This article originally appeared in Bloomberg View on September 6th, 2012.

If there’s one thing we learned from Bernie Madoff, Allen Stanford and the countless perpetrators of the financial crisis, it’s that nobody’s word is worth trusting.

The parade of Ponzi guys and unindicted bankers of recent years has inspired a new enthusiasm for sleuthing by the public. There’s even a cottage industry of vetters willing to size up a broker if you aren’t inclined to do the work yourself.

The catch is, for all the new willingness of investors to ask questions before they hand over control of their nest eggs, what you discover in regulatory records may tell less than the whole story. As for the commercial websites that purport to know which advisers are good or bad, let’s put it this way: Most are free to investors, and there’s that issue of getting what you paid for.

Some investors go the do-it-yourself route and access BrokerCheck, a database operated by the Financial Industry Regulatory Authority, known as Finra, a self-regulatory organization financed by Wall Street. Others check websites with names like financialjoe.com and investorwatchdog.com that offer reviews of brokers and their firms.

Investorwatchdog.com, introduced in May, says its users “avoid costly mistakes, identify problems sooner and select advisors with the best qualifications.” Financialjoe.com says it “takes on Wall Street by empowering investors and allowing them to rate and monitor their financial advisors.”

Freebie Sleuths

Rely on the freebie sleuths at your own risk. If it were my money, I would be gathering facts from court and regulatory records, including Finra’s database. I will get back to those problematic broker-vetting websites in a bit. But it’s worth explaining that even BrokerCheck has shortcomings.

Finra does require disclosure of some red flags about a broker’s finances — liens and bankruptcies, for example.

It doesn’t, however, demand that brokers disclose if they were sued in a matter that isn’t investment-related. Thus, although 253 former brokers from the bankrupt Stanford Financial Group Co. — yes, that Stanford — have been sued by a court-appointed receiver, they have no obligation to report that to Finra.

Ralph Janvey, the receiver in the 2009 fraud case brought by the Securities and Exchange Commission, is trying to recoup money those brokers made while they peddled Stanford’s securities. If you were thinking about hiring one of the former Stanford guys, you might like to know if they are on Janvey’s list: The broker on the receiving end of a big court judgment might have a lot of motivation to raid your account.

Robert Cornish, a Washington attorney who represents four Stanford victims, analyzed records of all 253 brokers and discovered that only 18 disclosed the lawsuit, which seeks to collect about $177 million from the group Cornish checked.

So BrokerCheck paints only a partial picture of a broker’s record. But it offers more than some of the vetting Web pages.

Consider investorwatchdog.com, run by former broker Jack Waymire in Lincoln, California. I was curious that investorwatchdog says it could help investors pick financial advisers “with the best qualifications” while cautioning in the fine print that it doesn’t review compliance records. So I queried Waymire by e-mail. He responded that the terms of service I had read the previous day had “out-of-date information.” Sure enough, after getting his response, I saw that investorwatchdog’s terms of service were changed from the printout I had made of its disclosures.

Waymire says advisers — who pay to be featured — have to get a score of 90 or better on his proprietary algorithm before they can be featured, though he sometimes makes exceptions for advisers who he says have been subject to “frivolous” complaints. It is worth noting that he is willing to lose business from risky advisers: He says he kicked a guy off his site on Aug. 30 for having huge tax liens.

Background Checks

I noticed that the site featured a California broker whose record included a fine by a state insurance department, a customer complaint and a termination. Waymire responded that the adviser had acknowledged his mistake and reimbursed an investor in one instance 30 years ago, and hadn’t hurt investors in the two others. Personally, I would pass on someone like that.

BrightScope Advisor Pages, which says it helps consumers “conduct due diligence,” also gets revenue from financial advisers who pay to be highlighted. When I asked Mike Alfred, the firm’s chief executive officer, about a featured broker who had a criminal record, he said in an e-mail that BrightScope was in the business of making information easier to find and use, but that “We are not in the verification business.”

The operators of these sites themselves have blots on their records, ranging from a failure to meet a state’s net capital rules at a brokerage firm a quarter-century ago (Waymire); to two customer settlements, one for $35,000 and one that was confidential, for Shawn Tierney, founder of financialjoe.com.

Waymire said his firm ultimately met Florida’s requirements. Tierney said he was no longer handling the account in question when one of the complaints was filed, and that an investigation in the other determined he had done nothing wrong.

