Commentaries

Finra messed up, what a shock

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 SEC’s animal house

Mary Schapiro wants her lawyers and investigators at the Securities and Exchange Commission to go back to school. Specifically, she wants them to enroll in something she calls “fraud college.”

From what I gather, the SEC’s “fraud college” will be an intensive training program to help the agency’s employees better detect fraud. It’s not the worst idea. But as Bess Levin at Dealbreaker points out it does sound a bit silly.

Question: Will Schapiro put any investigators who flunk out of “fraud college” on double secret probation?

The SEC is still lame

Don’t believe the hype about the new sense of “urgency” at the Securities and Exchange Commission.

The Wall Street Journal reports that the SEC’s recent string of enforcement actions against Bank of America, General Electric and former AIG chieftain Hank Greenberg is part of a new get tough campaign by SEC Chairman Mary Schapiro. But don’t believe it.

Settling investigations that are so old that the case files are getting green mold on them isn’t the sign of regulatory toughness. It’s simply an attempt by regulators to clean-up the docket so the litigation papers can be sent to cold storage.

Sure, the SEC gets some credit for moving quickly on the Merrill Lynch hidden bonus investigation. But the $33 million fine that Bank of America has agreed to pay to resolve the matter is chump change. And BofA CEO Ken Lewis has an incentive to settle, as he tries to sweep last year’s messy merger with Merrill under the rug.

But as US District Judge Jed Rakoff showed during a Monday court hearing, the SEC’s proposed $33 million settlement with BofA is nothing more than business as usual for the nation’s top securities cop. Rakoff got BofA’s lawyer to acknowledge that in agreeing to the settlement, the big bank doesn’t believe it did anything wrong in failing to disclose to investors that Merrill paid big bonsues to some of its employees.

The admission by BofA’s lawyer reveals a fundmental flaw in how the SEC goes about settling high profile cases. By allowing parties to pay a fine without “admitting or denying” the alleged regulatory offense, the SEC is nothing more than a collection agency.

It’s high time for the SEC in signature cases to require a bank, broker or rogue Wall Street executive to admit some liability before settling a civil enforcement action. And if that condition is a dealbreaker, then go ahead and sue ‘em.

Flash Schumer scores a victory–almost

It appears Senator Chuck Schumer, aka Flash Gordon ,is going to get his way on the dubious practice of “flash trades.” Maybe.

Schumer says the Securities Exchange Commission has told him it is close to banning flash trades–a process in which some high-frequency trading desks get a few millisecond sneak peak at market trade orders. This practice has fueled allegations that some high-frequency trading desks are getting an unfair advantage and can frontrun the general market.

Actually, the SEC isn’t quite ready to that, although the commission appears to be moving towards a ban on most, if not, all flash trades. (See statement below).

A ban on flash trades would be a good thing. But it’s still not clear how widespread the practice is.

And, as I’ve said many times before, this is the least serious issue when it comes to the matter of high-frequency trading.

I’m still waiting for Flash Schumer or SEC Chairwoman Mary Schapiro to come straight out and say they are worried about the possibility of HFT sparking a 1987-style meltdown.

A ban on flash trades is nothing more than going after the low-hanging fruit. If the SEC simply stops there it simply hasn’t done its job of protecting investors from a potential HFT-sparked market meltdown in the Wall Street matrix.