Let’s assume you own a broker dealer.

And lets also say that you have an Advisor who helps you manage your money, as most in your position would. Now -

What would you say if your Investment Advisor told you that his well considered opinion is that you should take your entire portfolio and allocate it like this: 55% Toxic Assets, and the remaining 45% into High Risk Hedge Funds?

Would you begin looking for a new Advisor? That is, after asking him for some of whatever it is that he must be smoking? (more…)

Linked Articles: “Was FINRA A Madoff Investor” (the SIPA)
“FINRA Oversees Auction Rate Arbitrations After Exiting Market”
(Bloomberg)

FINRA is currently processing 344 investor arbitration cases over losses generated by the complete collapse of the Auction Rate Bond market.

But FINRA itself actually had owned some $862 Million of the toxic assets prior to the collapse of the market, and exited the position months ahead of the market’s catastrophic failure. The good fortune of exiting the market at that time is proving to have been somewhat unique, as managers everywhere watched the market implode and watched their client investors lose everything. At least the FINRA Endowment, which is really money actually owned by FINRA Member firms, is being managed well – or so it would seem.

Yet serious ethical issues are raised by this and other recent disclosures. As we have reported previously in an article titled “WAS FINRA A MADOFF INVESTOR ?” we noted that the FINRA’s investment allocations model included some 45% of the total $1.5 Billion portfolio in hedge funds. If the FINRA was indeed a Madoff Investor, serious ethical issues arise. And likewise, if indeed, the FINRA became aware that the auction rate markets were unsustainable, did the FINRA not have an obligation to disclose this to the Public?

According to FINRA spokesman Herb Perrone in a recent Bloomberg article, Finra did not know the auctions were poised to weaken. Nevertheless, the FINRA did liquidate it’s holdings well before the fall, and some investors are concerned that not enough was done.

The Regulator did, however, eventually issue guidance for investors hamstrung in the market on March 31, 2008. But this was more than a month after the failure rate of the auction hit upwards of 80%.

And it is also well to note that the FINRA did not lead the charge toward warning investors. Massachusetts and New York were first in going after the banks that sold the securities.

Another Failure To Spot Disasater:

Although the FINRA’s portfolio managers were priescent enough to recognize the danger these assets posed to themselves, they failed to timely notify the markets at large or to indicate any warning that the auction rate market was in any danger.

But FINRA spokesman Perrone also reminded that the FINRA didn’t have anything to do with the market’s collapse, according to Bloomberg. The organization doesn’t regulate “over-the-counter securities transactions” such as trades in auction-rate bonds, which aren’t listed on an exchange, he said.

This author is reminded of the FINRA’s claim that they did not regulate banks, and so had nothing to do with the massive toxic positions accumulated at the broker dealers which later became banks as part of the bailout efforts. And this author is reminded of the FINRA’s comments that it had nothing to do with the failures at Madoff’s Hedge Fund, because the FINRA didn’t reglate Hedge Funds, althogh it did regulate Madoff Securities, the Broker Dealer doing all the trades for the Madoff Hedge Fund, and audited it many times.

Nevertheless, the FINRA had been involved in investigations into more than two dozen firms that conducted auction rate securities business. Perone said FINRA Enforcement has returned some $2 Billion of investor money, and the States and SEC have recovered more than $50 Billion so far. Leaving this author more than a little confused. Is that to say that FINRA knew there were systemic problems in the Auction Rate Market?

A FINRA spokesperson who recently gave a lecture on Leadership And Ethics In Regulation had the following to say: “Many institutions understood the risk in terms of their own investments. But the question is: Was that information freely shared with individual investors?… There was both a legal and ethical obligation to do so.”

This author would agree. And so, given that there was an ethical obligation to inform the Public, this author humbly asks the following of the FINRA:

what did you know, and when did you know it?

No, this is not an article about Bank America and Merrill Lynch and how the Regulators attempted to silence full and fair disclosure in offering materials to shareholders….why would I write about that anyway? At this point the level or lies, deception and fraud is so rampant on Wall Street and in Washington that it goes beyond beating a dead horse cliché.

The corruption at so many levels of our industry is a great time to announce our new affiliation with Financial Advisors Assurance Select (www.FAlegal.com) one of the leading providers of Errors and Omissions insurance. Why? Quite frankly because the SIPA is the leading voice of the Registered Rep and you need to be protected by outside sources. The largest firms on Wall Street are involved in a corrupt struggle with life and death due to toxic investments. Please do not think for a second that your head (and your commissions) won’t be served on a silver platter to the next lawsuit they face. Do not assume that your firm is going to protect you and your interests above theirs and more importantly, do NOT assume that just because your firm is deducting a monthly E&O payment from your commissions that the money is getting paid and the policy is up to date. FA Legal provides E &O insurance not just to Brokerage firms but to individual brokers as well. There are a host of reasons why you may want to consider E & O coverage from a non related entity, the least of which is to make sure that YOUR interests come first. We have heard from many brokers who have retold nightmare stories about how their firm basically turned over, cut a check out of the broker’s accrued commissions up to the deductible amount and left the broker in the whole 25K and with an ugly mark on his license. We have also heard that some firms are using, “ahem” errors to get out of sticky situations for the firm with nor regard for the broker. I am not a lawyer and I’m not giving legal advice here, but with that said, you would be absolutely nuts to not explore some options to cover you’re A#S!!!!

Click on the link and find out a little more for yourself and always remember who is looking out for your best interests?

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!

The video linked below is from Bill Moyer’s excellent reporting for the Public Broadcasting System. It is also carried on Bill Moyer’s site “Bill Moyers Journal” (  http://www.pbs.org/moyers/journal/index-flash.html ). This is investigatory journalism at it’s best – seldom seen anymore in a world of shills and corporate captured media -an interview with a star in the field, exposing massive systemic fraud – and the whys and hows that these individuals got away with the largest financial fraud in history – and continue to maintain their fraudulent activity today - and why it is very unlikely to stop anytime soon, particularly in this administration. Kudos Bill and William, for a job well done. If only everyone in America would watch your video and give themselves the gift of understanding. Here goes: From Bill Moyers Journal:

The financial industry brought the economy to its knees, but how did they get away with it?  With the nation wondering how to hold the bankers accountable, Bill Moyers sits down with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout. The Video Interview: