Mary Jo White’s Past and the Future of the SEC

Have you been buying into the sales pitch for President Obama’s nominee for chair of the Securities and Exchange Commission?

Mary Jo White’s supporters say she was tough as U.S. attorney for the Southern District of New York, where she prosecuted mobsters and terrorists. From my column for Bloomberg View today:

She spent the past 10 years representing Wall Street, so she knows something about the legerdemain of banksters. And — insert violin solo here — she is a patriot, willing to give up millions of dollars in income as chairman of the litigation department at Debevoise & Plimpton LLP for a lousy government salary.”

Of course, the addition of “former SEC chairman” can only enhance her resume if and when she decides to go back to private practice. As for the idea that she might somehow be able to use her experience working for Wall Street to help crack cases as a regulator, I’m not buying it.

The SEC and Justice Department have had former defense lawyers checking in and out of top spots for years, and it hasn’t led to any big-bank carnage among the people who orchestrated flakey derivatives, self-destructing collateralized-debt obligations or other outrages. When was the last time you saw anyone from a well-known bank doing a perp walk for his role in the financial crisis?

You can read the full column here.

As always, I’m happy to hear from readers via Twitter or at


Mary Jo White’s Past and the Future of the SEC

This article originally appeared in Bloomberg View on February 8th, 2013.

The sales pitch for President Barack Obama’s nominee to run the Securities and Exchange Commission goes something like this:

Mary Jo White was a tough U.S. attorney for the Southern District of New York who prosecuted mobsters and terrorists. She spent the past 10 years representing Wall Street, so she knows something about the legerdemain of banksters. And — insert violin solo here — she is a patriot, willing to give up millions of dollars in income as chairman of the litigation department at Debevoise & Plimpton LLP for a lousy government salary. (Although, with a little luck, she will make up for that once she adds “former SEC chairman” to her resume.)

The arguments in support of White are as old and tired as the government-to-private-practice hustle that they endorse.

Her supporters say she has the integrity to shift from Wall Street defender to champion of securities laws. But it’s hard to take seriously the notion that White will help crack complicated cases with her inside knowledge of how the bad guys work, an argument that often gets thrown around when Wall Street lawyers are tapped to be regulators. “People from the private sector know where the bodies are buried,” former SEC Chairman Mary Schapiro told the Washington Post after White’s nomination last month.

Top Spots

Maybe so, but the SEC and Justice Department have had former defense lawyers checking in and out of top spots for years, and it hasn’t led to any big-bank carnage among the people who orchestrated flakey derivatives, self-destructing collateralized-debt obligations or other outrages. When was the last time you saw anyone from a well-known bank doing a perp walk for his role in the financial crisis?

The Web pages of the best-known law firms give an idea of who the real winners are in the revolving door. Debevoise says it’s “the only law firm to have former U.S. and U.K. attorneys general as well as a Queen’s Counsel.” Cleary Gottlieb Stein & Hamilton LLP tallies 10 former federal prosecutors and three former SEC general counsels. At Covington & Burling LLP, they boast of having “convinced the SEC not to pursue an enforcement action” against one client, and that partner Bruce Baird, a former assistant U.S. attorney, persuaded regulators “not to proceed with cases on a significant number of occasions.”

It isn’t often we get an inside look at how onetime regulators work their disappearing-case magic, but a celebrated example that wound up under a microscope involved none other than White. When Morgan Stanley was considering hiring John Mack to be its chief executive officer in 2005, the securities firm’s board was concerned about an SEC investigation into possible insider trading involving Mack and Arthur Samberg, the former manager of the hedge fund Pequot Capital Management Inc.

The board retained White, who called SEC Enforcement Director Linda Thomsen on June 27, 2005, to get intelligence on Mack’s legal exposure. Three days later, White told Morgan Stanley’s board that she had seen “no evidence of any involvement by Mr. Mack in insider trading or other wrongdoing.”

Thomsen had let on to White that there was “smoke but not fire” in e-mails between Mack and Samberg, and privately worried that it could be disruptive to markets if Mack became CEO and then wound up as an SEC target. “It could have ripple effects that makes the markets go haywire,” Thomsen told a Senate committee — an overblown fear if ever there was one.

Wrongful Firing

Mack was never accused of wrongdoing. Gary Aguirre, an SEC lawyer who had been pushing to question Mack, was fired a few months after White’s call. He later won $775,000 from the SEC in a wrongful dismissal suit.

White declined to comment, said Debevoise spokeswoman Gabriella Schoff.

A revamp at the SEC that included improved policies for handling complaints and tips was supposed to boost morale. Yet the SEC’s ranking in an annual employee survey of “Best Places to Work in the Federal Government” has dropped steadily since 2007, with the SEC placing 19th of 22 midsized federal agencies last year. SEC workers’ view of the leadership of the most senior staff was worst among the categories they were asked about.

