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by Bill Singer
By Bill Singer,
Three years ago, I took both the New York Stock Exchange (NYSE) and the NASD to task for their withdrawal from an industry seminar sponsored by the American Conference Institute (ACI). On May 24 and 25th of that year, the Broker Dealer Defense Forum held its second annual conference in New York City: Prevailing Against Customer Claims: Strategies for Discovery, Arbitration Hearing and Proceedings. As I stated, in part, in my BrokeAndBroker.com blog entry on June 10, 2005 http://www.brokeandbroker.com/index.php?a=blog&id=5
ACI invited representatives from the New York State Attorney General’s Office, the Securities and Exchange Commission, the New York Stock Exchange, and the NASD to speak on this year’s Broker Dealer Defense Forum panels. There’s nothing unusual about that. It happens numerous times each year at different seminars run by many interest groups. It’s a healthy and important aspect of these seminars. We debate each other, we criticize certain regulatory initiatives, the regulators criticize industry trends, and the folks attending the seminar benefit from the debate and learn valuable lessons. No one on either side of the table benefits from uninformed lawyers or poorly represented clients.
A few weeks before the scheduled May 24th kick-off of the ACI BD Defense Forum, the SEC, the NYSE, and the NASD withdrew from the conference --- after the brochures were printed, after folks had paid to hear them speak, after they had previously agreed to attend. In the NASD’s March 16th letter, that organization conceded that the regulator had “agreed to participate [in January 2005]” but was “disturbed to receive the brochure for the program . . . the title and content presents a pure anti-consumer tone.” In the NYSE’s April 7th email, the organization said that the withdrawal was “due to the anti-investor tone of the program’s brochure. It would be inappropriate for me, or any of my colleagues, to be associated with the conference. I regret any inconvenience that my withdrawal from the program may cause you.”
If you are a regular reader of mine, you know that I frequently rail against the hypocrisy within Wall Street's regulatory community. Notable among my rants is the oft repeated refrain that the industry's cops seem to have a penchant for picking and choosing when to don the visage of high dudgeon--and that the picks and choices of when and what to attend seem too often driven by a warped calculus that favors major financial services companies and their interests. In keeping with my gadfly role, let me share with you yet another example of the failure of our regulatory system to understand the importance of appearances and the necessity to avoid sending mixed messages.
As of this morning, August 15th, the
press reports that New York Attorney General Andrew Cuomo's office is
contemplating legal action against Merrill Lynch & Co. for auction rate
securities (ARS) violations. Cuomo's office has also confirmed an investigation
into Goldman Sachs Group, Inc.'s role in the ARS market. In recent weeks,
Citigroup Inc.
Which brings me to the point of this blog entry -- admittedly, a very blunt point...indeed!
The Financial Industry Regulatory Authority (FINRA)--that proud successor to the NYSE and NASD regulators who stood on principle in 2005 and refused to attend an industry seminar--is holding one of its own conferences. FINRA is conducting a New York Regulatory and Compliance Conference on September 9, 2008. I certainly don't want to be accused of falsely categorizing the purpose of FINRA's conference, so let me quote from the webpage promoting the event http://www.finra.org/EducationPrograms/ConferencesEvents/p038547:
FINRA’s new conference addresses regulatory requirements and compliance practices of larger broker-dealers and other firms with multi-faceted—and on many occasions, global—business models. Workshops provide opportunities for regulators and industry peers to discuss strategies and solutions for regulatory matters that attendees find most urgent.
Depending on your status, you can attend this program at the famed Waldorf Astoria for individual prices running from $650 to $1,100. I think that includes a continental breakfast and lunch. Quite a bargain.