Then there is the million-dollar claim against Alfred, his brother Ryan, the president of BrightScope, and Axa Advisors LLC, one of their former employers. In a BrightScope blog posting on May 16, 2011, Ryan Alfred said “we were not required to pay any of the settlement.” Finra records for each Alfred, though, describe an “individual contribution amount” of $30,000 to the $135,000 agreement.

It took a world-rocking financial crisis to get the public to be more serious about checking the claims of brokers. Four years after the crisis began, there still is no substitute for using BrokerCheck or state regulatory records; Finra’s arbitration database; lawsuits and liens on pacer.gov; and LexisNexis’s SmartLinx for state courthouse actions. If that sounds like too much work and too much financial outlay — pacer and Lexis aren’t free — go ahead and peruse the new sleuthing sites. But don’t kid yourself about who their customers are.

This article originally appeared in Bloomberg View on August 2nd, 2012.

Let’s imagine the customers of a financial firm get word that more than a billion dollars of their money is missing. Then, less than a year later, customers of another firm learn that $200 million of their money is gone, too.

If such a sequence of events occurred, it’s likely that leaders from the industry would be called to appear before a government committee. And they would probably say something like:

Sorry, folks. But don’t try to slap us with expensive new rules.

Welcome to the era of financial regulation, cost-benefit style — emphasis on the costs, not the benefits.

Although it seems to have escaped the memories of the people in charge on Wall Street, the economy just about collapsed in 2008, and a lot of bad things followed. Credit froze, financial firms went under, and millions of people were thrown out of work as business owners lost their financing and their confidence.

Then, last October, that billion-dollars-gone-missing scenario came to pass. The commodities firm MF Global Holdings Ltd. declared bankruptcy after customer money got transferred to a corporate account and then disappeared. Last month, customers of an Iowa futures trading firm, Peregrine Financial Group Inc., found out they had lost $200 million after the firm’s chief executive officer said in a suicide note that he had been running a Ponzi scheme for 20 years.

Government Obligations

Which brings us to the obligatory government hearing.

Last month, the House Committee on Agriculture explored what it cryptically referred to as “Recent Events (that would be the lost customer money) and Impending Regulatory Reforms (which better not be too expensive).” Among those testifying were two futures industry leaders: Terrence A. Duffy, president of CME Group Inc., the world’s largest futures market, and Walter L. Lukken, CEO of the Futures Industry Association, a Washington-based trade group.

The two men made the requisite noises about ramping up the industry’s vigilance against fraud. Then both took the opportunity to get it on the record that there’s a more important agenda.

Duffy: “I would hate to see us get over-regulated to a point or have rules put upon us that put us in a very — a place that is very anti-competitive.” At a Senate hearing yesterday, he said he wasn’t opposed to an insurance fund for fraud victims “if people want to pay for it.”

Lukken: “It would be wise to carefully weigh the costs of any new regulatory mandates.” Some of the rules being proposed by the Commodity Futures Trading Commission could lead to market disruption, the exit of futures brokers from the business, and – – as if it were the customer we really cared about here — the limiting of customer choice, Lukken said.

There was a glimmer of hope after passage of the Dodd-Frank Act two years ago that lawmakers had put some measures in place to avert another financial disaster. To get the reforms up and running, though, government agencies first had to write rules that would execute the law’s objectives.

The financial industry has used many tactics to derail this process, but its standout victory was a 2010 lawsuit by the Business Roundtable and the U.S. Chamber of Commerce against the Securities and Exchange Commission, which had proposed a rule to make it easier for investors to oust corporate directors. The U.S. Court of Appeals in Washington said last July that the SEC hadn’t properly assessed the rule’s costs and benefits. It was “an aggressive stretch of the law” in the view of John Coffee, a securities law professor at Columbia University.

Getting Stuck

A stretch or not, it is what the SEC is stuck with for the moment, and it’s become “the cornerstone of the attack of regulatory reform in the courts,” according to an 82-page report released three days ago by the investor advocacy group Better Markets. Dodd-Frank was passed “to stop Wall Street from crashing the world again,” Dennis Kelleher, the group’s president, said in a telephone interview. “Now they’re saying they can’t do it if it costs them too much money.”

To get an idea of who has the upper hand in this fight, consider what it entails to be the chump who has to explain the “benefits” side of financial regulation. Costs can be easy to figure out. Say there’s a regulation that requires new compliance officers. Tally up the salaries. If there’s an assortment of new software you need to comply with Dodd-Frank’s reporting requirements, you call the computer vendors and get the numbers.

But how do you measure benefits, like the frauds that never happen because stricter rules are in place? Is there a dollar figure we can put on credit markets that don’t collapse? Or the elderly who don’t lose their life savings because regulators have cracked down on rip-off artists who troll retirement villages?

