRA’s annual reports as well as those of its predecessor, the NASD, I echo the questions being raised by Amerivet. Does FINRA have any appreciation for the need for total truth and transparency in our markets and economy? The questions beg: why won’t FINRA fully open its books? are they trying to hide something? do they have reason to be concerned?

OPEN THE BOOKS!!!

Financial Planning continues:

The request for records is part of a civil suit filed Aug. 10 in the Superior Court of Washington, D.C., by Inglewood, Calif.-based Amerivet Securities. It stems from a July 23 letter sent to FINRA from Amerivet, in which the company initially asked to review FINRA’s documents.

In the lawsuit, Amerivet accuses FINRA of a litany of wrongdoings, from mismanaging the organization’s investment assets to placing substantial funds with Bernard L. Madoff Investment Securities, the former broker-dealer and investment advisory firm that was brought down amid a $65 billion Ponzi scheme.

WOW! The allegation of an investment by FINRA in Madoff is a BLOCKBUSTER. What information did Amerivet and its legal representation unearth to make this allegation? This information must be revealed and FINRA must open its books and records to address this charge. (Click on image to access copy of Amerivet complaint)

Financial Planning further reports:

Amerivet also alleges that FINRA failed to regulate and oversee the operations of large securities firms such as the former Bear Stearns & Co., the former Lehman Brothers, Merrill Lynch & Co., and Stanford Financial Group.

Amerivet also claims that FINRA overpaid its executives, sustained investment-related losses of $568 million and separately incurred substantial losses in the auction-rate securities market. “FINRA has failed in what it represents in its advertising to be its core function, i.e. the protection of investors,” Amerivet says in the lawsuit.

Is there any doubt that FINRA has failed to protect investors? Is there any doubt that senior executives at FINRA were paid handsomely?

In regard to the auction-rate securities allegation, is Amerivet maintaining that FINRA lost money on the ARS which it owned or is Amerivet referring to money lost by investors? Details of FINRA’s liquidation of ARS in 2007 must be released. Did FINRA front-run the market in the course of selling its own ARS?

OPEN THE BOOKS!!

Financial Planning gains a degree of insight from FINRA and reports:

FINRA would not comment about the lawsuit directly, but Perone said the organization had steered clear of investing with Madoff.

“As for any claim or question as to whether we had money invested with Madoff, we had no investments of any kind in Madoff or in any of its feeder funds,” Perone said.

The allegations and implications of the Amerivet complaint strike right at the core of our financial regulatory framework. Any credible media outlet should be running the Amerivet complaint as a lead story.

The American public deserves answers.

OPEN THE BOOKS!!

LD

Related Sense on Cents Commentary:

Amerivet Securities Files Complaint vs. FINRA for Release of Investment Information and More (August 17, 2009)
FINRA Must Play by Its Own Rules (August 19, 2009)

How high a pitch and how many tunes will investigators receive from the canary known as Frank DiPascali? Do you think there are a whole host of people not sleeping very well lately wondering what notes Mr. DiPascali may reach?

Who might some of these people be?

1. Walter Noel: head of Madoff’s largest feeder fund, Fairfield Greenwich.

2. Sandra Manzke: formerly headed Tremont Advisors, another large feeder fund. Manzke left Tremont in 2006 and launched a money management firm Maxam.

3. Andrew and Mark Madoff: Bernie’s sons ran the Madoff broker-dealer operation.

4. Peter Madoff: Bernie’s brother and general counsel.

5. Shana Madoff and husband Eric Swanson: Shana, Bernie’s niece, married former SEC lawyer Swanson in 2007. Swanson was with the SEC for ten years prior to departing in 2006. Ms. Madoff served on a committee at the Wall Street regulator FINRA.

6. Robert Jaffe: vice-president of Cohmad Securities. Jaffe was instrumental in signing up a multitude of investors with Madoff.

7. Sonny and Marcia Cohn: this father-daughter team owned Cohmad Securities, which was physically located within the same space as Madoff’s operations.

8. Certain large Madoff investors with whom DiPascali had regular contact. How much did they know?

9. Who were the regulators from FINRA and the SEC responsible for monitoring the Madoff operation? Are they nervous as well? Will investigators dare to pursue this angle?

Obviously, if any of these individuals (and any others) are implicated by DiPascali, they are entitled to due process.

I would love to see Mr. Harry Markopolos reintroduced into this equation. Mr. Markopolos clearly knew the inner workings of the Madoff operation. Will investigators have the courage to engage him and expose the shortcomings in our regulatory oversight?

No stone should be left unturned!!

LD

Bernie Madoff

Having received the maximum 150 years in prison, Bernie Madoff now knows how he will ‘exist’ for the balance of his ‘life.’ Today does not represent the end of the pursuit of justice in this massive fraud, but truly the beginning.