That makes sense considering some of the private conversations that became public about their bosses. The SEC’s own general counsel (now at Cleary Gottlieb), David Becker, e-mailed former SEC Commissioner Annette Nazareth in 2009 after she had left for Davis Polk & Wardwell LLP and referred to “the inanity” of the idea of having an investor advocate at the agency, according to a Bloomberg News article last year.

It would be nice if White turned out to have what it takes to pump up morale and turn the SEC into a place where inspired investor advocates get the top jobs, but there are reasons to be doubtful. White is worried about being too hard on corporate criminals. She told the newsletter Corporate Crime Reporter in 2005 that prosecutors considering criminal charges should be “very concerned about the impact on the innocent employees or shareholders.”

White won’t play a direct role in prosecuting companies at the SEC, of course. But given her views on indictments, it’s hard to imagine she will encourage her staff to refer cases against companies to criminal authorities.

It’s also a worry that she knows too much about the career perils of being aggressive as a regulator. In talking about one of Debevoise’s hires from the SEC, she testified in a 2007 deposition that she needed to check whether the candidate had been so tough as a regulator that it would hurt his ability “to function well in the private sector.” Commitment to the job and mission is a good thing in government, she said, or at least it is “to a point.”

If we’re lucky, White, 65, will decide that a do-gooder legacy is more important than the next multimillion-dollar job.

AIG’s Greenberg Thumbs Nose at Taxpayers

The man who made the insurance company AIG into an industry giant has written a book — The AIG Story — and if there’s one thing we learn from Maurice “Hank” Greenberg, it’s that Hank admires Hank.

The book, co-written with George Washington University law professor Lawrence Cunningham, describes Greenberg as “innovative” and “independent” and “pioneering.” I reviewed it for Bloomberg Muse today:

If you’re among the U.S. taxpayers who watched in horror as $182 billion of your money made its way to the collapsing insurance giant American International Group Inc. (AIG) during the financial crisis, it might come as a surprise to learn that your forced munificence didn’t make much of a difference. In his new book, “The AIG Story,” former chief executive Maurice “Hank” Greenberg offers his take on what kept the company alive: “It was saved only by the loyalty and tenacity of its valiant workforce,” he says.

You can read my full review here. But the main thing I came away with when I put  ”The AIG Story” down was what a disappointment it is when powerful people with inside access to world events miss an opportunity to pass on insights to the rest of us.

Surely, after a high-flying career befriending heads of state and moving AIG from an insurance runt to a world-wide behemoth, a man of 87 would have constructive insights about the near-collapse of the global economy. And, with a little luck, maybe even a bit of introspection about lessons he’s learned? Instead, we get 328 pages of finger-pointing and self- congratulation.

So there you have it. A wasted opportunity. But do take a look at the list of people willing to praise the book on the back cover, and consider adding them to the list of authors you needn’t follow. publishes the “praise” here.


Top stock picks of 2013 lose out to Honey Boo Boo

You’ve been reading them again, haven’t you? I’m talking about those annual “best investment ideas” that you’re seeing on every TV business show and in all your favorite newspapers, magazines, and blogs.

Stop reading them. Their advice stinks at least half the time, which means — at best — you lose half the time and win half the time. You do the math.

I wrote about the useless “Best ideas of 2013″ style articles in my latest column for Bloomberg: Top Stock picks of 2013 lose out to Honey Boo Boo:

“My advice? When you see one of those how-to articles, retreat to the kitchen for what’s left of the holiday eggnog and shut off the computer. If some TV stock jock is interviewing a Wall Street star about a best pick for the year ahead, grab the remote and surf for a rerun of “Here Comes Honey Boo Boo.” At least it won’t be you who is being exploited.”

You can read the story here.

Top Stock Picks of 2013 Lose Out to Honey Boo Boo

This article originally appeared in Bloomberg View on January 3rd, 2013.

I have the ultimate hot tip if you’re obsessing over what to do with your portfolio in 2013: Ignore all the “How to Invest in 2013” nonsense that you see in magazines, blogs and on business television this time of year.

My advice? When you see one of those how-to articles, retreat to the kitchen for what’s left of the holiday eggnog and shut off the computer. If some TV stock jock is interviewing a Wall Street star about a best pick for the year ahead, grab the remote and surf for a rerun of “Here Comes Honey Boo Boo.” At least it won’t be you who is being exploited.

There is a good chance that you will lose money if you follow the 2013 top stock recommendations. And the grander the promise of profits, the more you should worry about getting burned.

