Why Bachus' SRO-that-must-not-be-named would prove a tyrant to RIAs

The author says that as a private corporation endowed with governmental powers, FINRA is unsafe at any speed

Friday 8.24.12 by Guest Columnist Mark Mensack

Brooke’s Note: Mark Mensack knows FINRA — all too well. The former West Point faculty member joined Morgan Stanley in 2008 and received a $873,000 signing bonus but landed in personal bankruptcy losing an arbitration with his former employer, Morgan Stanley, before the Financial Industry Regulatory Authority. In July, a FINRA panel ruled against him after he attempted to be a whistleblower and instead was ordered to pay Morgan Stanley $1.2 million. The figure was based on the value of most of his signing bonus plus interest and legal fees. He’s 50 with a wife and three children. It seems that the justice here is questionable at best as reported in this Bloomberg article.: Whistleblower gets sham justice from Wall Street court. In this RIABiz column, Mensack gives his very considered views on those who would give FINRA even greater powers.

I believe Rep. Spencer Bachus’ Aug. 5 Wall Street Journal Op-Ed arguing for a self-regulatory organization to oversee RIAs to be fallacious and fraught with red herrings.

Bachus holds the SEC responsible for not exposing the Madoff Ponzi scheme, but fails to mention that Bernard Madoff, who admitted his scheme began in the 1990s, was registered as an NASD, and then FINRA, member firm from March 1960 through June 2009. The congressman also fails to mention that Matthew Hutcheson, while indicted, is innocent until proven guilty.

More significantly, Hutcheson was never licensed as a registered investment advisor or broker, so neither the SEC nor FINRA or any other SRO ever had regulatory authority over him. See: Private foundations: Five steps to keep the next Bernie Madoff away from your assets.

Why FINRA is the problem

But the biggest red herring of all — the 500-pound fish in the room as it were — is Bachus’ implication that registered investment advisors have lobbied against the proposed Investment Adviser Oversight Act of 2012 because they want to avoid increased oversight.

It’s not increased oversight that RIA’s are lobbying against, it’s FINRA — an acronym not once mentioned in the Op-Ed — or a FINRA-like SRO. See: RIAs flood Capitol Hill with protests against a SRO-FINRA future on the day of the Bachus b ill hearing.

The reason FINRA is so often criticized, to quote Bernie Madoff whistle-blower Harry Markopolos’ congressional testimony, is that FINRA is a “very corrupt self-regulatory organization.” He went on to say that “I would give an A-plus to the SEC for incompetence and I would give the same grade to FINRA for corruption.” (1)

Bachus appears to agree with Markopolos regarding the SEC when he writes that the SEC couldn’t detect fraud even if it was handed to it on a silver platter. However, if one is to accept Bachus’ claim regarding the SEC, then the following situation is evidence that FINRA is no more capable of effective oversight than the SEC.

According to FINRA’s own documents, its predecessor, NASD, had evidence of the R. Allen Stanford Ponzi scheme in 2003 — six years before Stanford was caught. (2) Whistle-blower Leyla Basagoitia reported the scheme to NASD in 2003 and it was a counter-claim in her arbitration against Stanford. The NASD arbitration award states, “Respondent alleged that claimant is engaged in a Ponzi scheme to defraud its clients.” In this case not only did three NASD arbitrators, one of whom was an attorney, ignore Basagoitia’s evidence, they also ruled against her and made her pay Stanford. See: In the duel of FINRA vs. state courts, one comes out on top for most advisors.

Harsh words

Whether the Basagoitia case is incompetence or corruption, I don’t know, although it is obviously not an example of the effective oversight Bachus implies. However, William Galvin, Massachusetts’ secretary of the commonwealth, does seem to have an opinion when he describes FINRA’s mandatory arbitration system as “an industry-sponsored damage-containment and -control program masquerading as judicial proceeding. (3)

Harsh words, perhaps, but most Americans don’t realize that FINRA is a private corporation, not a government agency. FINRA has governmental powers, but it is not subject to the Administrative Procedures Act and can deny American citizens their constitutional right to due process. Furthermore, FINRA, according to the Supreme Court in Standard Investment Chartered Inc. v. FINRA, is immune from prosecution.