Victims of crime typically look for justice in two forms: restitution and justice “for all” parties involved.

The victims of the Madoff Ponzi scheme will be lucky to receive a small percentage of the monies invested in this fraud. The money is obviously extremely important to all the victims, but there is much more to justice than that.

For justice to truly be served, all of those who aided and abetted this fraud must also be brought to justice and pay the maximum price. To think that Bernie Madoff managed this scheme by himself is beyond naive. The Wall Street Journal highlights as much in writing, For Victims, Downsized Lives and Many Shattered Dreams:

“I hope he has to go to jail forever,” said Sheila Ennis, 63, of Manhattan Beach, Calif. “I hope they get all his assets, and I do feel others were involved. But now it’s a question of how we fix things for ourselves.”

Not unlike losing a loved one, victims of crime also need closure. That closure is only possible when every individual involved in the crime pays!! A financial settlement with Ruth Madoff should not preclude a potential indictment of her or her sons. Others directly and indirectly involved in this fraud also need to be fully investigated. To do otherwise would be a miscarriage of justice. If those investigations were to cross into government offices, then so be it, because justice neglected is justice denied!

Make no mistake, the fact that Madoff received the maximum allowable sentence is also an indictment of the SEC. Why? The fact that the Madoff Ponzi scheme grew as large as it did was simply a function of the culpability of the SEC. All those at the SEC who never pursued the Madoff fraud over the years should feel real personal and professional shame today.

As we move forward, I can only hope that our country and all who love it view the Madoff sentencing not only as the beginning of justice for the Madoff victims, but also the beginning of real transparency for victims of all financial frauds.

As I write this, though, I am reminded of the thousands of investors and tens of billions of dollars still frozen in Auction-Rate Securities. Those investors have neither restitution, nor justice, nor real media or judicial investigations truly working for them.

As a nation, we have a long way to go to regain our moral stature and promote our markets as being free and open for all.

LD

Hedge funds are currently unregulated. How could the SEC have found potentially another 150 “rats” in the space of a mere three months since Ms. Schapiro has been on the job? My instincts lead me to believe the following:

1. Ms. Schapiro is trying to convey a sense of leadership and progress on fraud investigations after the abysmal performance on the Madoff scheme. The SEC needs to burnish its image and Ms. Schapiro is trying to address that with this news release.

2. I have no doubt that many other hedge funds did operate as Ponzi schemes and likely had money invested in Madoff knowing he was the largest rat. As investigators from the SEC have reviewed the list of Madoff investors, the info there has likely led to other hedge fund frauds.

Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.

3. We know that FINRA, the self-regulatory organization overseeing Wall Street, had investments in hedge funds, fund of funds, and private equity. That info was provided in the FINRA 2007 Annual Report. We are STILL waiting for the release of the FINRA 2008 Annual Report. Could FINRA have invested in Madoff? Could FINRA have invested in other hedge fund Ponzi schemes? Why by April 28th has FINRA still not released their Annual Report?

In addition to releasing hints of hedge fund Ponzi schemes, Schapiro also provides hints of ongoing investigations into criminal activity in the municipal finance and credit derivatives sectors. “Low tide” in the markets will certainly reveal more rats scurrying amdist the garbage. Where’s FINRA? Actually, none other than Ms. Schapiro herself would know of FINRA’s investment activities as she headed FINRA prior to her move to SEC. Call me suspicious, but I view FINRA’s delayed release of its 2008 Annual Report as more than a casual event.

The investing public deserves so much better.

LD

Bernie Madoff

utilized this approach, even after Bernie shipped jewels and assets overseas, as they were trying to extract as much information as possible. This week’s news will give the public the first hint as to what kind of information the government has extracted.

My father was an assistant district attorney in Suffolk County, MA and has often made the point that white collar crime never received the degree of justice it deserved. The crime that Bernie and team propagated not only directly impacted his investors but also massively impacted the public at large. How is that? Bernie’s Ponzi scheme, perpetrated over such an extended period of time, has caused a crisis of confidence in our markets, our regulatory system, and ultimately our country.

It defies logic that this Ponzi scheme was not executed without enormous cooperation and involvement by a number of individuals both inside and outside the Madoff organization. There is no doubt in my mind that many of those individuals have information, that if revealed, can and will be extremely embarrassing for some high profile people within our regulatory bodies and our government.

If Bernie’s plea deal is perceived as far too generous and closer to the end of the process than the beginning, I for one will not be silent nor should the public at large.

In assessing Bernie Madoff’s actions, I see implicitly thousands of instances of assault, breaking and entering, grand larceny, rape, and premeditated murder (e.g Rene-Thierry Magon de la Villehuchet’s suicide). Call me harsh if you’d like, but that is how I see it.

If the government does not exact justice for this magnitude of criminal behavior with the pressure ratcheting increasingly higher on his den of thieves, then this country will have missed an opportunity to promote the virtues and principles upon which it was built.

