Before my second career as a lawyer, I was the third generation of my family in the wine and liquor industry. In 1981, I started law school; and in 1982, I was hired as a law student in Smith Barney, Harris & Upham's Legal Department. After I graduated law school, I was a regulatory lawyer with the American Stock Exchange and then with the NASD (now FINRA). After several years in regulation, I accepted the role of Counsel at Integrated Resources; and, thereafter, I entered the private practice of law. And that's how you create a 42-year career on Wall Street. What a long strange trip it’s been.
In 1998, I launched my first website, the "Securities Industry Commentator." Those were the early days of the World Wide Web or Cyberspace -- an age of flying toasters and dial-up-phone-modems. In the 21st Century, when it came to publishing the "Broke And Broker Blog," I literally asked my webmaster Odysseus Cline “what’s a blog?” He laughed at me, but, as always, he patiently answered my question, and got me up and running. Thereafter, I awoke each morning with a passion to write about Wall Street’s legal, regulatory, and compliance scene. I hope that the sincerity of my convictions and beliefs manifested itself in my content.
Among the highlights of my legal career was representing confidential informants during both the Department of Justice’s and the Securities and Exchange Commission’s 1990s probes into the price-fixing misconduct of major NASDAQ market makers. As SEC Chair Arthur Levitt said, in part, during his August 8, 1996, press conference regarding the matter:
I will state it simply and up front. We have found a widespread course of conduct among market makers to coordinate their quotes. Investors paid too much, and received too little, when they bought and sold stock on Nasdaq. New traders were, as a matter of course, trained in this fashion. Over time, this practice became the expected standard. In some instances, those who did not comply were harassed and penalized, even if they had acted in the best interest of investors.
This culture of collaboration subverted the price mechanism and curtailed competition. It raised the cost of capital and undermined market efficiency. It hurt investors and damaged the reputation of Nasdaq.
Where was the NASD, the cop on the Nasdaq beat?
The NASD was not blind to these practices in the marketplace. It simply looked the other way.
As the issue of the pricing convention was brought to the attention of the NASD, as the press and others raised it with increasing frequency, the NASD sounded no alarm; it conducted no investigation.
Nor was the pricing convention the only unacceptable practice. The NASD failed to ensure the accuracy and fairness of quotation and transaction information -- the backbone of securities trading. It failed to apply certain rules to its members, and selectively enforced rules against others. The NASD allowed the interests of large market-making firms to have undue influence over the conduct of its affairs and the regulation of its market.
The evidence -- gathered from hundreds of witnesses, thousands of hours of tapes, and more than a million pages of documents -- shows that the NASD did not fulfill its most basic responsibilities -- and I quote from its charter: to promote just and equitable principles of trade for the protection of investors. On the contrary, American investors were hurt -- large and small, sophisticated and inexperienced, institutional and individual -- all were hurt by these practices.
Nor has the SEC emerged unscathed. To the extent these practices took place on our watch, we should have acted sooner. We, as well as the NASD, need to be faster and more vigilant, to assure that the public interest is protected.
at "Statement By Chairman Arthur Levitt, U.S. Securities And Exchange Commission, Press Conference Regarding The NASD / Washington, DC /August 8, 1996"
Søren Kierkegaard said that "Life can only be understood backwards, but it must be lived forwards." Much can be said of Wall Street regulation. Those who regulate are often relegated to the unfortunate role of reading toe-tags in the morgue -- having failed to prevent the murder, they have little left to do but perform an autopsy. In understanding the failures to regulate Wall Street, we must look backwards to understand what went wrong. The problem, however, is that you can't drive forward only looking into the rearview mirror. It is the looming horizon on which you should fix your gaze. As such, former SEC Chair Levitt's 1996 remarks, even if they are by now only glimpses into the past, balance the backwards and forwards of regulation. 1996 was not the first time and will not be the last time when Wall Street's regulators "look the other way." Worse, the "culture of collaboration" has not vanished but merely adapted and adopted to newer products and evolving markets.
Nearly a generation ago, the SEC failed to detect the burgeoning fraud of Bernard Madoff. As early as 1999, analyst Harry Markopolos concluded that Madoff's reported market gains were impossible and likely fraudulent. Markopolos took his findings to the SEC's Boston office. He was ignored. A few years later, Markopolos went to the SEC's New York office. He was ignored. If you don't remember the history or it's a new story for you, Markopolos set it all out in his 2010 book "No One Would Listen." For a stirring reminder, watch Markopolos' Opening Statement before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing on "Assessing the Madoff Ponzi Scheme and Regulatory Failures" from February 4, 2009:
The SEC had failed to heed the warnings of whistleblowers about Madoff. Unfortunately, the SEC moved forward with the implementation of a Whistleblower Program that disregards many of the legacy failures encountered by the likes of Markopolos. In 2014, I represented the first in-house compliance officer to receive a Dodd-Frank whistleblower award ($1.6 million) from the SEC. My client uncovered a fraud not only upon the market but also upon the SEC's investigative staff. The amount of the Award is a testament to the value of the tips.The SEC Whistleblower process was excruciating for me and my client; and in recent years with other whistleblower clients, my experience has gone from bad to worse. In summoning up Chair Levitt's still trenchant admonitions, the SEC needs to act sooner, to be faster and more vigilant, to assure that the public interest is protected.
