There’s always somebody left grousing when a financial deal gets done. The buyer says he paid too much, the seller says she didn’t get enough, and the employees say they got the shaft when the merger led to layoffs.
When the dealmakers are securities regulators and the injured party is a noisy former regulator who sniffs out scams for a living, the resulting brawl can be more raucous than most.
Consider the complaint filed in federal court last week against the Financial Industry Regulatory Authority Inc and its chief executive, Mary L Schapiro, President-elect Barack Obama’s pick to run the Securities and Exchange Commission.
Benchmark Financial Services Inc of Ocean Ridge, Florida, is suing Finra and its top officers for allegedly deceiving members of NASD — formerly the National Association of Securities Dealers — about terms of the merger of NASD’s regulatory unit with that of the New York Stock Exchange in July 2007. The combination created Finra.
Benchmark is run by Edward Siedle, a former SEC lawyer who today investigates pension fraud and other financial abuses. The firm, a Finra member, has now twice challenged the regulator that oversees it.
Siedle sued NASD in 2002 when it tried to block him from publishing a book that examined and ranked the disciplinary records of member firms. Amid NASD’s objections and threats to sue him, Siedle scrapped the project.
THE $35,000 PAYMENT
This time, he’s arguing that Finra gave members a deal that stiffed them a bundle of money.
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To get that deal through, the brokerage firms that made up NASD had to vote for by-law changes that were dosed with generous amounts of both carrot and stick. Vote for the changes, and you get a $35,000 “special member payment,” NASD told its 5,100 members in December 2006. Vote against it, and you risk that the SEC will “make its own decision about the structure and governance” of NASD.
NASD’s proxy said the $35,000 payments would come from “the expected value of the incremental cash flows” from the consolidation. Schapiro told an audience at a road show that they would come from the proceeds of NASD’s sale of Nasdaq, according to a redacted Finra memo filed in a 2007 court case.
Thus motivated, NASD members approved the by-law changes at a special meeting on January 19, 2007. Helping seal the vote was NASD’s claim in its proxy and at road shows that a payment exceeding $35,000 per firm “is not possible” because it could “seriously jeopardise” its tax-exempt status.
CLAIMED CLAIRVOYANCE
How the clairvoyants at NASD could have known that when the proxy was published on December 14, 2006, is anyone’s guess, because it would be months before the agency received a ruling from the Internal Revenue Service. The information wasn’t in hand even by January 19, 2007, when members voted to change the bylaws, thus paving the way for the merger.
On March 13, 2007, with the road show completed and the voting closed, NASD finally got its IRS ruling. I bet you’d like to know what the IRS said. Well, so would I. And so would the former NASD firms who settled for $35,000. And so would Edward Siedle.
Contents of the unredacted IRS ruling are confidential, a Finra spokeswoman said in an e-mail to Bloomberg News. (While the letter is public, the redacted numbers aren’t.) Ditto for contents of a fairness opinion that NASD sought from Houlihan Lokey Howard & Zukin Financial Advisors, Inc before the deal was done. All that stuff has been filed under seal in a lawsuit that preceded Siedle’s, Standard Investment Chartered Inc vs National Association of Securities Dealers.
MUST BE GOOD
It must be pretty sexy stuff, because when a lawyer for Standard Investment wrote to lawyers at NASD and NYSE on July 19, 2007, to suggest that the documents under seal be shared with the SEC, the answer was an absolute no.
“We cannot agree with your proposal,” NASD lawyer F Joseph Warin replied.
“You do not have permission to share with the SEC (or anyone else) any documents produced by NYSE in this litigation,” wrote NYSE lawyer Douglas Henkin.
The SEC can’t see documents that self-regulatory organisations produce in a historic merger that the SEC must bless? Did I miss the press release that announced that the SEC is no longer in charge of the so-called SROs?
The still-secret IRS redactions are a major target of Siedle’s lawsuit, which doesn’t seem to be rattling too many nerves at Finra. The suit “restates allegations that have already been dismissed by the court,” Finra spokesman Nancy Condon said in an e-mail to Bloomberg. “We think this suit is equally without merit.”
FRESH CASE
One of the lawyers who brought both the Standard Investment and Benchmark suits, Jonathan Cuneo, said he has filed an appeal in the Standard Investment case. As for the recent Benchmark complaint, Cuneo says he has additional information about NASD’s actions that make this case a fresh, stronger one.
Siedle, in the meantime, was readying to leave for vacation on December 23 when the phone rang in his Florida office. A Finra examiner was calling to say that she would be there the first week of January to inspect his books and records. Siedle said he replied, “Funny thing is, just yesterday afternoon a reporter from Bloomberg asked me if I got harassed by Finra, and I said no. And here is your call.”
These days, it’s nice to know that examiners are showing up to kick the tires of brokerage firms. Who, though, is kicking the tires of our regulators? When the nation’s biggest non- governmental securities regulator is ducking behind sealed court documents and redacted documents, you have to wonder what they have to hide.