Of course, there is still this troubling question, which I feel compelled to raise. Among the speakers at this regulatory and compliance forum sponsored by a regulator are folks from Merrill, JP Morgan, Morgan Stanley, and Goldman Sachs. It's not that the folks from the aforementioned firms are speaking on their own; no, they are actually sitting on panels with their regulator counterparts from FINRA. More to the point, FINRA is presenting these speakers (and by inference, the speaker's firms) as organizations that apparently are knowledgeable about regulation and compliance --or how did FINRA phrase it in their online brochure? Oh, yes: "industry peers to discuss strategies and solutions for regulatory matters..." I assume that among the strategies to be discussed with FINRA's blessings and with the complicity of its attending staff will be the strategy of promoting and selling ARS to the investing public, and the follow-up strategy of buying back those securities under threat from state regulators. Of course, Merrill may offer a somewhat more aggressive strategy that involves not immediately caving in to pressure from state regulators and baiting states into threatening legal action.
All of which leads to my overwhelming sense of wonder. How the hell does FINRA justify breaking bread with the same firms that are in the midst of a landmark dispute with state regulators concerning ARS policies and practices? Given the allegedly sincere gnashing of teeth that prompted the NYSE and NASD's oh so principled withdrawal in 2005 at the ACI conference, does no one but me see the hypocrisy that is now running amok? FINRA is not merely attending a third-party's conference. No, FINRA is conducting a conference on regulatory and compliance matters. FINRA has invited firms presently in the spotlight for questionable anti-consumer conduct--and some of those member firms are still in the midst of ongoing negotiations.
For the record, I think it is outrageous for any regulator to charge money to attend an event whose purpose is to educate the industry as to better practices. Further, I cannot even begin to rationalize why it was okay for regulators to not attend the 2005 ACI conference but now okay to plan and promote this current FINRA version. Ultimately, this is the likely flaw in self regulation. Too much inbred conflict. Too much myopia by self regulators that just doesn't permit a clear reading of the messages they send to the investing public and less politically connected (and smaller) member firms.
By Bill Singer,
William Donald Redfern ("Respondent"), a former registered representative with Bear, Stearns & Co., Inc. ("Firm"), was charged by the New York Stock Exchange (NYSE) with having:
- Caused his member firm employer to violate NYSE Rule 405, in that he failed to use due diligence to learn the essential facts relative to a customer of his member firm employer, the customer’s orders and/or the customer’s accounts.
- Caused his member firm employer to violate NYSE Rule 405, in that he failed to communicate to his member firm employer the essential facts relative to a customer of his member firm employer, the customer’s orders and/or the customer’s accounts.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he facilitated the purchase of United States Treasury Bills in a customer account to effect the appearance that the account had certain assets on its books to satisfy foreign tax authorities.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he facilitated the purchase and sale of money market funds in a manner intended to obscure the paper trail of those funds.
- Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade, in that he failed to inform his member firm employer of relevant negative information relating to a customer and the customer’s accounts.
A NYSE Hearing Board ("Panel") found that Redfern violated NYSE Rule 405 (Charges I and II) by failing to communicate to his Firm information about unusual or suspicious transactions in a customer’s account that were indicative of money laundering. Charge V was dismissed and Redfern was found not liable for Charges III and IV. The Panel imposed a penalty of censure, a four-month bar and a $75,000 fine. Redfern sought a review of both the liability determination and the penalty. In the Matter of William Donald Redfern, NYSE Hearing Panel Decision 07-131 (August 3, 2007)
NYSE Rule 405: Diligence as to Accounts
Every member organization is required through a general partner, a principal executive officer or a person or persons designated under the provisions of Rule 342(b)(1) to
(1) Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization. . .
Redfern appealed the Panel's decision and sought a review of both the liability determination and the penalty imposed. On May 13, 2008, the NYSE Committee for Review ("CFR") convened to hear oral argument of the parties and subsequently recommended to the NYSE Regulation Board of Directors ("Board") that the Hearing Panel’s findings on Charges I and II be reversed, and the censure, fine and suspension imposed by the Panel be vacated. The Board approved the CFR’s recommendation.