Personal-finance news became a growing subgenre of business journalism in the 1970s, after companies started dropping defined-benefit retirement plans and the public “was thrown into this system and forced to make their way” says Dean Starkman, who runs a business-journalism blog at Columbia Journalism School. The resulting coverage to help the public manage its own money “perpetuates the idea that individuals can beat the market,” he says, “and that’s just not true.”

An army of commentators, many with abysmal track records, helps spread the useless predictions. You will see them quoted, photographed for magazine cover stories and trotted out for appearances at investor conferences.

“The entire conversation is corrupt,” says Starkman, who sees much of personal-finance writing as marketing material for the investment industry.

Few Exceptions

With a smattering of exceptions, even the best of the annual how-to-invest offerings will leave you winning about half the time, which of course means losing half the time. And what’s the point of paying commissions to end up where you started? Smart Money’s “Where to Invest 2012,” for example, picked six winners and four losers. The “Guru Round Up: Best Investment Ideas for 2012” that ran in Forbes magazine on Jan. 4, 2012, had three winners and four losers.

Even when a best-stocks list manages to keep up with the stock-market averages, which you can do in an index fund, it doesn’t necessarily help actual investors. My guess is that investors in real life don’t have the resources to buy more than one or two of the recommendations on any given tout list. Buy the wrong one, and it doesn’t matter if the list’s author is taking a bow for outperforming the Standard & Poor’s 500.

Along with the year-ahead coverage, be wary of the ambitious journalistic efforts that purport to impart brilliant investment ideas for the long term. Fortune magazine’s August 2000 list of “10 Stocks to Last the Decade” included Enron Corp. (which failed), Nokia Oyj (which fell from $43 to $9.63 during the next 10 years), Nortel Networks Corp. (which filed for bankruptcy protection in 2009) and Broadcom Corp. (which fell from $143 to $36 during the decade after the article).

In case no one has let you in on the secret, it’s old news that money managers rarely beat the stock-market indexes. So why pay attention when some journalist under orders to interview those managers woos you with headlines that promise a winning list of investments for the year ahead?

Ditto for the usefulness of predictions as to which way the markets and the economy are headed. Beneath the headline “Little Enthusiasm for Equities Among Advisers,” Investment News, a newsletter that caters to investment advisers, said on Jan. 1, 2012, that only 43 percent of advisers planned to increase their clients’ equity holdings, down from 63 percent in 2011. The S&P 500, of course, proceeded to go up 13 percent in 2012, the year advisers were more negative. It was little changed in 2011, the year they expected significant gains.

And then there was arguably the worst market call of the year, made Jan. 23, 2012, by newsletter writer Joseph Granville. He told Bloomberg Television that day that the Dow Jones Industrial Average would decline 4,000 points by year-end. The Dow wound up rising 887 points.

Terrible predictions ought to be career killers, but they aren’t. “There is no prediction so stupid you won’t be invited back,” Starkman says. Apparently so. Donald Luskin, the Trend Macrolytics LLC chief investment officer who is a contributor to CNBC, wrote in the Washington Post on Sept. 14, 2008, that doomsayers on the economy had it all wrong. The facts suggested that we were not on the brink of a recession, but of “accelerating prosperity,” he wrote. Lehman Brothers Holdings Inc., of course, collapsed the next day, shifting the financial catastrophe of 2008 into overdrive.

‘Batting Average’

Myron Kandel, founding financial editor at CNN, says there is a way to raise standards. Qualified professionals should be used as sources, Kandel says, and the public should be told how the person’s past predictions have fared. Otherwise, it’s “like evaluating a baseball player without mentioning his batting average,” he says.

That sort of policy might not sit well in a personal-finance industry where everybody except the small investor seems to profit from the status quo. Barry Ritholtz, the chief executive officer of Fusion IQ, said he once had the temerity to ask a magazine editor if he could contribute an item about the foolishness of financial forecasting after having been invited to write a forecast for the 2004 stock market. The editor advised Ritholtz that it was a big double-issue that sold a lot of advertising, and the format wasn’t going to change. “So do you want to be in it or not?” the editor asked. Ritholtz dutifully wrote up his prediction of a year-end Dow close of 10,403 (it ended the year at 10,783).

I can, with confidence, pass on this one prediction for 2013: A lot more experts will dole out financial advice. Few will say anything worth listening to.

In a Sex Scandal, You Want to be the Guy, not the Gal

In the unlikely event you missed it, our former Central Intelligence Agency chief got a tad too friendly with Paula Broadwell, the author of his biography “All In: The Education of General David Petraeus.” The ensuing media storm was, frankly, a gift to reporters who were dreading that the fiscal cliff would be the only news story around once the election was over.

