How the Government is taxing small businesses

Recently sticker shock had eyes popping out of their head all across America as Firm owners received their SIPC bill. For nearly 14 years the SIPC insurance cost of a brokerage firm was $150.00 flat fee paid annually. That changed dramatically for firms in the past few weeks as bills totaling 5, 10, even $50,000 began arriving at firms doorsteps to help pay for the huge cost associated with bailing out the Madoff’s and Lehman’s of the world. Instead of a flat fee, firms are now being taxed (or punished depending on your view!) a whopping one quarter of 1 percent of the firms total revenue (not profits, as one might expect, but revenues)… (more…)

States are desperate for revenues. Now some are mulling the possibility of going after sales taxes for business conducted for clients within those states, adding yet another layer of fiscal burden for Broker Dealers and individual advisors registered in those states. David Sobel covers this developing story… (more…)

In the wake of Madoff and other frauds, the SEC warned on March 9 that “the staff has determined that, in order to perform a valid verification of Assets, the staff must request independent confirmation of investor assets from various third parties” including your clients themselves.

We can only imagine just how reassuring a call from an SEC investigator will be for clients. They’re hearts are sure to be warmed – to the point of their blood boiling. And while there are, no doubt, some few advisors who actually like scaring the bejeezus out of clients every once and a while (you know the markets are just too boring) we still can’t figure out how this will assist regulation.

But the SEC brings up Madoff, and says heightened measures are necessary, since Madoff got away with his scam for some two decades. Of course, the SEC fails to consider that news of the Fraud had been brought to the SEC numerous times, and that the SEC decided it was better to simply ignore the claims – rather than act on them. But the SEC wasn’t alone.

In fact, Madoff had been audited by the FINRA numerous times as well, and no discrepancies were found by the FINRA either, Despite that fact that apparently no trades had been done by Madoff’s fund in some two decades of operation.

So obviously, of course: what we need is more regulation, right? More rules and procedures for both the regulated and the regulators to follow. Because we have seen how well they have done in the past.

But let me ask you: Could the chief regulators blood hounds have been so very unskilled that they were unable to catch scent that something was wrong at Madoff – when there were no trades? Are we really supposed to accept that the reading comprehension skills of the SEC’s Staff is so very poor that it failed to ascertain the meaning of the title of Mr. Kostapopulos’s document “Madoff Is A Ponzi Scheme Fraud And Must Be Stopped”? Even when brought to them on numerous separate occasions?

Maybe we are dealing with the Supernatural. Maybe the minds of all of those auditors, with all of their forensic training, just went ga-ga when in the presence of Madoff’s books and records. Maybe the laws of financial accounting and Physics cease to apply when in the presence of those books. Maybe Madoff got his books from the same guy who sold Jack his beanstalk!

No. And the sooner we stop farting around and get to the issues the better. There is no magic here. The answer is much more simple. For whatever reason, those charged with the duty to investigate Madoff did not do their jobs. Simple as that.

“Call it what you want – but when the quarterback chokes and won’t throw the ball, it doesn’t matter how sophisticated the plays you come up with. You replace the quarterback, you don’t re-write the rules of the game.”

Might I mention – the regulations, such as they were, were already considered to be over-burdensome. And the regulations, such as they were, did provide for the oversight of financial institutions; it’s just that for whatever reason, the regulators FAILED to do their jobs. And finally, the regulations, such as they were, did provide for the prosecution of these frauds under the law. Additional regulation, such as this silly idea of calling customers is purely knee jerk, and will waste taxpayer money while failing to uncover any meaningful insight. However, it will scare the hell out of customers.

A Knee Jerk Reaction

This author believes that the regulators are in full CYA mode. And this bodes well for no one. As I’ve written about in the past, reactionary regulation often serves not to increase the effectiveness of regulation, but rather complicates and makes it overly burdensome with makework provisions designed to show the public that the legislators are not standing idly by, they are taking action.

We must fight the desire to do something, anything, in order to satiate the public’s demand for action. Cool thought and thoghtful consideration must win the day, if we are to prevent the problems of the past from rearing their ugly heads again. Think of Sarbains Oxley, and the damage done there; a good example of reactionary regulation made of the best intentions- disastrous for an industry.

Reactionary regulation is a slippery slope; as soon as one new ineffectual reg is legislated in, others are sure to follow, hamstringing the ability of the industry to adjust or react. Particularly in times of crisis such as these.