Those are important questions, but they aren’t the ones being asked at Washington hearings that have titles like “The SEC’s Aversion to Cost-Benefit Analysis,” which took place April 17 before the House Committee on Oversight and Government Reform.

One witness that day from the Cambridge, Massachusetts-based research group Committee on Capital Markets Regulation had this suggestion for financial regulators looking to get the cost-benefit equation right: If a regulator isn’t able to develop data for its cost-benefit analysis internally, it should get the numbers from third parties such as trade organizations. If that doesn’t work, the agency should try to get the information directly from the firms that will be affected by the regulations. (Whom I’m sure will be anxious to help the SEC get a new rule in place.) Inconveniencing financial firms with such requests, though, could be burdensome for the firms, the witness said, so overseers should make data requests “with an eye to minimizing the imposition on and disruption to” the firms they regulate.

See? Easy!

The object of this exercise, of course, is to swamp regulators with so much cost-benefit work that rule-making will be impossible.

To keep the SEC busy, one proponent of cost-benefit analysis showed up at that House Oversight hearing in April with a nifty checklist for the SEC. J.W. Verret, an assistant professor at George Mason University’s law school, said in his testimony that when the SEC proposes a rule, it should estimate the impact on job creation. And gross domestic product. And whether U.S. stock exchanges will lose listings to overseas rivals. While we’re at it, let’s just have the SEC “retract and re-propose” the Dodd-Frank rules the agency has completed, and start all over again with a new cost analysis, he said.

By the time the SEC is done with that, it should be time for a flash crash, a couple of London whale copycats, maybe another MF Global or two. Then we can start the whole re-regulation argument all over again, if there’s anything left to argue about.

This article originally appeared in Bloomberg View on July 5th, 2012.

Rajat Gupta, the former McKinsey & Co. chief and pal of imprisoned inside trader Raj Rajaratnam, has one goal after being convicted last month of securities fraud: To convince federal Judge Jed Rakoff that he deserves minimal jail time.

There is a compelling public interest, after all, in keeping white-collar criminals on the street. The financial markets need liquidity, as any summer intern at a Washington lobbying firm can tell you, and we would be facing dark days if we lost our best talent at leaking confidential information. What good is a tipster in a place where high-frequency trading means swapping cigarettes for a batch of washed and folded laundry?

I don’t mean to suggest that his lawyers and throng of big-name business friends aren’t already doing a serviceable job of portraying Gupta as an honorable man who doesn’t belong in jail. Gupta’s lawyer, Gary P. Naftalis, pushed so hard to be allowed to tell the jurors about Gupta’s philanthropy that Rakoff had to offer a reminder: Even Mother Teresa would be judged on the evidence — but presumably not her saintliness — if charged with robbing a bank. And on the website www.friendsofrajat.com, a collection of supporters cite everything from Gupta’s role as a founding board member of the Global Fund for AIDS, malaria and tuberculosis to his selfless offer to pay for a friend’s son to go to college.

Going Far

The effort to tout his charity and good heart is a respectable start for the former Goldman Sachs Group Inc. director. But it doesn’t go far enough.

With the sentencing slated for Oct. 18, there’s no harm in maxing out on every possible pitch as to why the man found guilty of leaking confidential information to Rajaratnam should get a break. The community-service alternatives alone are boundless. A not-for-profit to wage war on bullying of school-bus monitors comes to mind. Or maybe a faux-feminist foundation that cranks out op-ed articles on why it’s bad for women to receive equal pay to men.

Speaking of op-eds, it wouldn’t be the worst idea for him to get his worker bees cracking on a competition among news media outlets for first dibs on a Gupta byline. If Gupta’s lawyers balk, at least the public-relations people could ghostwrite a sermon on Gupta’s finer points, and hunt down a big name in business willing to put his or her name on it. You know, the types who are on important corporate boards and maybe even run global management-consulting firms.

White-collar defendants with bottomless checkbooks have been known to make colossal efforts to paint themselves as philanthropic pillars of the community. Sometimes that charity begins right around the time investigators deliver their first subpoena. Other times, as in the case of Gupta, magnanimity is a long-established practice.

You might wonder who would care if a rich person found guilty of a crime has sprinkled a few crumbs among the little people — and juries often wonder the same thing. Experts in selecting and analyzing juries say that jurors in mock trials and focus groups get turned off when there’s too much talk about a defendant’s good works. Philip K. Anthony, the director of jury consulting at DecisionQuest Inc. in Los Angeles, says jurors often mention that wealthy defendants derive benefits from their largess, including tax write-offs and goodwill from business associates and the community.

