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Financial Industry Regulatory Authority (FINRA) Insider Trading?

Stock-Markets / Market Manipulation Dec 08, 2010 - 06:18 AM GMT

By: PhilStockWorld


Best Financial Markets Analysis ArticleInterview with Larry Doyle at Sense on Cents, by Ilene 

Here's the hypocrisy of the Financial Industry Regulatory Authority* (FINRA); it dumped a portfolio of Auction Rate Securities* (ARS) before the ARS market froze up in early 2008. People are asking legitimate questions and FINRA is refusing to answer. When FINRA wants its questions answered, it knows how to get the answers through its subpoena power. Why won't FINRA fess up and be transparent about its dealings in the ARS market?

I recently caught up with my friend Larry Doyle and asked him whether there had been any progress in uncovering the events behind FINRA's timely liquidation of its ARSs in 2007 since our last conversation. Here's a transcript of our conversation about FINRA and FINRA's ARS sales. Larry touches on a number of important topics including transparency, the incestuous relationship between Wall Street and Washington, the absurdity of self-regulation and twisted logic of granting a quasi-government entity government-style immunity, while allowing it to be free from the reach of the Freedom of Information Act.  

FINRA's Timely Auction-Rate Securities (ARS) Sales

Before we continue, please read my previous interview with Larry Doyle here. Excerpt: 

"The ARS market operated smoothly until the credit markets seized up.  First signs of trouble emerged in 2007 when the spreads started to blow out (widen significantly). Spreads widened because dealers realized the true nature of the risks and backed away from supporting the market. Selling intensified as investors were trying to get out in the late spring and summer of 2007.  Investors stopped buying, though the dealers maintained an intermediary market for a while.  Finally, sellers so overwhelmed buyers that Wall Street had to stop serving as an intermediary.  This developed over a period of months, but was not shared with the clients.  Wall Street was trying to lay these ARSs out on investors.  When the market collapsed in February 2008, the “cash equivalency” disappeared."


Going into 2007, FINRA had $647 million dollars of ARSs.  It was holding ARSs as the credit markets started to freeze in mid 2007.  FINRA says it did nothing nefarious when it sold its ARSs. But that fails the smell test.  It sold its ARS holdings before the markets collapsed. Meanwhile, investors got stuck with approximately $150 billion of ARSs.

One would have to be exceptionally naïve to think FINRA officials did not have material, nonpublic information on the ARS market before it decided to sell its holdings. ARS investors are screaming for FINRA’s ARS liquidation to be explored. Having information about the securities and acting on it without that information being available to the public would potentially qualify as front-running and insider trading.


While FINRA sold its ARS in mid 2007, the fact that it cautioned investors on these instruments was not displayed on its website until March 2008.  I ask–when did the concerns arise?  Did FINRA sell its own position while having “concerns” months earlier?

The officials were either incompetent or, in my opinion, they acted on insider information. It’s hard to conclude otherwise given what we do know. We do know the sales were made in the middle of 2007, and we do know the market collapsed months later. I believe FINRA was protecting the industry and protecting itself, to the detriment of investors...

Larry:  At FINRA’s annual meeting in August, 10 to 12 proposals for greater transparency were brought up by its own member firms, illustrating the dichotomy between small firms and large firms. These have been severe. FINRA serves the larger firms, the JP Morgans, Goldman Sachses, other large investment banks, e.g., Bank of America (the broker-dealer operations of these large firms). It is not working for the smaller firms that are scattered around the country. 

Ilene: Is that changing due to the financial crisis?

Larry: If it is, it is moving slowly.  I call FINRA's approach the "Mark McGwire approach" - it wants to play like Mark McGwire, a former baseball player who won the championship, but he may have been on steroids and didn’t want to talk about the past. It refuses to talk about the past.  But if we can't expose what happened in the past, how can anyone have any confidence in its regulatory activities?  A lot of investors have lost confidence in the regulators and the financial sector's regulatory system.  Most people view the SEC as the major regulatory force, but Wall Street is largely regulated by FINRA. The questions that have never  been answered are mind boggling -- questions about compensation, its investment practices, investments with Bernie Madoff, ARS sales. FINRA has never responded to requests for trading information on the ARS it is known to have sold. 