No Justice, No Confidence!!

LD

**Cross-posted from my blog, Sense on Cents. Come by and visit!

Ben Bernanke’s testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be … nowhere.

Simon Johnson and James Kwak read it the same way I do:

This is another sign of the serious brainpower that has been expended on finding ways to avoid or minimise government ownership of banks, and to avoid the slightest possibility of offending shareholders – shareholders whose shares have positive value primarily because of the expectation of a further government bail-out.

And The Economist’s Free Exchange puts it bluntly:

At this stage, I joked, I’d be just as happy with them just saying, “We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That’s pretty much the whole plan and we’re counting on it bringing the financial sector back to life someday, somehow”. Is it just me or is that pretty much what Ben Bernanke said yesterday?

No, it’s not just you.

Well, that’s good to know. I mean, it seems like a whole bunch of us have been saying this makes no sense, and we don’t want our hard-earned taxpaying dollars going down the drain, but we felt like voices crying out in the wilderness. Perhaps we are not alone afterall:

I’d add a political-economy point. Here’s Noam Scheiber, in the new TNR economics blog:

Yesterday afternoon I spoke to a senior Democratic aide in the Senate who repeatedly emphasized that, the way things stand now, it would be almost impossible to get another cent for the banks. Congress has “bailout fatigue,” the aide said.

Indeed. As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

More and more, it looks as if we’re headed for the decade of the living dead.

I couldn’t have said it better myself. But like I said, I’m not a major economist who won a Nobel Peace Prize. Krugman is and did, so I’m gonna listen to him.

So speaking of banks wanting more money, guess who is back at the trough asking for more money from us, the taxpayers I’ll give you a hint – it’s an alphabet company. Yep – you got it, AIG:

Hell freakin’ yeah, they’re back. Some nerve, too, if you ask me, especially after their lavish spending ways. They want us to continue to subsidize them when tey have not demonstrated any fiscal restraint or responsibility?? Are you kidding me?

And while I am on this topic, it is high past time for the Democrats to stop blaming this situation totally on the Republicans. I can understand WHY they are trying to convince everyone that they had absolutely NOTHING to do with this, but the reality is that they have been in charge of BOTH Houses of Congress for over two years now. Where was their oversight of the SEC, in its non-existent oversight of people like Bernie “Made-Off”? Where were they when Franklin Raines ran Fannie Mae into the ground (and Raines, who left in disgrace, was one of Obama’s advisers)? Where were they when Jim Johnson ran Freddie Mac into the ground (and we know where Tim Johnson is – he was on Obama’s Veepstakes Search)?

So, yeah – Bush was horrible – we know that. But for the past 2 years, the DEMOCRATS have been the ones in charge of the purse-strings and the oversight, so stop the blame game, start taking some responsibility, and STOP HANDING OUT OUR MONEY LEFT AND RIGHT!!! Enough already!!

And that ESPECIALLY goes for you, Nancy Pelosi, with this new $410 BILLION dollar package chock-full of pork the House is proposing!! ENOUGH!!!

We’ll be departing from “LD’s Central Station” on Saturday at 9:00 am EST until 12 noon to attempt to put some clarity into this madness!!

We thought the month of January was challenging but it seems we were just getting going. With the turns on the track getting ever more challenging, we will do our best to keep you informed and ahead of the curve.

Our train was packed last week so we will make sure to keep those extra cars. Make sure you board promptly, get settled, grab a coffee, and settle down for an engaging online Q/A chat as we “navigate the economic landscape.” Bring a friend along as well.

For our newer riders, your conductor is not a professional financial planner but merely a Wall Street veteran who welcomes sharing his instincts and experience.

While we board, let me preannounce that we will have a very special show Sunday evening on LD’s Dollars and Sense on No Quarter Radio from 8-9pm.

We have two very interesting guests joining us. Lynn Marshall has one of the most unique backgrounds in the world of finance today. How does one develop a background that includes senior level experience in investment banking, agriculture, and community banking? Think Lynn has some amazing perspectives on the economy and markets? Don’t miss him.

Additionally in light of the developments at Stanford Financial, we are very happy to have John Moynihan return to our show to discuss the dynamics in the world of offshore banking. Find out more than you could ever imagine by talking to these enlightened experts on LD’s Dollars and Sense on No Quarter Radio this Sunday evening from 8-9pm.

Aaaaaaaaaaaall Aboard!!

In the midst of the current economic turmoil, we all want to look for individuals, groups, parties, and/or industries that are culpable and direct our indignation towards them. While we may gain some sort of short term gratification, are we changing the nature of the dialogue and in turn the course of our country? I think not.

The opportunity for the “silent majority” within the American public to voice their opinion, promote real core values of decency and accountability, and “lead” our country has never been greater.

