Madoff: Right Under FINRA's Nose

December 12, 2008

As many of you likely imagined, I have been flooded with press calls today about FINRA member firm Bernard Madoff Investment Securities, Bernie Madoff, and the Madoff siblings and employees.  Here's a copy of the SEC Complaint and here is the U.S. Attorney's Press Release and the Complaint. The Madoff empire was a major player on NASDAQ and a long-time kingpin (if not king maker) for many things once NASDAQ, once NASD, and now FINRA.  Just look up the various elected and non-elected seats that the Madoff clan held among industry regulators and trade groups.  

As a lawyer, I will abide by the golden rule that folks are presumed innocent.  I have read the Complaint and it is sad, chilling, and disheartening.  I also know that not everyone at the firm was a crook and not everyone will even be implicated.  Still, it's yet more mud thrown onto the reputation of Wall Street.

All of which brings me to my point--yes, the "Singer Point" as many of you likely view it.  That tired, oft-repeated, mantra-like condemnation of the self-regulatory system that has failed the public investor and the securities industry alike.  In the spirit of the holidays, let me keep this uncharacteristically short.

The criminal allegations are not naming defendants who are small-fry pennystock hucksters or boiler-room fraudsters.  This is the cream of FINRA's crop.

If a major player such as Bernie Madoff and his FINRA-member firm can pull off a multi-billion dollar scam right under the nose of FINRA, then of what value is that regulator?  And let me at least be blunt.  Madoff and his firm were no strangers to FINRA.  To the contrary, they were welcomed if not esteemed.  They sat on Boards, on committees--even on the National Adjudicatory Council that reviews enforcement matters.  Those folks had the ears of the powerful and likely helped formulate policy.

Everything I have read today and everything that I suspect that I will read in the weeks to come apparently went on right under the nose of FINRA.  When its staff did its yearly examinations, either things were disregarded, missed, or overlooked (and quite probably there was a fair deal of obfuscation by the firm as well). It will be interesting to follow the criminal case and see how much of FINRA's dealings with the firm was at arm's length and whether the judgments of many supervisors and executives was clouded by the knowledge that this was Bernie's firm.

I have said it far too many times, but now it bears repeating: Self-regulation is a failure.  What more proof can I offer than to point to this current cause celebre?  If FINRA couldn't detect this--when it went on right under its nose--then just how effective is this regulator?