In the fall of 2009, FINRA said it sold for cash management issues.  There are still upwards of 140 Billion in ARSs that are frozen--tiny progress from when we talked before. And it’s been three years from when these "cash surrogates” were sold. But FINRA was supposed to be monitoring the broker dealers. FINRA not only failed to regulate, it liquidated its own positions.  I’m going to a book launch of “Ruthless,” a fabulous review of this nightmare characterized by failure of regulators to regulate along with pervasive self-dealing.  

But now FINRA won't get investigated because FINRA investigating itself is joke, as is FINRA being investigated by the SEC, now under Mary Schapiro (previous chairperson and CEO of FINRA).  This is why we need outside pressure to come to bear.  

Lieutenant Colonel Elton Johnson of Amerivet and his attorneys (Jonathan Cuneo, William Anderson, and Richard Greenfield) have continued to pursue complaints against FINRA.  I commend them for their persistence in pursuing what really transpired within FINRA. What's really meaningful here is that FINRA's annual meeting on August 12, 2010, for the first time, new board members not recommended by FINRA itself were voted in.  This is the first time smaller broker dealers got new people on the board.  How did FINRA respond to that.  It didn't. (For more information, read FINRA Gets New ‘Sheriffs’; Amerivet Proxy Proposals Approved!! Strongly Recommended.)

Ilene: What do you mean by it didn't respond?

Larry: Member firms voted in favor of proposals for FINRA to provide information, 70% of member firms are asking for information, and yet FINRA is refusing to give it to them. FINRA is stonewalling, with a little bit of lip service, but there's still no transparency. Without transparency, there's no confidence. There's plenty of evidence that investor protection by regulators is lacking (flash crashes, the frozen ARS market, the Madoff scandal) but the Mark Mcgwire approach FINRA takes is to not talk about the past. One of the proposals was to find out the full relationship between Madoff and FINRA. FINRA's response was that its own internal investigation never found anything amiss.  The person who might ask for a special investigation would be Mary Schapiro at the SEC.  She doesn't appear to represent investors so much as she represents the industry. Do you think she will investigate FINRA's activities? 

Ilene: I guess the Freedom of Information Act (FOIA) is not useful to compel FINRA to disclose the information that were voted for in the proposals?  

Larry: Right, the regulator is a private entity, not subject to the FOIA.  

Ilene: What about the ARS victims getting a subpoena for the information?  

Larry: A case was brought against FINRA by Standard Investment Chartered and the essence was that FINRA executives, including Mary Schapiro, lied in a proxy statement used in the merger to form FINRA in early 2007.  

[Ilene: Read more about Standard Investment Chartered vs. FINRA in Larry Doyle's I Come to Bury Judge Rakoff, Not to Praise Him: "In this case, Rakoff ruled that FINRA was able to operate with absolute immunity in the merger of the NASD (National Association of Securities Dealers) and NYSE Regulation to form FINRA itself. For those not familiar, FINRA is a non-profit which serves as Wall Street’s self-regulator.

"Allegations made by plaintiff’s attorneys explicitly laid out that then FINRA head and current SEC Chair Mary Schapiro lied in the proxy statement used for this merger. That lie constituted a misappropriation of $175-350 million dollars."

See also, JUDGE RAKOFF DISMISSES CASE AGAINST FINRA OVER MERGER OF NASD AND NYSE: "Pursuant to the Securities Exchange Act of 1934 , 15 U. S .C. §§ 78a-7800 , the United States Securities and Exchange Commission is authorized to delegate certain regulatory functions to SROs, which are therefore considered ‘quasi-governmental’ bodies…. As a result , SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions. [my emphasis]]

Ilene: So when it comes to the FOIA, FINRA is not a government entity and not subject to it, but when it comes to absolute immunity for its actions, it has absolute immunity. 

Larry: Yes, it is private when it comes to disclosure and not being subject to the FOIA, but "government" in the extent of its responsibilities and power.  The allegations showed that FINRA was trying to benefit its executives rather than help investors or its smaller member firms.  But now FINRA would say the courts have ruled.

Ilene: This might not precluded ARS victims from trying to get a subpoena to get the information about the ARS sales released, would it? Why isn't anyone suing FINRA and asking for this information?

Larry: I think it's like trying to sue Wall Street. FINRA is essentially Wall Street - so there’s a lot of pressure against suing... it would be a long and torturous battle.  The self-regulatory model doesn’t work for the financial industry.  How can we have Finreg and barely a mention at all of regulating the financial industry's regulator?