I often lament that there is too much "marketing" of the appearance of regulation and not enough "effective" regulation. Effective regulation proactively detects fraud, pursues the fraudster, stops the fraud, and protects the investing public -- all of which entails harvesting tips, analyzing data, conducting interviews, filing charges, and sending trial staff into court. In contrast, modern-day regulation has devolved into self-serving publicity by senior regulators posting endless amounts of podcasts, videos, speeches, bulletins, guidances, alerts, and press releases. The bureaucracy warns you about problems that it never detected or can't redress. In lieu of a record of accomplishment, you get a wish list. Merely warning the public about scams and frauds is not regulation. Wall Street regulators are not supposed to be fans sitting in the bleachers watching the game. Regulators are supposed to strap on the pads, buckle up the chin-strap, and get on the field of play. Sometimes you're going to get knocked down by a cheap shot. Sometimes you get to make a hard-hitting tackle. After all, when it comes to regulating Wall Street, it's a contact sport.
I have tried to be a sincere advocate for industry reform because I have witnessed the financial devastation caused by financial predators. Similarly, I have seen the dire consequences of inept and incompetent regulators. Clowns to the left of me. Jokers to the right. Here I am stuck in the middle with you. After nearly a century of existence, the Maloney Act of 1938 is a failed experiment in self regulation by which powerful, entrenched Wall Street interests hold sway at the expense of investors and industry employees. All of which explains why in 1998, I helped launch the first slate of candidates (Alan Davidson, LaRae Bakerink, Dan Jamieson, and me) to contest the NASD’s hand-picked nominees to its Board election. At the time of that historic 1998 contested election, there were about 5,500 member firms – today, that number has dwindled down to just about 3,000. It has become a maddening game of musical chairs whereby we have fewer firms but increasing numbers of regulators. Despite that math, the public is not better protected, small firms are under siege, and the industry’s employees suffer disparate treatment that favors their employer firms.
I will not mince words: FINRA is run by a bloated, gerrymandered, lackluster Board of Governors that persists in socially engineering smaller firms out of business and preventing the industry’s financial professionals from discharging their roles with independence and in the best interest of their clients. More ominously, the FINRA Board fails to pursue a policy of transparency when it comes to the elections of its Governors:
On September 6, 2023, FINRA declared the victories of two unopposed candidates in its Board of Governors elections; however, a month later, FINRA still declines to publish the tally of the votes cast for each candidate and, critically, fails to publish the tally of votes cast in "Abstention." "FINRA Announces Results of Governor Elections" (FINRA / September 6, 2023)
FINRA's conduct seems more in the nature of a cover-up than the robust disclosure expected from a regulator: so much for high standards of corporate governance. Worse, no sitting FINRA Governor has spoken out against the organization's unacceptable failure to promptly disclose the actual votes in the 2023 election; but, in truth, such equivocation is all too characteristic of this lackluster Board.
FINRA's oft-voiced advocacy for ESG and diversity/inclusion and ethical corporate governance comes off as insincere and hollow when the self-regulatory-organization fails to timely release the actual vote tallies in its elections -- all the more so when a given election is the subject of a boycott and the two Board candidates ran unopposed. . . .
at "Quantum Physics And FINRA's Inability To Tally The Votes Of Its Board Elections" (BrokeAndBroker.com Blog / November 2, 2023)
Apologists for self-regulation seem to think that all is well and good: It is not. If there is a compelling reason to certify some non-governmental or quasi-governmental industry regulator, then we should opt for what I have long characterized as a private-sector-regulatory-organization that would reflect all stakeholders on Wall Street and not just FINRA member firms.
After a quarter of a century of producing online content, it’s been my readers who have fueled my fire. Your engagement, your questions, your shared outrage at injustice – these are the things that kept me at my keyboard, year after year. You, the industry insiders and the curious outsiders alike, have been the sounding board for my thoughts, my partners in pursuit of a more transparent, accountable Wall Street. It is with profound gratitude that I thank you for subscribing, for sharing, for challenging me, and for simply being there.
The other morning I awoke and realized that it's time for me to retire. I've had a wonderful run but I see the finish line, and it's time for me to cross over it. Ever since I first climbed into the Wall Street ring, I have tried to fight the good fight. I landed some roundhouses, and, sure, I took a few counter-punches. I refused to offer ill-deserved praise or unwarranted support. I criticized incompetency. I called out ineptitude. I mounted Rocinante; and if you look closely enough, you will see some windmills worse for my effort.