Crisis Of Confidence

We simply cannot engage in activity that creates the impression that everything is out of control. Calling individual clients will do nothing more than scare clients, and create the perception that there is no confidence even at the regulatory level. Confidence is the bedrock of our financial system, like it or not. Anything that serves to diminish confidence in this environment must be avoided like the plague – because that is what a crisis in confidence is, a plague. And this industry needs healing.

CALL TO ACTION:

Reps, please comment your thoughts below. We at the SIPA want to forestall future reactionary regulation, and plan to go to the lawmakers with the voice of the industry behind us. So we need to know what you are thinking in order to make this happen. Take five minutes and give us your thoughts. Now the enforcement actions associated with levying blame for the financial crisis are beginning, and you are likely not immune. Work needs to be done right now to ensure that the legislators do not run roughshod and further destroy an already hurting industry.

We appreciate your support, and ask for it again. Tell your friends to comment, and to join the SIPA. There are a number of trade organizations – but the SIPA is dedicated to you,the individual working in financial services – rather than the firm, or the several can’t fail institutions. Remember, the voice of 600K Advisors can’t be wrong. Commit to commenting. Be Heard!

Today the Treasury Secretary began outlining his vision of a new Regulatory structure to replace the old one. This new system will save us all from another catastrophic meltdown in our financial system and make sure corruption and greed is caught early on. The SIPA response? Yadee Yadee Yadee…

With all due respect, why create a new broke system when we can enjoy the fruits of our old broke system? All the rules in the world are wonderful and make politicians and regulators alike feel like they re protecting investors but at the end of the day  if NOBODY enforces them what’s the difference?

Lets take a step back to our past to see why a ‘New” regulatory system is a waste of time unless there is fundamental changes in the mind set. Years ago I worked in operations for a wire house and would remember Brokers and correspondents running to the back office at 2:05 pm begging to get their mutual fund purchase/sale in. At this firm we required all Mutual fund tickets be in OPERATIONS HANDS by 2:00 pm eastern. Some where around 2003 the after hours mutual fund scandal broke due to the efforts of Elliot Spitzer (not a securities regulator). Billions and Billions were made by firms running tickets at 6, 7, sometimes 10:00 pm. The market closes at 4:00 pm yet for some reason, not one Securities regulator had a problem with a Mutual fund ticket time stamped at 8:00 pm? Since when is 4:00 not 4:00? This illegal and fraudulent behavior occurred for 10+ years yet we had to rely on Spitzer to out it.

Let’s look at the research scandals that also plagued Wall Street. I remember working Compliance and handing out the restricted list of securities the firm was involved with. We would prohibit any buy or sale until the updated recommendation was published. Yet for many years some of the larger firms on the street were putting out fraudulent reports about liking certain stocks while at the same time unloading their positions. They did this for many years yet once again it was the Attorney General who found the crimes. Think about some of the other scams and scandals that plague Wall Street and then ask your self if a new regulatory system would solve the apathy regulators tend to carry toward the elite Wall Street firms.

Now think about this: Lehman brothers , Bear Stearns and several other elite firms were so over weighted down with CDO’s and other toxic assets, yet no securities regulator ever questioned their risk management, their FOCUS reports or anything else. Once again, I draw upon my own previous experience when my examiner let me know during an audit that the firm currently had 12% of its total holdings in ABC stock. They informed me of the potential risk and we began restricting the stock and lowered our exposure. However, for some reason this same regulator sent employees into Lehman, Bear, Goldman and Merrill and saw absolutely no risk with holding billions in toxic assets or did they see the risk and just refused to say something?

Naked shorting of stock then cannot be readily borrowed has always been illegal, yet it wasn’t until last summer when the largest firms on Wall Street were being crushed by shorters that the SEC finally jumped in to enforce Short sale rules. Our Government is not without fault either in this mindset. For instance, the SEC took over Sanford Financial as well as several other small firms and hedge funds in the past year. A receiver was immediately appointed to oversee the day to day operations. Our government announces that AIG is broke and puts hundreds of Billions into the company but didn’t send a receiver be appointed? So now the Government wants to talk tough and take a 90% tax out of greedy bonuses that were given with the Fed Chairman’s consent?