But a gift they could have handled with a little more care.

In my Bloomberg View column this week, I take a look at the differences in both the language used and the questions raised in coverage of the two players in Washington’s latest sex scandal. Petraeus, for example, was referred to as “vulnerable.” Broadwell was referred to as a “slut.”

They both cheated on their spouses. They both were accomplished professionals. But there was a lot that wasn’t equal about the way they were treated in the media. “They threw this poor fellow to the wolves,” said celebrity divorce lawyer Raoul Felder on Daily Beast TV. Meanwhile, The Baltimore Sun called it just another “bimbo eruption.” A West Point grad with two master’s degrees, Broadwell is no bimbo. Let’s hope the coverage is a little better next time a sex scandal rolls around.

Every Mistress Needs Someone to Play Sugar Daddy

This article originally appeared in Bloomberg View on December 3rd, 2012.

I know we’re just settling in with our popcorn for the scene where the lawyers and PR handlers transform disgrace into opportunity for the players in the David Petraeus story.

Already Petraeus is on the contrition circuit, saying last week he “screwed up royally.” Why next thing you know, he will be nominated to replace Hillary Clinton at the State Department.

But before we move on to “Act II: The Image Rehab,” could we clear up this business about how women get depicted when the stuff hits the fan in a scandal?

Some of you are feeling sad that Petraeus, the retired four-star U.S. Army general who had an affair with the author of his biography “All In: The Education of General David Petraeus,” had to quit his job as Central Intelligence Agency director last month after admitting to an extramarital affair. “They threw this poor fellow to the wolves,” celebrity divorce lawyer Raoul Felder told the Daily Beast’s “Beast TV.”

Poor fellow, indeed, getting his reputation tarnished for engaging in indiscretions with Paula Broadwell, a married woman who surely must be responsible for the fall of our military hero, considering media commentary that dubbed her a slut and a cunning seductress.

How could this bad result have come to such a good guy?

“From what we know now, he wasn’t an alcoholic or a drug addict — something that might impair his thinking,” wrote columnist Susan Reimer in the Baltimore Sun. In fact, “he did nothing truly weird, like Rep. Anthony Weiner, who sent those cell-phone pictures of his crotch to random women.”

Behold Man

He probably wasn’t a bank robber or an animal abuser or an inside trader, either, and from what I can tell, the only things he is guilty of are cheating on his wife and a surfeit of professional preening.

But there is something a little bit off when one party to a sex scandal is congratulated for the sins he managed not to commit while the other gets attacked as “a shameless, self promoting prom queen,” which is the way Broadwell was described by an unidentified military officer in the blog Business Insider. (Memo to Mr. Unidentified Military Officer: Next time you get on the phone for a media interview, show a little military-style courage and attach your name to those smears.)

Petraeus is no stranger to self-promotion himself, and several writers have called him out both for his assiduous courting of the reporters who covered him and for his tacky decision to adorn his civilian clothes with military medals for a recent speech in Washington.

But that self-promotion hasn’t led to any portrayals of Petraeus as “a shameless self promoting prom king.”

I have, though, seen a lot of stories that referred to Broadwell as Petraeus’s mistress. And so has J. Nathan Matias, a research assistant at the MIT Center for Civic Media who studies gender representation in the media. Matias used a news database called Media Cloud to get an idea of how Petraeus and Broadwell were being depicted in mainstream media and in blogs, and noticed that the word “mistress” was being used in such varied places as USA Today, Newsweek and Bloomberg View and Bloomberg Businessweek have also referred to Broadwell as his mistress.

“If I were trying to write a piece, I wouldn’t refer to her in that kind of possessive way,” Matias told me. “I’d try to find language where I’d say they were having an affair, and identify her in terms of who she is in society, just as they are identifying Petraeus.”

Readers coming across the word “mistress” tend to visualize a woman who provides sex in exchange for cushy, rent-free living and a lot of high-end shopping, Matias said. That label is “kind of demeaning” in any event, he said, but doesn’t even apply in the case of Broadwell, a lieutenant colonel in the U.S. Army Reserve, a West Point graduate and recipient of two master’s degrees.

Lost Virtue

“She is getting the typical response to the scarlet letter woman — he is a man, so he’s weak, but she is crazy, demonic and a threat to national security,” said Victoria Pynchon, a blogger on negotiation and women’s issues at “He’s mostly getting a pass, and the women in this story are getting no pass.” Equal treatment in the media would at least make Petraeus the sugar daddy to Broadwell’s mistress, wouldn’t you think?