The greatness of our country is in its diversity, but those who would swamp our core values of decency and accountability in pursuit of their own commercial success has vastly exceeded the level of acceptability. I am fully tolerant of those who make mistakes to be allowed the opportunity to make recompense and move on. However, in light of the current dynamics at work in the markets, economy, and society as a whole, I believe we are paying the price for the long term erosion of a set of core values founded on decency and integrity.

Where do we see this erosion? I guess the question could be posed as, where don’t we see it?

Sports….within every league, the pursuit of the almighty buck has decimated the virtue of decency and integrity. Speak up and don’t patronize those teams and organizations that condone cheating.

Politics…from both sides of the aisle, politicians collect excessive money and “buy” elections, rework districts, “pay to play,” cheat on taxes, and throw ridiculously exuberant celebrations. Inundate your representatives with messages of disgust. Let them know that a bill (the stimulus bill includes provisions that restrict bidding to union labor) that restricts a fair and competitive bidding process from both union and non-union labor is UNACCEPTABLE!!

Music…the invasion of vulgarity in every form into this medium far exceeds the freedom of expression. The same can be said for film. Don’t patronize them.

Families…when a father does not take the responsibility for bringing a child into this world, he is cheating the society that very often pays the cost. 70% of African American newborns enter this country into single parent units. 50% of Hispanics and 30+% of Caucasians. If Barack Obama wants to talk about RESPONSIBILITY, then let’s start right here!!

Business….why is it 2009 before women are paid equal wages to men? Why do business executives promote excessive profit versus doing the right thing by their employees and customers? Be vocal in your support of businesses that operate with integrity and equally vocal in your contempt of those that don’t.

While we can debate and discuss Stimulus Plans, Financial Stability Plans, market volatility, recessions (if not depressions), and so on, the real debate before our country at this moment in time is actually much larger than any of this.

Who are we as a people? What do we truly want for our children and grandchildren? What degree of sacrifice are we willing to make for future generations?

Will we be the leaders we want and know that we need? This is OUR country. I implore you to become that much more vocal in your own communities for the voice of decency and integrity. In doing so, we will be promoting good business principles. I firmly believe that by changing the nature of the dialogue, we can change the nature of our business and economy. Our markets may then begin to improve. Unless and until that happens, I am not encouraged that we will see the improvement that many political and business pundits would have us believe. While some may think cheating can be viewed in isolation, a society that tolerates cheating en masse is destined to failure. Cheaters NEVER win.

Share the voice of reason. Let us talk the talk, walk the walk, and be the leaders that our country needs!!!

Sorry if some view this as preaching but I, like many of you, am past the point of accepting the multiple corrosive aspects of our society that create a cesspool for our economy as a whole.

LD

The media focus is almost entirely on the quantifiable costs of the financial meltdown—shrinking investments, foreclosed homes, repossesed automobiles, lost jobs, and too little cash to pay for needed food and tangible things.

We don’t talk enough about the emotional costs of what is going on. Stress, worry, feelings of helplessness, fear of loss, and what the future holds. Once the harbinger of hope and optimism while on the campaign trail, our new president now speaks of disaster and catastrophe.

The feelings most of us experience play havoc in our heads and, as a direct result, our bodies. And some have gone over way the edge. Writing for Time, Ken Stier reports that shortly after Bernie Madoff’s 50 billion dollar Ponzi scheme became known, a French financier killed himself in his New York City office. Rene-Thierry Magon de la Villehuchet was apparently devastated when a billion of his clients’ and his own family’s dollars were lost in Madoff’s mega-swindle. A financially distaught businessman in Los Angeles killed his wife, children, and then himself. Calls to suicide hotlines have risen sharply.

It seems that now is the time to care more for each other. In a thoughtful U. S. News and World Report article, Liz Wolgemuth advises co-workers to not avoid their laid-off colleagues but rather to acknowledge them with a hug or similar caring gesture. Words are not important or necessary, and newly departing workers don’t need advice quite yet.

That advice can be generalized out to everyone we know who appears to be in (or headed for) trouble. One of my friends confided that he couldn’t bear to call a mutual friend who was losing his home because words would only fail. He also felt guilty because his home wasn’t in peril. But, it’s easy to break through that awkward barrier by a simple communication that one cares (e.g., “Hi—I heard what is going on, and I just want you to know that I am thinking about you both”).

Some are in a position to be helpful to those around them in concrete ways—gifts, job tips, running errands, watching after kids while parents job-seek, and the like. But most of us are, ourselves, bracing for whatever is coming down the pike. We can’t count on corporations, financial institutions, or our politicians–they seem to subvert whatever they touch–but we can trust the substantial research literature on affiliative behavior; It clearly demonstrates the uncommon power of just being there for each other in whatever ways we can, if only to offer emotional support. It’s not the same as money, but it’s worth a lot.