Paul Neale, the chief executive officer of Doar Litigation Consulting — the Lynbrook, New York-based firm that worked on the Gupta case — declined to comment on the trial. But he did say he has never seen philanthropy as a “definitive factor” in 23 years of mock trials that his firm has conducted.

Reality Play

Reality, though, can play out differently. Richard M. Scrushy, the former CEO of HealthSouth Corp., was acquitted by a jury in 2005 on charges he directed an accounting fraud. The Birmingham, Alabama, community got a heavy dose of his pious side even during the trial. Scrushy delivered a lecture and donated $5,000 to a church attended by one of the jurors. He and his wife hosted a Bible show that aired five days a week on local TV during the months before the trial began.

Even Rajaratnam benefited from hundreds of supportive letters to the court. Federal Judge Richard Holwell acknowledged Rajaratnam’s “very significant dedication to others” at sentencing, giving him 11 years even though sentencing guidelines called for as much as 24 1/2 years.

Maybe it wouldn’t hurt for Gupta to consider the example of Ronald Ferguson, the former CEO of General Reinsurance Corp. who faced a potential life sentence for helping American International Group Inc. deceive shareholders. Part of his pitch to the judge at sentencing was that he wanted to get back to his seminary education “and live my purpose to serve others.” Though his conviction was reversed on appeal and then settled in June in advance of a retrial, U.S. District Judge Christopher Droney sentenced him to only two years back in 2008. “We will never know why such a good man did such a bad thing,” Droney said. Ferguson’s supporters flooded the court with 379 letters.

A seminary stint may not be in Gupta’s future, but perhaps he could catch a break if he winds up filing an appeal and selects a new legal team with the magic touch.

In one of the most famous insider-trading cases of the late 1980s, Martin Siegel faced as much as 10 years in prison and a $260,000 fine. He had sold inside information in return for suitcases full of cash. Despite his crime, he spent only two months in prison, five years of probation, and received no fine.

It’s a pity that Gupta won’t have a shot at hiring the lawyer who shepherded Siegel to his propitious outcome. Siegel used Jed Rakoff, the guy who will decide what sentence suits Gupta’s crimes.

This article originally appeared in Bloomberg View on June 7th, 2012.

We’ve seen this movie before and the ending still stinks.

The sex-discrimination lawsuit by Ellen Pao against the Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers may be the gender and workplace story of the moment. But let’s get one thing straight: This doesn’t describe anything that’s new. It seems to happen routinely. Just yesterday, at a hearing in London, a lawyer for Latifa Bouabdillah, a former Deutsche Bank AG director, said the woman’s male colleagues were paid bonuses “double or triple that of the claimant” for the same work.

Swap out Pao for Pamela Martens, who led the class-action “Boom-Boom Room” lawsuit against Smith Barney in the 1990s, or Allison Schieffelin, who sued Morgan Stanley in 2001, or Carla Ingraham, who sued UBS AG in 2009, and you wind up with some combination of the same old complaints: coworker come-ons, power meetings for guys only, higher pay for men and retaliation against the uppity women who have the nerve to complain.

In the venture-capital world, where you get more than the usual share of people who are prone to thinking their every experience is novel, there is shock over news that a highly qualified woman has filed a suit against a celebrity firm. But sex discrimination isn’t the iPad, folks. It’s more like the electric typewriter.

Only a week before Pao filed her lawsuit on May 10, Jack Welch, the former General Electric Co. boss, told a gathering at a Dow Jones “Women in the Economy” conference that women who wanted to advance just needed to work harder. “Over-deliver,” he counseled — advice that would strike a lot of glass-ceiling casualties as exactly what they had been doing their entire careers.

Getting Tired

I don’t know about you, but I got tired of this very predictable narrative about 20 years ago.

I have no idea if Pao’s allegations, filed last month in San Francisco Superior Court, are true. But they sure sound familiar. Pao alleges in her complaint that one male coworker gave her a book with sexual drawings and poems on Valentine’s Day and another cut her out of business meetings after she terminated a brief relationship with him. In her 2007 performance review, she was labeled “the top performer of the junior partners,” according to the suit. After that, Pao says she complained about discrimination. Then things changed, with two subsequent reviews citing her “issues and clashes” with other partners, the lawsuit says.