Wall Street - investors are leaving in droves, they don't want to play the game and know it's rigged.  We get the high frequency trading, the flash crashes, FINRA's member firms voting for disclosure, and FINRA ignoring them. Time after time, people come to my website and write that they can't speak up because they run the risk of retribution.  What would the retribution be?  FINRA oversees them... there are serious problems. 

Ilene: What do you think FINRA could do to address the problems you see on Wall Street?

Larry: Ordinary investors don't get a true picture of risk. Wall Street should be required to put out a comprehensive and concise, easy to read explanation of risk. That's the approach in the U.K.  FINRA said it couldn't get it by the industry.  That must the bigger banks, because FINRA doesn't listen to the little guys. FINRA and the SEC are supposed to be telling Wall Street what to do, not taking orders from the big investment banks.  The industry, the lobbyists from the big banks are not interested in increasing transparency, it would hurt their profits.  Industry is not interested in increasing transparency or hurting their profits. The Wall Street oligopoly is such that a few big banks dominate the markets and they have limited competition so they can control prices and the regulators.  Their lobbyists write the laws. This is what I can the Wall Street-Washington incest, and ordinary Americans are starting to see this.  This is reflected in the disparity between the stock market and the real economy. 

I truly believe if FINRA and the SEC provided greater transparency, addressed prior violations of ethics, and threw people in jail for breaking the law, confidence in the markets would return. Mary Schapiro knows where the bones are buried on Wall Street and now she's head of the SEC; she's a career regulator, deeply embedded in the Wall Street- Washington cronyism.  Could we handle the truth? Of course, anyone paying attention already knows, and a lot of confidence could be restored if people who committed acts of fraud were held responsible. A significant percent of our economy operated as a large Ponzi scheme, magnified by the derivatives market.  Who’s supposed to oversee this? People at FINRA and SEC.  The SEC was incompetent, FINRA was in bed with the industry. 

Keep in mind, FINRA oversees broker dealers and 70% of them are calling for increased transparency.  FINRA blew them off. That 70% represents America more than the larger banks located on Wall Street.

FINRA oversees the broker dealers, and 70% are calling for increased transparency.  FINRA blew them off. Those 70% represent America more than the large banks located on Wall Street. What truly amazes me is how little attention is being paid to this outfit. Congress is incompetent when it comes to FINRA. A court ruled that in performing its regulatory responsibilities, FINRA should have total immunity. But managing its own assets is not part of its regulatory actions. Why does this crowd get to operate above the law?


Addendum: Larry's most recent article on FINRA discusses how FINRA may have know before 2007 that the Auction-Rate Securities market was in serious trouble: How Did FINRA Know the ARS Market Was Failing Well Before 2007?



Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority, Inc., or FINRA is a private corporation which functions as a self-regulatory organization (SRO, an organization that exercises regulatory authority over an industry or profession). It is not a government agency.  FINRA was formed by the merger of the enforcement arm of the New York Stock Exchange, NYSE Regulation, Inc., and the National Association of Securities Dealers, Inc. (NASD). The merger was approved by the Securities and Exchange Commission (SEC) in July, 2007.

FINRA performs market regulation under contract with brokerage firms and trading markets. It focuses on regulatory oversight of all securities firms that do business with the public. FINRA regulates by adopting and enforcing rules and regulations governing its members’ business activities. It often provides advice to the U.S. Securities and Exchange Commission.  (See FINRA’s website is at Also FINRA

Auction Rate Securities (ARS)

An auction rate security (ARS) refers to a debt instrument (corporate or municipal bonds) with a long-term nominal maturity for which the interest rate is regularly reset through a dutch auction. (Auction rate preferreds are similar in nature but are shares in a fund, and as such, are not tied to an underlying longer term maturity loan.)

The auction failures in February 2008 led to widespread freezing of the ARS assets in clients’ accounts. Currently, the instruments trade in a secondary market but at a significant discount to par. A renewed investigation of the ARS industry was led by Andrew Cuomo, the Attorney General of New York, and William Galvin, Secretary of the Commonwealth of Massachusetts. These investigations found industry-wide violations of law. Investors in ARSs maintain these instruments were misrepresented as liquid cash alternatives and allege that broker dealers failed to disclose the liquidity and credit risks involved.  (See also 

Thank you to Sam Antar at White Collar Fraud.

Pic credit to William Banzai7


Philip R. Davis is a founder of Phil's Stock World (, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (

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