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The Farce Called FINRA Has No Shame

06/05/2009 05:12 am ET | Updated May 25, 2011

The Financial Industry Regulatory Authority (FINRA), is the "non governmental" regulator for U.S. securities firms. FINRA runs the mandatory arbitration system for the resolution of all disputes between brokers and their clients. Many believe (and I am one of them) this process is biased and rigged against investors.

FINRA's Board of Governors is a who's who of the securities industry. Prudential, Merrill Lynch, Pershing and other industry insiders are well represented. They "govern" their fellow brokers the same way the SEC "governed" Bernie Madoff.

FINRA's kangaroo court is currently processing cases brought by investors who purchased auction rate securities. These investors were told ARS were "as good as cash." It turns out the markets were rigged (much like FINRA's arbitrations) by the market makers, who made huge underwriting profits packaging and selling these "investment" products. The ARS markets froze in February, 2008 leaving investors holding more than $100 billion.

We now learn that FINRA itself bought more that $860 million of ARS. Unlike investors who are stuck with these bonds, FINRA dumped all its holdings less than six months before the market for them froze up.

What remarkable foresight!

FINRA is the ultimate insider. Is it really possible it did not know the market for ARS was in deep trouble when it got rid of its ARS?

In October, 2007, Mary Schapiro, formerly the head of FINRA, gave a speech in which she said that "individuals bought auction-rate securities even as institutional investors were dumping their shares." Shapiro posed "the question" as follows: "Was that information freely shared with individual investors?"

At the time, FINRA's own sale of its ARS was not publicly disclosed.

Ultimately, it will fall to the SEC to investigate the propriety of FINRA's conduct. That could present a problem. Mary Schapiro is now the head of the SEC. How vigorously will she investigate her own behavior?

In the meantime, gullible investors will proceed with their FINRA arbitrations, clinging to the false hope of a fair hearing.

And pigs will fly!

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