Pao’s San Francisco lawyer, Alan B. Exelrod, declined to comment. Kleiner Perkins said in an e-mail that the suit “is without merit” and will vigorously defend itself. Kleiner general partner John Doerr, whose name is frequently decorated with the phrase “legendary venture capitalist,” said in a statement posted on the firm’s website May 30 that it all amounted to “false allegations” against his firm, which has “the most” women of any leading venture-capital firm.

Twelve of Kleiner’s 49 partners are women, and in the venture-capital business, that’s considered very, very good.

How is it that 20 years after Anita Hill broke the silence about gender discrimination and harassment at work, there are still companies that can take a bow for being gender-equality heroes when 75 percent of their leaders are men?

There are many excuses used to explain away the snail’s pace progress for women at work, but the two most popular go something like this: It takes time to get women in the pipeline with education and experience. Or — don’t you hate when this happens? — those ungrateful women get jobs only to bail out because they can’t take the stress, want more free time for Pilates or miss staying home with the kids.

Let’s take that last one first.

New York-based Catalyst Inc., which does research on women in business, started tracking the progress of 4,100 full-time Master of Business Administration graduates around the world in 2007, homing in on those it identified as “high-potential employees.” No matter how Catalyst sliced the data in its four reports on “high potentials” since 2009, men started with higher salaries — a pay gap of $4,600 in the first job out of school — and enjoyed larger increases each year.

Dropping Out

To address the argument that women are dropping out of corporations because they want more personal time or less stress, Catalyst teased out just the men and women who aspired to be senior officers or chief executives of for-profit companies. They also compared only men and women who had no children to address the “mommy wants to be home with the kids” argument. In each case, men started out making more and advanced more quickly.

So much for the girls-can’t-handle-it argument. As for the pipeline argument, consider Pao. She had seven years of business experience, an electrical-engineering degree from Princeton University, and a law degree and MBA from Harvard by the time she landed at Kleiner in 2005. She’s had a lot of female company accumulating the right pedigrees for years, too.

Women earned only 10 percent of undergraduate business degrees back in 1971, receiving 10,460 degrees compared with 104,936 by men. By 1985, women had increased that number tenfold; in 2002, women received more degrees than men. That doesn’t sound like an empty pipeline to me.

It’s time to shift the focus from trying to “fix” women, to trying to understand the subtle forces in organizations that may be holding women back, Christine Silva, a senior director of research at Catalyst, told me in a telephone interview.

Good idea. But part of the issue isn’t subtle at all.

Some employers just don’t want to hire women. Period. The biggest eye-opener I’ve seen in academic research to support that idea was a study in 2000 that tracked 26 years of auditions and hiring statistics for symphony orchestras.

Orchestras had come under pressure in the late 1960s to hire musicians in an unbiased manner, and began to conduct “blind auditions” where judges couldn’t see the person trying out. They literally performed behind a screen. In the end, professors Claudia Goldin of Harvard University and Cecilia Rouse of Princeton University found that a woman’s chance of being hired increased by 25 percent when juries were clueless about a tryout’s gender.

Standard Attack

We could benefit from a corporate version of that blind-audition idea. Until someone figures out how that would work, my guess is we will keep rolling through lawsuit cycles of predictable allegations and ugly revenge strategies. Comb through the reader comments at the end of articles about Pao, and you will see that she is already getting a blast of a tried-and-true “nuts or sluts” attack that deems women who sue as either crazy or a little loose.

Pao herself reveals in the lawsuit that after a peer badgered her, she had sex with him two or three times, which is enough for some of her critics to conclude that she has no case at all.

Her foes are also anxious to get the word out that her husband, hedge-fund manager Alphonse Fletcher Jr., is black, litigious and unconventional. Don’t be surprised to see reporters put more energy into investigating Fletcher than they do probing Pao’s allegations. Fletcher does indeed have what can only be described as an unusual biography. He has sued an employer for discrimination, has himself been sued for sexual harassment of two men and lived with a male partner in New York’s famous Dakota building (which he sued for racial bias) before marrying Pao. His spokesman, Stefan Friedman, said he would ask Fletcher for a comment, but he never got back to me.

Fletcher’s history is an open invitation for guilt-by-association coverage that already is distracting from his wife’s allegations. It has nothing to do, though, with an office culture where, as Pao describes it, women were barred from power dinners with important clients because their presence would “kill the buzz.”

Back in 1987, a Smith Barney office manager in Garden City, New York, sent out an invitation to “All Garden City Brokers” for a day of golf and dinner at his country club. When several of the women tried to RSVP, the message came back that women weren’t invited. Presumably they, too, would have killed the boys’ club buzz. For too many women at work, 25 years later, this bad workplace act is still in reruns.