At the end of the day it’s obvious that selective regulation does not work. Yet we have seen no indication of that mind set changing anytime soon. In fact, we fear the scandals can get worse then ever before for one simple reason: The large Elite firms now have ‘can’t fail status” due to tax payer money totaling 2 trillion and counting. Do you really think the Wall Street elite is now concerned that if they screw over investors with bad prints, bad research and inside information that it will have any effect on them? Chew on this for a moment: how are you going to levy a huge fine for future fraudulent behavior of you already have trillions invested in them? Imagine a fine of 100 Million for bad acts against Merrill for some atrocity all the while knowing they have a line of credit with the government and if they did pay, it would delay repayment of the TARP money. A new Regulatory overhaul will change what? Nothing.

The SIPA wishes a heartfelt congratulations to Mr. Alan Davidson of Zeus Securities, upon his election to represent the interest of small firms in the National Adjudicatory Council (NAC). The NAC reviews FINRA disciplinary decisions. The election is of special significance because it was contested and Mr. Davidson ran as an independent candidate. 

Despite the opposition supporting the FINRA nominee, Mr. Davidson won. And so, Mr. Davidson’s victory is truly a victory for small independent firms, which made their voices heard loud and clear.

The SIPA spoke with Mr. Davidson this morning:

SIPA: Congratulations. On behalf of the SIPA membership, we’re all excited about your win. Especially at this particular moment in time.

Davidson: Thank you. I’ve got a strong agenda, and I want to make sure that small firm owners and registered persons know that I will do whatever I can for small firms, and will work hard to get that agenda across.

SIPA: What particular issues do you see as a focus?

Davidson: Leveling the playing field. Sanction guidelines need to be reduced, and the limit needs to be raised for actionable issues; smaller issues need to be downplayed…

SIPA: What smaller issues?

Davidson: Well, for example, rule based violations that do not affect the customer. These issues need to be addressed more appropriately – letters of caution, for example.

SIPA:  That’s great. That’s certainly something we hear a lot about.

Davidson: And then there is the participation of small firms on the committees and boards of the FINRA. I’m going to encourage active involvement. Members of small firms should participate, and I encourage them to contact me, and to seek office too. I think it’s time to create a level playing field.

SIPA: Thank you for taking time to talk with us. We all look forward to your efforts going forward.

Davidson:  It’s been a pleasure!

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CYA In These Crazy Times

As one of the leading voices of Registered Reps and their rights to Life, Liberty and the pursuit of higher returns, The SIPA has had an out pouring of e-mails and phone calls from Individual registered Representatives who are now being made the brunt of this cruel Bail-out Blarney.  As everyone knows by now, Bernie Madoff wasn’t the only one in town who figured the regulators weren’t looking.  Recently the SEC revealed that another Ponzi scheme in Texas was being perpetrated by none other than Alan Stanford.  The scary thing about this is not that he stole money for years without any regulatory intervention, but rather the fact the honest hard working Brokers tried to stop this and were turned away.  Click the image below to see the interview in its entirety.

Here is an honest and hard working Broker who is concerned for his clients, concerned for his firm and when he goes to his Compliance Officer he is shown the door and more shocking is that when he went to his regulator he was ignored.  Every broker should be taking steps right now to document each and every conversation and concern you have with your Supervisors and your Compliance officers.   Do not for a second assume that just because your compliance officer signed off on something that your job is done.  Right now it’s every man for himself and it appears that brokers may be the easiest thing to throw under the bus.  For instance, we recently heard from a top five Wall Street firm Broker that he had his Form U-4 marked for the first time in 20 years due to a complaint that he “bought FNMA preferred stock for his client three years ago”! It was recommended by this will known company and was triple A rated yet due to the collapse on Wall Street, he is now being treated like he is a boiler room caller in Long Island selling time shares for land in Wyoming!.

When your company touts a company…You need to seriously check out their motives.  Many brokers for large firms have this crazy notion that as long as my company is pushing a particular investment it must be in the best interest of the client.  WRONG!!!!  Just remember that if you are brought up on charges of unsuitable investments you can count on two things:

1. You Company will NOT have your back and
2. The Trial attorney would love it if they did

Why is this?  When these over zealous trial lawyers get going they are like sharks smelling a wounded whale.  They know that the more blood that is in the water the greater the bounty.  Your company will not have your back because they do not want a class action suit against them or commercials about their firm and investments running early in the morning.  As for the lawyers, they would love nothing more then to get their claws into one of these companies that does get your back and admits that they encouraged all reps to buy a particular stock.  Don’t believe me?  Without giving too much free publicity, check out the name of this web site:  www.SueMorganStanley.com

If you do get a customer complaint, we would urge you to do two things, let your compliance officer know and then contact your own outside counsel.  In-house counsel is paid to protect the firm first and foremost and anything that can open the firm up to exposure will be avoided.  This means that even if they know you did nothing wrong they may sit there mum and do nothing because you are just a pawn in their greater scheme.  We would urge all Reps to especially review and begin asking harsh and blunt question of their management in they helped raise capital for any hedge funds…especially if they were proprietary hedge funds.  You should demand total transparency of these funds and the fees and if they are unwilling to provide it….seek legal counsel immediately.  The SIPA is not a law firm nor are we offering legal advice…but if you drop us an e-mail we do know some quality lawyers with integrity and chutzpah 

The election for NAC Membership is upon us. Votes must be postmarked by March 9 to be counted. At this particular moment in time, when the entire country is in outrage given the recent regulatory failings of Madoff, etc., it is more important than ever to voice your choice for the small firm representative for the NAC council. Why?

The NAC reviews decisions rendered in FINRA disciplinary and membership proceedings. Given the reality of lop-sided enforcement in the recent past, it is vitally important for small firms to voice their concerns by making a choice of who they want representing them on the council.

“What is at stake is the review process for regulatory enforcement actions, which has, in the past, been stacked against small broker dealers and their Advisors/Reps.”

If you think this unimportant, think again. In the near future, the prosection of those who’se clients lost money due to mismanagement and fraud will begin. As always, you can bet that the fat cats who perpetrated these crimes will be punished somehow. But they will be afforded the best defences that money can buy.  But not so for the Advisors who fell for the tricks, and recommended the frauds to clients. No, in those cases we are likely to see public eviscerations of those Advisors in order to ”send a message” that regulation is back on track, and to demonstrate that allegations of a captured and corrupt system are wrong.     Add to this the recent decision to up the single seat arbitration threshold to $100,000…

There are two candidates. One has been appointed by the FINRA and the other is running in contest. At the SIPA we endorse neither, but ask that you do seriously consider the qalifications and positions of these two candidates – of very different backgrounds and supporters. 

Below are some helpful links:

The Candidates In Their Own Words:

Exclusive To The SIPA: The Candidates Write The SIPA Membership in their own words, discuss their positions, and why you should vote for them.
James S. Jones (the FINRA appointed Candidate) is HERE. 
Alan Davidson ( The Non-FINRA Candidate) is HEREThe FINRA’s Election Docmentation Package is HERE

FINRA’s Election Notice Of Feb 5 ‘09 is HERE

FINRA Notice To Members Concerning Heightened Threshold For Single Seat Arbitrations is HERE

 HOW FINRA PROVES ONCE AGAIN TRANSPARENCY IS A FARSE!

The Sipa and its Board have been approached by various prospective candidates for the National Adjudicatory Council ( NAC) position that is available for a small firm member.  In December, FINRA decided to ‘nominate’ a qualified small firm candidate named James S. Jones of Crews & Associates in Arkansas.  Although he is listed as a Chief Compliance officer, we decided to do some research and then reach out to Mr. Jones and ask him if he would like to post a message to the thousands of Broker Dealer Owners and Brokers who are now members.  It has always puzzled me as to why FINRA (formerly NASD) felt the need to ‘nominate’ a candidate for members.  Are members incapable of accomplishing this feat on their own?  It’s a little puzzling that a owner of a Broker Dealer can file a focus report, Manage his firm, Produce commissions, handle  FINRA audits and WSP’s, Take and pass series 7,24,63,55 exams and dozens more….yet FINRA thinks they would be overwhelmed if they had a sheet of paper in front of them with a half dozen names on it to choose from????

   Transparency Is A FINRA Priority

FINRA always claims that market transparency is one of their most important goals…Yet most of the major scandals on Wall Street have been detected and punished by State Attorney Generals and the FBI.  So with this in mind I looked at the Small firm nominee put forth by FINRA with the hope that they finally might get it and start putting forth candidates that are representative of the group they are representing.  Alas….i expected too much from an organization that is still concentrating on consolidation and power grabs.  Crews & Associates is indeed ‘Classified as a small firm” according to the number of reps they currently employ.  What makes this ‘small firm’ different though is the fact that they are owned 100% by First Security Bancorp!.