In a blog post that managed to squeeze in the word “slut” four times, the conservative commentator Robert McCain noted that Broadwell had conducted interviews with Petraeus while the two were jogging, which apparently is reason to conclude “the slut was very cunning in her seduction.” Even the Washington Post found a way to present her as conniving, noting that she was “willing to take full advantage of her special access” to Petraeus while researching her book.

Petraeus, meanwhile, was described by an unnamed friend (does anyone talk for the record on this story?) as being “vulnerable” after leaving the camaraderie of the military to take the CIA post.

In the Baltimore Sun story, the author suggested “we need to learn to get past these bimbo eruptions.” Bimbo, from, is “an attractive but stupid young woman, especially one with loose morals.” What we really need to work on is getting journalism schools to teach students the apparently lost art of looking up words in the dictionary.

Best investment advice: Vet brokers yourself, because regulators aren’t doing it for you

Just because a stock broker has a license to do business doesn’t mean they’ve received a meaningful stamp of approval from regulators. Next time some financial person is pitching you for business, go back and read the stunning coverage of Mark C. Hotton, a guy who allegedly was fleecing investors for years as regulators sat back and ignored a stream of red flags.

Hotton is the fellow who fooled the Broadway producers of “Rebecca: The Musical” into thinking he’d raised millions of dollars in financing for them. The producers of Rebecca only lost $60,000 doing business with Hotton. Others haven’t been so lucky.

Hotton is in jail today, and it’s a joke when you consider that, after years of alleged stealing of millions from investors, he finally got caught because he fleeced a few big-shots from show-biz. It’s even more of a joke that U.S. prosecutors took a deep bow for their “lightning speed” sleuthing after catching Hotton 22 years after his first crime — which should have been a reason to keep him out of the brokerage business altogether.

I wrote about Hotton’s capers in a recent Bloomberg column. A week after that story, I wrote a second one, this time for, about a fresh complaint against (the now-incarcerated) Hotton filed by Finra, which is the Wall-Street-funded regulator that is overseen by the Securities and Exchange Commission. There really ought to be a special judicial forum where the public can bring complaints against regulators who are utterly clueless.

There’s No Business Like the Brokerage Business

This article originally appeared in Bloomberg View on November 1st, 2012.

If regulators and brokerage firms are serious about restoring public confidence in the markets, they will have to do better than they did in the pathetic case of Mark C. Hotton.

Hotton is the 46-year-old former stockbroker who allegedly duped the producers of the Broadway musical “Rebecca” into believing he had lined up $4.5 million in financing. According to law enforcement officials, he even concocted a fictitious Australian guy, Paul Abrams, who would have been good for $2 million if only he hadn’t keeled over from malaria when it was time to write his check. While the clueless backers fell for his stories, Hotton pocketed finder’s fees. “Rebecca” has been “postponed indefinitely,” according to the show’s website.

It’s distressing, but it shouldn’t have come as much of a surprise from a man whose brokerage industry records since 1993 reveal a stolen-property charge, 16 customer disputes, a firing, a lien and a bankruptcy.

The real disgrace here isn’t Hotton, who is being held without bail after his arrest on two counts of fraud last month. The bigger scandal is trumped-up claims like this one:

“Ultimately, Hotton’s imagination was no match for the FBI, which uncovered, with lightning speed, his alleged financial misdeeds,” said Manhattan U.S. Attorney Preet Bharara in an Oct. 15 press release.

Lightning speed? Now that is what I would call a real whopper.

First Queries

I first began to contact Hotton’s lawyers a year ago this month when I saw that Hotton continued to work as a broker after filing for Chapter 7 bankruptcy, but they weren’t very talkative. Michael S. Finkelstein, a lawyer on Long Island, told me to call him back at 4 p.m. on Nov. 22, but didn’t answer that day, and never responded to voicemails. Similarly, voicemails and e-mails that I left with three other Hotton lawyers since Oct. 8 after the “Rebecca” flap erupted have gone unanswered. I couldn’t reach Hotton for comment.

Hotton has faced allegations of financial misdeeds as far back as 1990, yet moved on to work at six brokerage firms, including Ladenburg, Thalmann & Co. and Oppenheimer & Co. He was accused of fraud in multimillion-dollar lawsuits filed before anyone involved in “Rebecca” had ever heard of him. But there was nothing speedy about law enforcement’s response until the victims were attention-grabbing show-business types.

Hotton got a modest $60,000 from the producers of “Rebecca,” according to the U.S. attorney, and I suppose the crack investigators at the Federal Bureau of Investigation deserve credit for getting to the bottom of one of his punier swindles.

Anyone truly interested in watching out for the public might have started paying attention after Hotton bounced a check for $31,550 to Vilsmeier Auction Co. in Montgomeryville, Pennsylvania, on April 25, 1990. Hotton took possession of a 1985 Ford van and three other vehicles, thanks partly to a forged letter from a Westminster Bank officer assuring that his account had sufficient funds. Four months later, the real manager at the bank said in an affidavit that the letter was bogus and signed by a person who didn’t exist.