In reversing the Panel's decision, the Board noted that the Firm had identified the "red flags" presented by the customer at issue when Redfern sought to open the accounts. As such, the Firm was on notice of unusual or suspicious aspects of the customer account that suggested money laundering. The Firm notified Redfern that the Firm would be conducting due diligence before permitting the accounts to be opened. Moreover, the Firm told Redfern that the customer’s accounts would be subject to heightened supervision.
Clearly, the Firm either knew the essential facts about the customer and his accounts and chose not to act or, inexplicably, chose not to use its existing resources to fulfill its Rule 405 duties. As detailed in the Board's decision, the arsenal for detection at the Firm's disposal included its Compliance Department, Senior Management, Branch Managers, Legal Department, and Lexis/Nexis Research. Although Redfern certainly had his own obligations as a registered representative that he may not have fulfilled, NYSE did not prove that Redfern "caused" the Rule 405 violation which is the charge at issue in his appeal.
There is a somewhat esoteric point of law/procedure involved in the final disposition of this case. NYSE charged Redfern with causing Bear Stearns to violated NYSE Rule 405 because he failed to adequately communicate information that he was alleged to have had and that was allegedly unusual or suspicious and suggested of money laundering. In a nutshell, the charge was that but for Redfern's "silence" the Firm would not have violated the rule and money laundering activities would have been prevented. The problem with that conclusion is well explained by the Board. First, the Firm manifested a concern about the customer because it alerted Redfern when he opened the accounts that there was concern--the red flags were waving in the wind and noted. In furtherance of its detection of suspicious activity, the Firm specifically told Redfern that it would conduct due diligence before allowing the opening of the accounts. As in keeping with the old biblical admonition: The Firm had eyes but saw not and had ears but heard not. Even the Board described the Firm's failure to detect the facts as inexplicable.
Now, let me provide you with some of the facts in this case. I have presented this matter in a somewhat inverted manner because it was important to separate the legal/procedural basis for the overturning of the findings and sanctions from the (quite frankly) lurid details.
Redfern was employed at the Firm from 1994 through 2002. In May 1994, SR(a 33 years old
citizen of Russia, who maintained a business address in Moscow, Russia and a residence in Luxembourg) opened a securities account in his own name at the Firm. Redfern was assigned to SR’s personal Firm account. On the new account form for this account, SR’s occupation was listed as the Chairman of a certain Russian bank ("Russian Bank A"), which was chartered by the Central Bank of the Russian Federation. SR’s annual income and net worth were listed as $3 million and $15 million, respectively. In July 1998, SR left his position at Russian Bank A. Subsequently, during 1998 to 2000, several other accounts besides SR’s personal account were opened at the Firm, of which SR was the beneficial owner or had a beneficial interest (the "Accounts"). The Accounts included two accounts in the name of a commercial bank located in Russia ("Russian Bank B") and five accounts in the name of a private investment company ("Investment Co. A").Russian Bank B was a commercial bank with offices in Russia. SR’s wife, who used a different last name from SR, was listed on the new account forms as the bank’s President and had trading authorization for the two accounts, opened in August 1998 and February 1999. SR was listed as the bank’s secretary. Russian Bank B’s annual income was listed as $15 million and its net worth as $100 million. At the time Russian Bank B’s accounts were opened at the Firm, Respondent was aware that SR controlled these accounts.
Investment Co. A was a limited liability company incorporated in Belize whose stated purpose was to invest in securities and real estate. The five Investment Co. A accounts at the Firm were opened between September 1998 and December 2000. At various times, Investment Co. A notified the Firm that its address of record was in Ireland, Belize, or the Channel Islands. SR was an officer of the company, as was his wife. During the period the Investment Co. A accounts were open at the Firm, other individuals not related to SR also were directors of the Investment Co. A accounts and had written authorization to give orders to buy and sell securities and to wire funds to and from the accounts. SR was the owner of and exerted control over the Investment Co. A accounts. Investment Co. A’s annual income on the new account forms was variously listed as $10 million and $20 million and its net worth as $100 million and $250 million.