Here is a link to the Company web site http://www.fsbank.com  They mention their 100% ownership of Crews and Associates as well as the following:

“Based in Searcy, Arkansas, the privately held First Security Bancorp has the most complete and diverse product offering of any Arkansas-based financial services holding company. Supported by the strength of more than $250 million in total capital and more than $2 billion in assets, First Security has the ability to meet any financing need – right here in Arkansas. With more than 900 employees covering locations throughout the state, we offer solutions for the financial needs of individuals, businesses and the public sector, including a network of local community banks, respected investment banking and wealth management services, public finance, real estate.”

A show of hands please amongst all small firm owners if you have Net Cap of 250 Million, Assets of 2 billion and 900 employees????  Anyone?  Anyone? 

FINRA insists that they must do the nominating, yet are they really trying to give small firms representation that reflects them or is this more of the same old tired Bank shell games?  Im sure Mr. Jones is a very honorable and decent man however, I don’t Mr. Jones looks at his monthly accounts payable versus Accounts Receivables and wonders how on earth he will last one more month let alone the entire year.  New regulation that puts even more burned on the capital of small firms is of little consequence when you have 250 million in Net Capital isn’t it?

2008 was a trying and quite frankly disgusting year for Wall Street.  The large Banking Financial institutions ran amok and unregulated for years and finally it caught up with them, Yet it appears that FINRA is right back to Business as usual.  The last thing the securities Industry needs right now is MORE BANKING INPUT!!!

If you Trust FINRA and its “Transparency” then by all means you should vote for their handpicked choice.  At the very least we would like to hear from Mr. Jones how he can relate to some of the other candidates currently running for a contested spot on the NAC.  For instance, Alan Davidson owner of Zeuss Securities in NY has been running his own small firm for decades and knows what the cost of regulation is and how it can suck the life out of your bottom line. Mr. Davidson doesn’t have a big Bank behind him to pay for fines or to pay for every new compliance tool that is suddenly required due to hasty expensive regulation.  The other Candidate, Mr. David Sobel is also a small firm advocate seeking the NAC position.  Mr. Sobel doesn’t own his firm nor is he in production but his resume indicates a vast legal knowledge of the issues at hand.  The SIPA is not endorsing one specific candidate; however we are asking members to think about which candidate best reflects you.  We have enclosed the resumes of the two contested candidates for you to review.  We believe it’s important that every member of NAC have a little ‘skin’ in the game and that means that ay rule or judgment can directly effect them as well.

One of my favorite quotes of all time is Sherriff Brodie in Jaws backing up slowly from the eyes of a monster with a cigarette butt dangling loosely from his mouth and whispering “ WE’RE GONNA NEED A BIGGER BOAT”

Can any one line better sum up 2008 on Wall Street? Wall Street and our financial institutions collapsed and the economy took on water like it had been attacked by the huge Jaws beast….and all the while, Our Federal Government came on TV every day saying “ WE’RE GONNA NEED A BIGGER BOAT”  The Treasury Secretary and Fed Chairmen even had the same stunned look as Brodie did when they realized they were way out-manned and too small to combat this beast. The unprecedented moves made by the Government in 2008 will live in infamy and who knows, one day we all may look back fondly and talk about these historic moves as if they were a stroke of genius. The SIPA humbly disagrees with this notion and took these attempts to task and questioned whether there was a real solution here or was the Government merely throwing as much crap against the wall as possible and seeing what would stick. Unfortunately we believe there will be even rougher times ahead in 2009 and even though all the pundits are projecting a January BOUNCE in the stock market because of President Obama, we’re concerned that investors may think there is still way too much poison in the kool aid to risk drinking from Wall Street’s punch bowl again. Lost in the euphoria of Government intervention are a lot of sticky situations to work out. Here’s just a few or our questions/predictions for 2009:

1. The Government now owns AIG, Banks and Brokerage firms. What happens world wide if other governments refuse to allow them to compete with their private companies and starts locking them out? More importantly, what does the US do if AIG and these other banks and Brokerages continue to slide? Do we allow it to be taken over? Go bankrupt?

