Tuesday, August 18, 2009

SEC Schapiro Missed Stanford Fraud In 2003

While Mary Schapiro was a Vice Chairman at the NASD (now FINRA), the securities industry self-regulatory organization, the NASD failed to follow up on information that the Stanford Financial Group was a Ponzi scheme. See the CNBC article, "Stanford Regulators Admit Not Pursuing '03 Fraud Claim."

In 2003, Leyla Wydler, a Stanford employee, alleged that the group was running a Ponzi scheme. Who would know better than an employee at the firm that it was a fraud, but the NASD did not follow up on the claim.

As ridiculous as it may sound, the NASD at the time had a policy not to follow up on brokerage employee claims of fraud. It only followed up on customer allegations of fraud. The policy continued until this past March.

If employees cannot be whistle blowers to the brokerage industry's self-regulatory organization, what hope is there for weeding out fraud and deception?

The disclosure came in prepared testimony for a Senate Banking Committee hearing on Monday from Daniel Sibears, Executive Vice President of the Financial Industry Regulatory Authority, FINRA.

Schapiro joined the NASD organization in 1996 as President of NASD Regulation and became Vice Chairman in 2002. In 2006, she was named NASD's Chairman and CEO.

The whole incident occurred during her time at NASD (FINRA). Can we hope for any better supervision and review of allegations at the SEC?

Isn't the fundamental problem that the securities and brokerage industry watchdog agencies are dysfunctional, too big, too rigid, too set in their ways and not cognizant of what they can do to gain knowledge of industry fraudulent practices in a timely manner and remove criminal practices?

Maybe our regulatory agencies are too big to fail also and need to be broken up into more responsive and flexible entities that can navigate the waters of bad brokerage industry practices.

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