I submit that RIAs aren’t lobbying against FINRA to avoid increased oversight; rather, they are lobbying against being subject to the whims of a nongovernmental organization that holds itself above the Constitution. What American would not lobby against a private corporation that acts as the judge, jury and executioner with an established reputation of being rigged in favor of the securities industry? See: Why advisors see FINRA as the devil.

Sham justice?

FINRA arbitrations have been described as a kangaroo court, and there are plenty that appear to fit the description, according to some. (4) You can easily Google examples such as Basagoitia’s or Postell v. Merrill Lynch — where FINRA fired arbitrators for ruling against Merrill Lynch, or _Watts v. Wells Fargo _ , where Judge Max Cogburn comments about FINRA’s “level playing field” or Oliver Schwarz, who FINRA agreed was fraudulently induced to sign a promissory note, but found against him anyway. See: One-Man Think Tank: Six reasons that FINRA should be dismantled.

You will also find my own FINRA experience, which is similar to Basagoitia’s, described as “sham justice” (5) and “an abdication of legal rights.” (6) The independent government watchdog group, Project on Government Oversight, recently used my experience as an example of FINRA’s inherent conflict of interest, and lack of transparency and accountability. (7)

As a result of these articles, many other advisors who lost in FINRA’s kangaroo court contacted me with similar stories of FINRA arbitrators ignoring their evidence. I discovered that I was one of at least five former Morgan Stanley advisors that FINRA forced to declare bankruptcy by threatening to suspend our licenses if we did not pay FINRA’s arbitration award.

A whistle Bachus can’t hear?

Finally, the reason that leads me to believe Bachus’ argument is fallacious, and perhaps disingenuous, is that his own committee has ignored evidence of wrongdoing for nearly a year. As chairman of the House Financial Services Committee, Bachus has ignored my own whistle-blower allegations against Morgan Stanley, which relate to what 401(k) expert Edward Siedle describes as fraud that “makes Madoff look like chicken feed.”(8)

In October 2011, I filed a complaint through the House Financial Services Committee website regarding both my whistle-blower allegations and FINRA’s failure to explain why nearly half of the testimony, which was necessary for a successful appeal, was missing from FINRA’s record of my arbitration. I also wrote, called and/or met with individual members of his committee, including Rep. Mike Fitzpatrick, Rep. Scott Garrett and Rep. Maxine Waters. Since my first complaint nine months ago I have received no response or acknowledgement regarding the whistle-blower allegations or the inexplicable events of my FINRA arbitration, which are described in the articles you can find online.

While the SEC might not have the resources to provide appropriate oversight of registered investment advisors, Bachus’ notion that FINRA or a similar SRO could or should provide that oversight, based upon my experience, would only enhance the fox’s ability to steal the chickens.

1. House Committee on Financial Services, 2/4/2009
2. See FINRA arbitration awards online – NASD Case #03-02025
3. Congressional Testimony 3/17/2005
4. Al Lewis, Dow Jones, 3/13/12
5. Wm. Cohan, Bloomberg.com 3/18/12
6. Ibid.
7. POGO.org 5/29/2012
8. Forbes 10/07/2010

Mark Mensack, a former U.S. Army officer, has a Master’s in philosophy from the University of Pennsylvania. His final active-duty assignment was on the faculty of the United States Military Academy at West Point, N.Y., where he taught philosophy, ethics and critical reasoning. He holds the accredited-investment-fiduciary-analyst designation, and has 17 years’ financial services experience — 14 as a financial advisor with broker-dealers, and three as an RIA.

Mark Mensack | Harry Markopolos | William Galvin

FINRA | Bachus | SEC | Madoff