During 1998 to 2002, the equity in the Accounts ranged from $50,000 to $12 million, and there were 20 or more wires to the Accounts, totaling over $20 million, and 95 or more wires from the Accounts, totaling over $18 million. On approximately 145 occasions, a total of over $15 million was journaled between the various Accounts at the Firm.
As early as 1995, SR was the subject of reports in the Russian media alleging fraud and financial improprieties at Russian Bank A while he was Chairman. Redfern, who was fluent in Russian, became aware of those allegations. Over the next several years, SR was the subject of numerous stories detailing allegations of a $27 million financial scandal and that he was "on the lam" in Luxembourg.
I commend to you the details of the Panel decision and the Board reversal, which you can read at http://www.nyse.com/pdfs/07-131.pdf You will likely find your mouth ajar and eyes widened as you read more of the facts. I suspect that many of you will shake your head in disbelief when you try to reconcile the facts with the outcome. That's fine. Sometimes the best law is forged from unsettling facts and unpopular defendants. Sometimes the best regulation arises from the most noxious pile of garbage. Perhaps it will help if you keep Otto Von Bismarck's sage advice in mind:
Laws are like sausages, it is better not to see them being made
By Bill Singer,
A few years back I attempted to help a number of defrauded investors who had been scammed into buying so-called "pre-IPO" shares of Securetee International, Inc. In a nutshell, Securetee was a bogus offering sold mainly to unwary European investors by unregistered brokerage firms. Prominent among the phony broker-dealers was an outfit called Jackson Cole Investments. Briefly, SecureTee appeared to have been incorporated in Nevada. However, the State of Nevada advised me that the company was no longer a corporation in "good standing." The original address the company provided upon incorporation was in Czechoslovakia (alas, even the country now no longer exists) and was probably a bogus address. SecureTee did have a California address but said address was no longer valid. When calling the California office number, I found it was the number for a company that rents out office space to other tenants. I was advised that SecureTee no longer had an office there and left no forwarding information. Jackson Cole Investments was not a registered broker-dealer in the U.S. There is no record of such an entity on file with either the United States Securities and Exchange Commission ("SEC") or, at the time, with the National Association of Securities Dealers, Inc. ("NASD").
Far from being a fraud that none of the defrauded complained about, the Securetee scam was well-documented during 2003-2005 on a number of internet forums, and foreign regulators issued belated warnings but did little else. Bad enough that individuals were scammed out of their savings by investing into non-publicly tradable shares. As President Bush so woefully attempted to state during one of his speeches: Fool me once, shame on you. Okay, so those investors learned a hard lesson about not verifying what they bought and whom they dealt with. I don't hold any regulator or prosecutor accountable for that. You need some reasonable warning, some decent notice before a regulator should move into action. Frankly, bogus sales are too often quick hit-and-runs. Chalk the pre-IPO sales up to a well designed scam.
However, the second part of the maxim is: Fool me twice, shame on me. No sooner had Securetee's pre-IPO sales been concluded then the scamster rolled into action with a second phase of their fraud. Those same foreign investors who bought the crap were now getting calls from allegedly U.S.-based broker-dealers promising to "legend" the pre-IPO shares and offering significant profits through sales to motivated buyers that they claimed to be representing (all somewhat hush hush, doesn't want his identity known, wants to close quickly)--of course, there was the polite request for the ever popular up-front fee of thousands of dollars to legend the shares. Among the firms making these calls was one known as Great American or Great Lakes Securities.