People who bounce checks and forge documents don’t belong in the securities business, but Hotton, who pleaded not guilty to two fraud counts last month, managed to get a broker’s license three years later anyway.

I asked Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority, how a broker like Hotton could stay in the business as long as he had. She said that before 2009, the complaints against Hotton had either been denied by his employers, or “settled for little money.” She says Finra began to investigate Hotton in 2009. That’s nice, I suppose, but three years later, Finra still has not announced any sanctions.

Finra Knew

Ong said that Finra knew Hotton had been convicted of criminal possession of stolen property, which apparently isn’t enough to convince regulators that a broker shouldn’t be in charge of other people’s money.

In the securities business, there is this brilliant idea that firms have a self-interest in tossing out bad guys. So I checked in with two firms that employed Hotton. I sent a list of 11 questions about Hotton’s criminal record and customer complaints to Paul Caminiti, a spokesman for Ladenburg, and all he had to say was that Hotton left the firm in 2005 to join Oppenheimer.

It gets worse.

On Oct. 15, the day Hotton was arrested, I called Noah Sorkin, a securities lawyer who worked at Oppenheimer when Hotton was there. Today, Sorkin is general counsel in New York at AIG Advisor Group, a network of independent brokers. “Lemme do this if it’s OK with you,” he said when I began to ask about Hotton. Sorkin said he would be happy to chat with me, but would first have to talk with lawyers at Oppenheimer. I’m still waiting for that call back.

An Oppenheimer spokesman, Brian Maddox, said this: “Investigations were conducted by both Oppenheimer and a securities regulator and no evidence of misconduct was uncovered. Any claims involving Mr. Hotton’s activities came to Oppenheimer’s attention after he left Oppenheimer.” He added that Oppenheimer employees who hired Hotton are no longer with the firm.

That probably would come as a surprise to Philip R. Schatz, a lawyer who filed an affirmation on June 25, 2010, in a multimillion-dollar lawsuit against Hotton while he was working at Oppenheimer, which wasn’t named as a defendant. Schatz said that, in previous lawsuits he had been involved with, Hotton’s actions at Oppenheimer and Ladenburg left him with serious reservations about the broker. In fact, he wrote that he had urged Sorkin in 2006 to investigate Hotton. “I told Mr. Sorkin that if I were in his position, as a matter of prudence, I would conduct a thorough review” of Hotton’s history, he wrote.

Yet for almost three more years, Hotton worked at Oppenheimer before moving to another firm. His story is but the latest example of the joke that securities regulation has become.

Memo to former employees:
Don’t mess with Goldman Sachs

Goldman Sachs’ most famous opinion writer did what no Goldman employee is supposed to do: He talked, very publicly, about his experience at the firm.

Greg Smith’s March 14 New York Times op-ed “Why I Am Leaving Goldman Sachs,” generated 3 million page views within 24 hours. The issues he brought up about how business is done at Goldman hit a chord with the public.

Now he’s written a book “Why I Left Goldman Sachs.” I reviewed it for Bloomberg today, and you can read the review here.

I have criticisms of “Why I Left.” Smith walks us through his 12 years at Goldman but doesn’t reflect on the fact that he himself was seduced by the firm and its much hyped culture of integrity and “customer first.”

And he doesn’t look at the current problems of Goldman and its competitors with a sense of history. Fraud, scandals, and conflicts of interest on Wall Street should be addressed, as Smith says, but they are nothing new. “Why I Left,” though, is mostly limited to the dozen years Smith was at the company and the “toxic” culture he observed at the end. I wonder if he understood that Goldman may not have been all it was cracked up to be in the first place.

That said, he’s getting creamed with criticisms I don’t think he deserves. The book was all hype and didn’t disclose anything illegal, goes one argument. Well, the author said “I don’t know of any illegal behavior” in that op-ed seven months ago, so why did his critics expect otherwise? My favorite Greg Smith bash is the argument that goes something like this: “He asked Goldman for a million-dollar bonus that he didn’t deserve.” Are we really supposed to be shocked at the notion of someone on Wall Street wanting to get paid more than they deserve?

Considering Smith’s out of work, maybe Goldman will consider him for its next FT/Goldman Sachs Business Book of the Year Award, which gives five-figure payments to authors who sometimes even write about brokerage firms. Talk about a conflict of interest.

Goldman’s counterattack has been over-the-top. The firm shared excerpts from Smith’s self-evaluations with Bloomberg, as well as documents that showed he was denied a raise and a promotion.

