Regulatory Post-Mortems: Executing the Dead

October 22, 2008

This morning I began updating the website's 2008 FINRA Cases of Note to add the monthly disciplinary reports for October. I came across this nugget, which I abstracted as follows:

Lehman Brothers, Inc.
AWC/2004100012901/October 2008

The Firm's written plan of organization maintained to identify each aggregation unit, specify its trading objective(s) and support its independent identity failed to accurately describe a separate aggregation unit established for its risk management purposes. The Firm failed to ensure that all traders in each aggregation unit pursued only the particular trading objective(s) or strategy (or strategies) of that aggregation unit and did not coordinate strategy (or strategies) with any other aggregation unit. The Firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with applicable securities laws and regulations, including SEC Rule 200(f), according to which the firm should have maintained a written plan of organization that identified each aggregation unit, specified its trading objective(s), supported its independent identity and ensured that all traders in an aggregation unit pursued only the particular trading objective(s) of that aggregation unit. The Firm's failure to comply with these requirements affected the accuracy of the aggregation methodology used to support its trade-by-trade calculations of net position. The Firm's ability to ensure the accuracy of its trade reports as to whether a particular trade was long or short, and whether a particular short sale was prohibited, was impaired and that, in some instances, this impairment resulted in flawed calculations of net positions, which resulted in violations of NASD Rules 3350 (the short sale rule) and 6130, and SEC Rule 10a-1. The Firm accepted short sales in securities for its proprietary account and customer short sale orders and, for each order, failed to annotate an affirmative determination that the firm would receive delivery of the security or that the firm could borrow the security or otherwise provide for delivery of the securities by settlement date. The Firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with NASD Rule 3370(b)(2).

Lehman Brothers, Inc.: Censured; Fined $250,0000; Required to revise its written supervisory procedures regarding compliance with SEC Rule 200(f) and NASD Rule 3370(b)(2)

Bill Singer's Comment: On September 15, 2008, Lehman Brothers Holdings Inc. announced its intention to file a Chapter 11 bankruptcy petition, which would not include certain of its subsidiaries, most notably including Lehman Brothers and Neuberger Berman Holdings, LLC. The holding company further advised that it was exploring the sale of its broker-dealer and investment management operations. Although Lehman Brothers and Neuberger Berman Holdings would continue conducting business and may not be subject to the holding company's creditors' claims, the company stated that it anticipates the orderly winding down outside of bankruptcy of Lehman Brothers, Inc. and Neuberger Berman, LLC


Oh, puhleeeease! On September 15, 2008, Lehman Bros. filed for bankruptcy. Sadly, that fact seems to have escaped the busy FINRA regulators who likely spent weeks and months (perhaps years??) hot on the tail of this noncompliant member firm. But let the industry and public rest assured that there are rewards for such vigilance. About 30 days after the firm's bankruptcy, FINRA has published a condemnation of the firm's short sale practices. Not only has FINRA slammed the firm with a Censure--oh, such a powerful arrow in the regulator's quiver-- but the SRO imposed a crippling $250,000 fine (just don't cash the check for a week or two, and if it bounces, maybe hold off before the redeposit). Moreover, just to really get Lehman's attention and to underscore the very relevant status of self-regulation in this day and age of collapsing capitalism, FINRA imposed the ultimate sanction: this now defunct firm must revise its written supervisory procedures.

I mean is FINRA serious? How uncomfortable the regulator must feel having to publish this crap--especially when it references Lehman's "risk management." What risk management? Perhaps if FINRA and other regulators had been less consumed by the minutiae and details of regulating major players like Lehman, and had actually picked up their heads and looked at the bigger picture (and perhaps smelled the stench), then we would not now be outraged by this post-mortem action.

While FINRA is executing the corpse of Lehman, perhaps the SRO will undertake an independent outside investigation of its own failure to timely detect the chronic and systemic misconduct of its major member firms. A few more belated investigations like this Lehman one, and last one out, turn off the lights.

If you have been splashed by my dripping sarcasm, I'm sorry. Send me the cleaning bill.