Finra messed up, what a shock

October 3, 2009

The report by Finra on its failure to detect the alleged Ponzi scheme at Allen Stanford’s offshore bank is no shock.

Finra makes the SEC look like an agressive regulator. And this should give anyone reason to pause when you consider that Mary Schaprio, the current Securities and Exchange Commission chairman, most recently headed-up Finra.

Schaprio tells us her mission is to beef-up the SEC’s enforcement procedures in the wake of its own failings on Stanford and more significantly its botched investigation–or non-investigation–of Bernard Madoff. Why didn’t she first do this when she was at Finra?

The report outling Finra’s missteps notes regulators failed to follow-up on claims made by former Stanford brokers that the CDs the firm’s offshore bank in Antigua was selling were either bogus or “too good to be true.” Going as far back as 2004, a number of brokers raised this claim in arbitration disputes they had with Stanford.

Late last year, after Madoff was arrested, I began investigating allegations that Stanford’s financial empire was a Ponzi scheme. I did this while I was still working at BusinessWeek and early on I came across a few arbitration cases in which brokers had alleged the returns Stanford CDs seemed too good to be true.

Soon after Stanford was charged by the SEC with civil fraud, a source pointed me to an old lawsuit filed in Florida state court where a former employee also claimed the operation was a Ponzi scheme.

All of of these legal filings were either in the public record or in Finra files, yet it appears the level of communication between Finra’s arbitration unit and its enforcement operation is poor. This has been a long standing complaint from brokers, investors and securities lawyers and it needs to be fixed.

The inability of one side of an organization to talk to another can be damaging to a business. It’s no less damaging for a regulatory agency. But when regulators don’t communicate, innocent investors get hurt.


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