Well, actually, no. Madoff has certainly reserved a special place in financial ‘hell’ for his fraud, but make no mistake, the single greatest fraud ever perpetrated on investors is the collective Wall Street enterprise that marketed and distributed Auction-Rate Securities. The ARS market at its peak was a $330 BILLION market. Of that initial size, those on Wall Street tracking developments within the ARS market project that $165 BILLION held by thousands of retail and institutional investors remain frozen.
The Wall Street Journal highlights the next in what could be a long running series of ARS investigations in writing this morning, Cuomo Says Schwab Faces Fraud Suit:
In an official notice sent to Charles Schwab & Co. Friday, Attorney General Andrew Cuomo warned that his office plans to sue the largest online brokerage firm for civil fraud over its marketing and sales of auction-rate securities to clients. Emails and testimony cited in the letter show Schwab’s brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing.
I am heartened to see AG Cuomo launch this action against Schwab but I wonder why he does not simultaneously take the same action against EVERY bank, broker, and investment management firm involved in the marketing and distribution of ARS.
Regular readers of Sense on Cents know that I believe the ARS trail leads back to the Wall Street self-regulatory organization, FINRA. For the benefit of our newer readers, allow me to reconnect the dots once again.
In reading FINRA’s 2007 Annual Report, I unearthed that FINRA owned $647 million ARS. In reviewing NASD’s (FINRA’s parent) 2003-2005 Annual Reports, I highlighted that the NASD did NOT account for ARS as cash. I pursued this story of FINRA’s ownership of ARS and Bloomberg broke it in late April. There is much more that needs to be exposed. The WSJ continues:
Mr. Cuomo writes in the letter that his office would be open to a settlement with Schwab, but it must agree to buy back the securities from investors still stuck with them.
Why just Schwab? Why shouldn’t every institution involved in this fraud be similarly engaged and held to the same standard right NOW!! Who are some of these outfits? Oppenheimer and Co. and PIMCO to start.
More than a dozen Wall Street firms and small brokerages agreed to pay more than $60 billion to buy back the securities from investors after investigators found they didn’t properly inform clients about the risks, or that the market was crumbling, increasing their losses. Schwab is among a handful that haven’t settled.
“The Attorney General’s allegations are without merit,” Schwab said in a statement. “They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created” and then stopped supporting the market.
At Charles Schwab, which uses the advertising slogan “Talk to Chuck,” brokers admitted their ignorance about the product, according to Mr. Cuomo’s letter.
“Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee,” Schwab said.
The attorney general’s investigation of Schwab found that brokers were unaware of and misleading about the risks of the securities — promoting them to customers as cash-like investments, according to the letter. It also found that some traders and executives knew the market was cracking as early as the autumn of 2007 and took steps to protect the company, but didn’t disclose those problems to customers.
Schwab mistakenly believes they are being singled out. EVERY institution should be pursued in similar fashion. Last I checked, ignorance of the law is no excuse for perpetrating a crime.
Who is charged with protecting investors and making sure investment products are marketed and sold appropriately? FINRA (Financial Industry Regulatory Association):
The Financial Industry Regulatory Authority (FINRA), is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,850 brokerage firms, about 173,000 branch offices and approximately 649,000 registered securities representatives.
Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
FINRA failed miserably in protecting investors from this Auction-Rate Securities fraud. Was FINRA merely asleep at the wheel and missed this fraud? Anything but.
FINRA owned $647 million ARS and liquidated them in Spring 2007. Lehman Bros. liquidated ARS positions in the same time frame. On that topic, I wrote “U.S. Attorney and SEC Investigating Lehman’s Auction-Rate Securities Sales; They Should Also Invstigate FINRA’s.”
While AG Cuomo should pursue each and every institution involved in this fraud, in my opinion, he is working from the top down. He should start at the bottom by pursuing FINRA’s actions and involvement in this fraud.
I write this commentary in hopes that interested parties are able to further pressure media outlets and regulators to address FINRA’s liquidations of ARS and lack of investor protection from this fraud.
Meanwhile, I am in the process of writing to members of the FINRA board on this topic. Will they respond?
For interested parties new to Sense on Cents, please access all information on this topic by typing Auction-Rate Securities in the search window on any page.
Thousands of investors with $165 BILLION frozen in ARS. Each and every investor deserves an immediate return of all their capital. If our markets are ever able to achieve real transparency and integrity, the public at large needs to know the full extent of the FINRA angle in this ARS fraud!! This story is not going away.
by Larry Doyle
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