What They Missed: Where FINRA Missed Opportunities To Catch Madoff And Stanford

What They Missed: Where FINRA Missed Opportunities To Catch Madoff And Stanford - 10/2/2009

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HEADLINES \| SETTLEMENTS AND DISMISSALS \| COURT FILINGS LINKS TO OTHER NEWS \| NEWS ARCHIVE	HEADLINES ARCHIVED SETTLEMENTS AND DISMISSALS ARCHIVED

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What They Missed: Where FINRA Missed Opportunities To Catch Madoff And Stanford
Sue Asci

InvestmentNews. October 2, 2009
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EXCERPT: A special Finra-appointed committee today made public the results of its review of the Financial Industry Regulatory Authority Inc.'s examination programs that were remiss in detecting the multibillion-dollar Ponzi schemes of Bernard Madoff and R. Allen Stanford. In addition to suggesting that Finra's programs be reformed, the report outlined a series of missed opportunities where Finra's examiners could have dug deeper into both fraudsters. Questions over jurisdiction were cited as challenges in both cases, and the report concluded that Finra must seek new jurisdiction from Congress to regulate activities under the Investment Advisers Act of 1940. In the case of the alleged $7.2 billion fraud perpetrated by Texas financier R. Allen Stanford, at least five sources gave credible information to the agency's predecessor, the National Association of Securities Dealers, between 2003 and 2005 warning that the certificates of deposit being sold to clients were a potential fraud. One source was a letter from the Fort Worth, Texas, office of the Securities and Exchange Commission. The report also found that certain members of the examination staff were “unsure of the full scope of the organization's investigative authority, reluctant to pursue investigations where jurisdiction questions arise and not adequately trained to identify alternate bases of jurisdiction.” The Stanford case also revealed that the agency does not set criteria for advancing an issue to senior management based on the “gravity and substance” of allegations — and noted that Finra does not have a centralized database where examiners could get access to all complaints about a member firm. In case of Mr. Madoff, the broker-dealer records provided to Finra contained “no indication that the Madoff firm was operating an investment advisory business,” the report said.

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