Did you know that your bosses could hand out information from your HR files if you tick them off? I’ll bet that looming threat is adding a whole new understanding of the firm’s culture of “collaboration, teamwork and integrity” with the troops at Goldman.

The book could have been better. The issues Smith raised are important even if they are age-old Wall Street problems. And the message from Smith’s former employer is loud and clear: Don’t mess with Goldman Sachs.

‘Dumb Money’ Is Staring Most of Us in the Face

This article originally appeared in Bloomberg View on October 4th, 2012.

Financial pros have a long history of sneering at mom and pop investors as “the dumb money,” all the while cashing in on commissions each time a sucker sells at the bottom or buys at the top.

Now the U.S. Securities and Exchange Commission has made it official: The investing public doesn’t know what it is doing.

It took an act of Congress and 182 pages for the SEC in August to publish its “Study Regarding Financial Literacy Among Investors,” an exercise mandated by the Dodd-Frank Act of 2010. The study’s grim statistics showed that about half the investing public can’t read a stock trade confirmation and two-thirds can’t figure out how much their adviser would pocket on the sale of mutual-fund shares. After being shown documents for an account in which a customer’s broker used an outside custodial firm to hold the securities and issue the account statements, only a quarter could identify the custodian. There is more where that came from, but you get the idea.

Consider the profile of the 4,800 investors surveyed for the report, which concluded that they “lack basic financial literacy.” More than half had full-time jobs, 11 percent had part-time jobs, 70 percent had at least a two-year college degree and 63 percent had annual income of more than $50,000. We’re not talking about Mitt Romney’s indolent moochers here. The dumb money could be your neighbor. Or you.

Getting Taken

Of course, there’s ample evidence by now that you didn’t have to be Uncle Charlie in the nursing home to wind up parking your money with Bernard Madoff, or to sign up for designed-to-fail collateralized-debt obligations from Goldman Sachs. Smart money can be clueless, too.

For the moment though, let’s stick with investors who don’t work on Wall Street and don’t have an inkling that the worthwhile initial public offering is the one they will never be able to buy. So we have this new information about the public’s failure to understand finance. What do we do with it?

The report has been a jumping-off point for a lot of feel-good proposals that, sadly, are dead on arrival. The SEC says it got “many comment letters” advocating a “comprehensive financial literacy program in the United States that starts in elementary school.” Hey, a new education program sounds great. But try that one out on your strapped local school principal.

And maybe ask those principals how just plain old, non-financial literacy is working out. On Sept. 24, the College Board said reading scores on the SAT were the lowest in four decades. How do you teach people to read prospectuses when they have trouble reading at all?

The weird thing about the SEC’s comprehensive look at the failings of U.S. investors is that the effort comes even as a new law is about to unleash a flood of fresh hazards on the public. On April 5, President Barack Obama signed the Jumpstart Our Business Startups Act, a stunning piece of deregulation that will relax disclosure rules for some public companies and allow Internet stock offerings through what is known as crowd-funding.

So even as we learn that investors need more education about basics, we set them up as prey for a whole new genre of rip-offs.

There are some solutions here, and the quickest fixes are the ones that make investors smarter about fraud, not about computation of mutual fund fees:

Brokerages should be required to give customers a copy of an adviser’s regulatory record before they can open an account. Along with that, firms should reveal the number of times a broker has had a case expunged from his or her record (I’d look for a new broker if that number was more than one) and send a recap of every bankruptcy filing, every sanction by a professional organization and every lawsuit filed against the broker in state or federal court.

Head Scratching

I was heartened to see that 37 percent of the investors in the SEC study said they actually checked a broker’s records, but it was a head-scratcher that 21 percent didn’t consider “allegations or findings of serious misconduct” to be important. Get these facts under customers’ noses and make it hard for them to avoid considering them.

Firms also should explain in writing the terms of the relationship to new customers. I don’t mean boilerplate disclosures about the odious policy of mandatory arbitration that lets firms avoid court. There should be a statement in plain English saying what the firm promises. “Dear Mrs. Smith: We may say in our glossy ads that you are a valued customer, but we don’t have to put your interest before ours, and if you want to sue us, you will have to prove that we sold you something that wasn’t suitable, which is a lot harder than proving we weren’t working in your best interest.” OK, so the wording could be more delicate, but either way investors should get the broker’s commitment in writing.

Lazy investors (like the one who told the SEC, “If you can’t put it on a 4 x 5 card, I don’t want to deal with it”) should at least take smart shortcuts: First, go through the indecipherable documents your broker sent you and read the footnotes, which will at the very least arm you with material for your next cocktail party. After that, look for these words or terms: “certain proceedings,” “conflict of interest,” “fraud,” “Wells notice,” “litigation,” “Securities and Exchange Commission,” “cease and desist” and “not FDIC.” You will find all of them in the sections the smart money hopes you never read.

