Goldman, Stanford highlight disclosure problems, some say

Brokers must report receipt of Wells notice, whereas firms don't have to, they note

May 2, 2010 @ 12:01 am

By Dan Jamieson

The SEC's lawsuit against Goldman Sachs' broker-dealer unit and recent revelations about fraud at Stanford Financial Group show how weaknesses in the disciplinary reporting system allow serious problems at firms to go unreported, according to some in the industry.

They also highlight the fact that firms and brokers are held to a different standard, which is “patently unfair,” according to Bill Singer, a shareholder in the law firm Stark & Stark. Investors can be harmed by having less information about firms than they have about brokers, he said.

When the Securities and Exchange Commission announced fraud charges against The Goldman Sachs Group Inc. last month over the structuring and marketing of a synthetic mortgage bond, the firm took heat for not disclosing that it had received a Wells notice last June. A Wells notice is a formal warning from a regulator that it intends to file charges.

Goldman Sachs brushed aside the criticisms, saying that it is up to the firm to decide whether proposed charges warrant disclosure, based on whether they constitute material information that could affect the publicly held firm's stock price.

Individual brokers have no such flexibility — they must publicly report receipt of a Wells notice. In fact, they must disclose when they become the subject of an investigation.

“I don't know why you'd disclose for the individual and not for the company,” said Denise Voigt Crawford, Texas' securities commissioner and president of the North American Securities Administrators Association Inc.

The Financial Industry Regulatory Authority Inc., which plays a large role in writing disclosure rules, is “hostile to [individual] brokers,” Mr. Singer said. “If you had brokers voting on these [rules], they would be far more evenhanded.”

Finra spokesman Herb Perone declined to comment about the agency's disclosure policy.

The industry has argued that disclosing every complaint or regulatory inquiry at the firm level would overwhelm investors with data of limited use.

But as firm-specific scandals continue to erupt, critics don't buy that.

“There is no justification for keeping from investors anything that regulators have,” said Edward Siedle, founder of Benchmark Financial Services Inc., an investigative firm that serves institutional investors.

But keeping some information hidden “is exactly what the system is designed to do,” he said.

“If anyone had wanted to fix it, it would have been fixed long ago,” Mr. Siedle said.

SEC Form BD is the document that firms use to disclose regulatory matters. The form requires significantly less information than Finra forms U-4 and U-5, which govern disclosures about individuals.

SEC spokesman John Heine declined to comment about why disclosure rules are different for firms and brokers.

Mr. Heine said that he isn't aware of any proposal before the SEC to change Form BD.

The Finra forms are developed in concert with state regulators.

Finra also runs the online BrokerCheck database, which is used by the public to access a variety of facts about individuals and firms, including disclosure information.

The same day that the SEC announced its charges against Goldman Sachs, the commission's inspector general released a report detailing how the agency's Fort Worth, Texas, office let Allen Stanford sell $7 billion in allegedly fraudulent certificates of deposit to investors.

The report made clear that investors can be kept in the dark even though regulators are convinced that investors are being fleeced.

“We all thought it was a Ponzi scheme to start with — always did,” an SEC enforcement official in the Fort Worth office told the inspector general, according to the report. Finra's predecessor, NASD, and Texas regulators were also alerted to the suspected problems with Stanford — NASD as early as 2003 and Texas as early as 1999.

“Between 2003 and 2005, the National Association of Securities Dealers ... received credible information from at least five different sources claiming that the Stanford CDs were a potential fraud,” according to a September report from Finra.

Yet no regulator made public disclosures about Stanford until news of the fraud broke early last year.

Under current disclosure rules, there isn't a lot that regulators can do to warn the public about a known bad firm, short of filing formal charges.

The SEC's inspector general faulted the commission for not figuring out a way to file a case.

“The filing of such an action ... could have potentially given investors and prospective investors notice that the SEC considered [Stanford's] sales of the CDs to be fraudulent,” the inspector general's report said.

The SEC did four separate exams of Stanford, the last one specifically designed to build an enforcement case, the report noted.

But SEC examination reports are exempt from public-records laws requiring disclosure.

A Stanford Victims Coalition USA survey found that 95% of 211 responding Stanford investors said that knowledge of an SEC inquiry would have affected their decision to invest, the inspector general's report said.

Although regulators had re-ceived several customer complaints about Stanford, the firm didn't have to disclose them publicly.

Individual representatives must report most complaints.

Firms are required to report quarterly to Finra all customer -complaints against the firm or its brokers that allege theft, misappropriation or forgery.

But Finra doesn't publicly disclose this data.

“Why can't we consolidate and rank all the [disclosures] regarding a particular firm and allow comparisons of particular firms?” said Barbara Roper, director of investor protection for the Consumer Federation of America.

In 2002, Mr. Siedle attempted to create his own database of disciplinary information, much of it taken from the Finra system, but Finra went to court and shut him down.

“All Finra said was, "You're not allowed to do that.' They never disputed the data,” he said. “They will stop anyone who tries to improve the system.”

“It was never intended to be a commercial database,” Mr. Perone said.

“Since 2002, there have been numerous improvements to BrokerCheck.”

E-mail Dan Jamieson at


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