2. The government just gave a bail out to the big three with a March Deadline…Yawn. Now that 15 -20 billion has been spent to keep the poorly managed car companies alive, how likely is it they are going to change? And if they come back and say we need 50 billion more the big three now have the new President over a barrel..He can’t say no now after pushing for the original bailout plan.

3. The hedge fund mess is just beginning. Madoff might just be a small blip on the wire a year from now as hedge fund after hedge fund finally come clean and admit they were unregulated and hid losses for years. With these revelations will come quick and painful liquidations which could squash the stock market even more. What’s more, those honest hedgies that have shown great returns over 2008 aren’t safe either; great returns in thispoison market imply redemptions too: people will be grabbing those funds back to cover other losses, mortgages, etc… Ask the few rock star fund managers active during the ‘87 crash – their fantastic returns were greeted with massive redemptions.

4. Regulation will be forever changed in 2009. The possibilities are endless, but the likelihood exists that the SEC may become nothing more then an arm of the Fed or Treasury. In fact, we believe that by the time confirmation hearings begin in early 2009 there could be a charge on the hill to create a new regulatory authority. In fact, we are counting on our members to provide The SIPA with the thought power and ammunition to bring a sane and workable solution to the powers that be. Your thoughts, letters, creativity and interest are vitally important and appreciated. This is why it is so important to become a member of The SIPA right now – to make sure that your voice is heard loud and clear. Change is coming, and we have a real opportunity – right now – to affect meaningful change. One thing is sure: the road ahead will be rough, regardless. If we do nothing, the same people who fomented financial CHAOS will be charged with finding the solution. And though that may qualify as a valiant attempt at delivering Poetic Justice, in practice it may prove to be nothing less than a disastrous attempt to put the fire out with gasolene. So Join The SIPA now, and make yourself heard!

All things considered, 2008 could have been worse. For the SIPA, the crisis has proven to be Great Clarifier. The SIPA has been a driving force in reaching out to individual Brokers and Firms to fight for their rights, and the recent chaos has defined the predicament and made the need for change clear and inevitable. Membership has swelled to over 1000 members, many of whom are thought leaders in financial services. Thank you to each and every one of you who have begun to make the voice of the Broker finally heard. We look for your continued guidance and support as we tackle many more issues in the coming year.

A Happy and Prosperous New Year to all of you

The SIPA

What’s that smell in this room? Didn’t you notice it, Brick?
Didn’t you notice the powerful and obnoxious odor of mendacity in this room? 
- Big Daddy, in Cat On A Hot Tin Roof by Tennessee Williams

In the rush to judgement and assign culpability (which is good and necessary)  a new poster boy for failed regulation has emerged: Christopher Cox, Chairman of the SEC. He has has admitted “Failures” and begun an internal investigation of his agency. Ironically, it may be his honesty and integrity that is driving him to take the heat. As head of the SEC he could just attempt to dodge the bullet – deny responsibility for himself and his agency, could he not? His collegues have done so and worse. 

But while Cox does bear some blame, at least he is attempting to stand up and correct an organization gone wrong. Which is a lot more productive than his colleagues are doing. Others are readily accepting his admissions as if all problems were truly his and his alone, while publicly endorsing those whom they say will now do a better job. 

It is an ugly irony that is indicative of the roots of the true problem.   Arrogance and unaccountability are not virtues in a Public Servant. In fact they are anathema to the functioning of an open society, and it is only in rueful hindsight that we become aware of just how deep the rabbit hole goes. Case in point, former SEC Cheif Arthur Leavitt…He took over the SEC in the mid 1990’s and stayed until 2001. 

Under Mr. Leavit’s Direct Watch:

1. The largest firms on the street were buying mutual funds YESTERDAY WITH TODAYS NEWS, abusing an administrative loophole unavailable to retail investors  . Cost to Mom n Pop Investors? Multi Billions.
2. The largest firms on Walls Street illegally Day Traded Mutual Funds and further wreaked havoc on the Investments of millions of Americans.
3. The largest firms on the Street began issuing bogus research reports, lying straight faced to the American public about the companies such as Enron, WCOM, etc
4. The SEC flat ignored tips and reports of wrongdoing – In 1999 for example, a tip was sent to Leavitts SEC that Bernard Madoff was creating financial statements and claiming huge gains that did not exist… Leavit’s staff ignored it

A Common Element: 

In 3 of the four abuses cited, the common link is HEDGE FUNDS.  Regular American Investros were not allowed to put in late mutual fund trades nor were they allowed to rapidly buy and sell mutual Funds.  Cannary Capital was the largest abuser and there were many more who were allowed to do what they would; Bear Stearns for example. And Bernie Madoff’s abuses were with his hedge fund not his Securities firm, once again showing a complete lack of regulation in the hedge fund industry.