‘Dumb Money’ Is Staring Most of Us in the Face

Americans are pretty much illiterate when it comes to finance. They don’t know how to read a stock trade confirmation and have problems figuring out how much commission they’re paying their brokers on a mutual fund sale.

For years, professionals on Wall Street have sneered at the public as “the dumb money.” Well, they may not be geniuses on Wall Street, either. But they’re right that retail investors could use some serious coaching.

A recent report by the Securities and Exchange Commission mapped out in 182 painful pages how little the public understands about finance (which suits some people on Wall Street just fine, by the way). I talk about the grim details in my latest Bloomberg View column:

 ”Consider the profile of the 4,800 investors surveyed for the report, which concluded that they “lack basic financial literacy.” More than half had full-time jobs, 11 percent had part-time jobs, 70 percent had at least a two-year college degree and 63 percent had annual income of more than $50,000. We’re not talking about Mitt Romney’s indolent moochers here. The dumb money could be your neighbor. Or you.”

The results have inspired calls for financial literacy programs starting even in elementary school, but let’s get real. From the looks of things, school administrators don’t even have the resources for plain-vanilla literacy programs, let alone special classes in personal investing.

An alternative to new programs: At least get the public smarter about avoiding fraud. I have some ideas about that that you can read here.

Vetting a Stock Broker? Pay Attention to Who’s Supplying the Records

Investors are spending more time checking on the backgrounds of the financial types who pitch for their business, and that — mostly — is a good thing.

The public used a regulatory database to check the records of 14.2 million stockbrokers and advisers last year, according to the Financial Industry Regulatory Authority, known as Finra, a self-regulatory group that’s financed by Wall Street. That’s more than double the 6.7 million searches in 2007, the year before the financial crisis began.

Nothing wrong with investors getting more vigilant, of course. But there are some important caveats about what investors get when they check in with a broker-vetting site.

Finra’s records don’t include lawsuits against brokers that aren’t considered “investment-related.” That means that a lot of brokers who are exposed to the possibility of big judgments have official records that say nothing about that exposure.

And then there’s the issue of the freebie websites popping up to help investors vet brokers. Check the fine print, and you learn that some of those sites get their revenues from advisors who pay to be featured. If you get it for free, and the broker pays to get his or her name in front of you on the site, can it really be investor-friendly?

I took a look at the broker background-checking business in my latest column for Bloomberg View. Read article.

Wall Street Finds Friends Can Help Scrub Records

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 and that offer reviews of brokers and their firms., introduced in May, says its users “avoid costly mistakes, identify problems sooner and select advisors with the best qualifications.” 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, 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

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; 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.

No Big Boy Pants for Banks That Whine Over Rules

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.

No Big Boy Pants for Banks That Whine Over Rules

Are you tired of it yet? “We are all for financial reform,” the Wall Street story goes. “But we can’t have regulations that make us anti-competitive.”

Another financial crisis like the last one and you have to wonder who we’d be worrying about competing against. Whatever. The financial industry is very busy trying to make the case that before we can make new rules, we have to prove that the benefits outweigh the costs. I write about it in my latest column for Bloomberg View:

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. But how do you put a dollar figure 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?

The object of the exercise is to swamp regulators with work and make rule-making impossible. The strategy is working. Read article.


Rich Guys Who Face Jail Time Can Still Get a Break

Rajat Gupta, the former CEO of McKinsey & Co., was convicted of securities fraud last month, and has until October 18 before he’s sentenced by Federal Judge Jed Rakoff.

Cases like these are a real eye-opener on how things really work if you’ve got a lot of money and a bunch of friends in high places.

When Joe SixPack gets caught on some transgression like cheating on his taxes, little Joe, Jr. may wind up going through grade school without dad making it to his Little League games. But Joe SixPack doesn’t have lawyers like Gupta’s Gary P. Naftalis, who gets his name on those “super lawyer” directories the way some people get their names on the Police Benevolent Association cold-call list. The trick at this point is for Gupta to either win an appeal on his case, or to figure out a way to get Rakoff to hit him with the smallest possible term in prison.

In my Bloomberg View column published today, I discuss the ways that rich people who are found guilty of crimes attempt to influence the judge so that prison terms are minimal. One way to get a judge to go a little easier is to get the right people to make a case that you’re a good citizen who’s done great deeds for society. A web page supporting Gupta,, gives a hint at what Rakoff may be hearing from Gupta’s supporters. Read article

I’m always happy to hear from readers. Please email me at or send me a message at @antillaview.