Great American Securities or Great Lakes Securities, a purportedly Illinois broker-dealer and the company that solicited an up front payment in exchange for finding a seller for the pre-IPO shares, was not registered as a broker-dealer with the state of Illinois, the SEC, or the NASD. There had been a Great American Securities, which was a member of the Chicago Board of Options, but that firm dissolved in 1992. Great American purported to be a member of SIPC, but it was not. Great American also described itself as a member of the Chicago Board of Acquisitions. Okay, I'm not sure how to even address that--unless, someone, anyone, can tell me what the hell the Chicago Board of Acquisitions is. I never heard of it. There is no such listed organization. Funny thing is that some of the folks I spoke to about this case seemed uncomfortable about not having intimate knowledge of the good-old (not!) CBA and suggested that they were slightly familiar with the organization. Only goes to show you that even veteran industry members--even regulators--can easily be scammed. No one ever likes to admit ignorance. That's the first thing a good fraudster latches on to.
So...what steps did my law firm take a few years ago to track down this mess?
For starters, we spoke with a Jim Daly of the Securities and Exchange Commission (SEC) who said he was very familiar with SecureTee and Jackson Cole. He did not know about Great American/Lakes. Because the SEC is not permitted to reveal the existence of ongoing investigations, we couldn't get much feedback. However, from our numerous conversations with Mr. Daly, he did express interest in the situation, was grateful for the additional information, and there was an implication at least of some ongoing inquiry. Mr. Daly's contact information was (202) 551-6551 or by e-mail to oiea@sec.gov.
We also contacted the Illinois Securities Department, because Great American/Lakes purported to operate its business from Chicago. That department investigates potential fraud and determines if and when to refer the matter to the state's Attorney General's office (criminal authority). At their request, we faxed to them some of the forms Great Lakes wanted investors to complete. The Department advised that they would "look into the matter." After a number of conversations with Cheryl Weis of that office, she advised us that the Department lacked jurisdiction to pursue the company. Moreover, she noted that even if the Department were conducting an investigation, they would not be permitted to disclose an ongoing inquiry. Nonetheless, Ms. Weis seemed quite troubled by Great American and said that she would go to her Director about issuing an Order to at least make people aware of Great American's shenanigans, but she offered no guarantees. Ms. Weis' contact number was (312) 793-9643.
In addition, we contacted the Nevada Securities Department at (702) 486-2440, which also investigates fraud and determines if that state’s Attorney General should be involved. Unfortunately, after looking into the matter, that Department advised us that they have no jurisdiction because neither SecureTee nor the investors were residents of that state. The fact that SecureTee was incorporated there was apparently not sufficient to grant jurisdiction to conduct a fraud investigation, or so we were told.
Finally, we contacted the Federal Bureau of Investigation's ("FBI")
California office. SecureTee had an office in that state. We were advised that
the matter would be referred to the FBI's Fraud Division; however, the FBI noted
that it was "backlogged" and it could take some time to get to this
case. No one with whom we spoke would reveal their names. That office could be reached
at (310) 477-6565.
To those of you familiar with the Internet, I'm sure this second phase of the
SecureTee scam (send us money to clear things up) sounds like to ongoing
Nigerian Scam. Okay, so not so clever. However, you don't need to be
too clever these days. All those sheep to be fleeced. And they line
up so willingly. Sadly, despite many calls by me to every regulator with
apparent jurisdiction, the foreign regulators declined to take further action
because they said the second wave of the fraud emanated from the U.S., and the
U.S. regulators declined to take action because the scam mainly involved foreign
investors and a defunct U.S. entity. The crooks had crawled into the
penumbra between foreign and U.S. regulation and frolicked there with
delight. No one with power cared. Clearly, the bad guys counted on
this.
Yesterday, one of my clients from England notified me that he was contacted a few days ago by a U.S. broker-dealer offering to legend the shares and to refer him to U.S. "solicitors" for the purpose of completing the transaction. Once again, I have reached out to the U.S. regulatory community. Perhaps this third wave of fraud will not come crashing down upon our shores and send a tsunami back to the Old World. Then again, tell me, does anything really change when it comes to regulatory somnabulism?
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