And A Common Element In Discovery 

All of these horrific frauds were detected and stopped by investigations done outside of the SEC and FINRA.  In each case, the bad acts were found and punished by Elliot Spitzer or other District Attorney offices or the FBI. Sure, Spitzer liked the court of Public Opinion and had his own issues. But where was Mr. Leavitt in all of this? Can he really say that he didn’t know?

What Kept The Regulators So Busy That They Missed The Obvious?

So what exactly were Leavitt and Pitt and Donaldson doing all those years?  Well for one, they all spent a great amount of time and energy trying to ‘consolidate’ the vast sets of regulatory eyes out there.  They all pushed for the end of a  3 tier regulatory structure that would have provided three sets of eyes on Firms such as Lehman, Bear and Merrill and instead thought it would be better if ther was only one Self Regulator with SEC oversight over them.

 Let’sbe blunt here.  Under Leavitt th American Investor was defrauded to the tune of hundreds of BILLLIONS and that was when the NYSE and NASD conducted same year audits and the SEC also conducted Audits.  How and WHY in the world would one think that one SRO wold be better when his staff faled in the above 4 mentioned matters with double the number of regulatory eyes? Pitt and Donaldson even wrote  a full page op ed peice in the Wall Street Journal extolling the virtues of their consolidation plans!!!

Ultimately the consolidation effort took necessary resources away from the real tasks of regulating, and set the stage for the larger abuses. In this environment, regulation began to focus on the low hanging fruit – the ;late filing of a report; the late time stamping of a trade ticket; the failure of a rep to update his U4 in timely fashion. Ultimately, the tough regulatory row to hoe – the discovery and prosecution of the shenanigans at the Bulge Brackets – was all but dropped in favor of an effort to consolidate authority and to hit the small firms with their rule based violations. Ultimately the failure of this policy was the focus on administrative issues at the small firms, while failing to regulate the customer harming frauds purpetrated by the Bulge Bracket firms.  

In hindsight, entire endeavor to shore up regulatory powers into a single entity can be seen as a monumental failure. A  gift of fire that continues to burn.

The Arrogance Of A Failed Policy

But it doesn’t end there – at simple failed policy and mis-alocated resources. No, Mr. Leavitt took it upon himself to criticize and marginalize any who might dissent, and anyone who did not believe in his vision of consolidated power. There were dissenters. But the dissenters never built an effective power base. And worse, some of them had less than clean hands. Nevertheless, the several dissent movements did represent the small firm – which Mr. Leavit would be well to be reminded is the vast majority of what makes up the Securities Industry – and in the aggregate, apparently accounts for very little in the way of Major Fraud.

Mr. Leavitt would do well to be reminded that the vast majority of what makes up the Securities Industry are so-called “Small Firms”, and in the aggregate, those “Small Firms” apparently account for very little in the way of Major Fraud.

Yet Mr. Leavit actually characterised the dissenters as the “rump of very tiny firms” . See it here for yourself. “In an interview with BloombergTV last month, former SEC Chairman Arthur Levitt characterized the FIA as a “rump group of very tiny firms” and criticized it for trying to stop the [consolidation] deal.  SEC member Annette Nazareth, who helped negotiate the deal, also took aim at the FIA and its desire to exercise member voting power.”

The Chairman of the SEC openly called the majority of firms under his purview – the small firms – the ass-end of the business. NICE.

And now, True to form, the same man who called the majority of small firms Asses, is doing whatever he can to throw Cox under the bus.

This smacks of the worst sort of cover-your-ass finger pointing and in-fighting to preserve personal priviledge. And it is truly unbecoming behavior in a Public Servant, particularly for someone charged with maintaining the Public Trust.

When can we expect Mr. Leavitt to publicly examine his own role in the fiasco that has become our regulatory matrix? When can we expect leadership that is accountable and unmotivated by personal agenda? And when do we begin to dismiss outright the comments of unrepentant destroyers of our financial system?

The entire WORLD would like an answer.