“Flash Boys” irritates Wall Street and even some finc’l journalists. (Two reasons to buy it.)

Best-selling author Michael Lewis (Liar’s Poker, The Big Short) has often irritated Wall Street with his readable inside takes on the goings-on of financial one-percenters. And with his latest best-seller, Flash Boys, he’s even getting under the skin of other financial writers, which I suppose makes sense since there isn’t a one of us who can come close to Lewis’s genius.

Flash Boys is Lewis’s book on high-frequency trading, a topic that, up until now, was impenetrable to the average reader. And that’s what’s so threatening to Wall Street: Grandma could read Flash Boys and get a handle on the downsides of the computer-driven trading that’s dominating the markets.

The book is mostly a look at HFT through the eyes of a Canadian trader who got tired of getting bad trade executions and pushed back against what he considered market manipulation.

But Lewis also writes about the bizarre case of a former Goldman Sachs computer programmer who got thrown into jail for taking HFT code with him when he left Goldman. That’s right — a computer nerd you’ve never heard of wound up in the slammer for taking high-frequency computer code from Wall Street, while Wall Street big shots who oversaw mortgage fraud and other disgraces that helped bring down the economy walk the streets. You can read my CNN.com column about Goldman and its former computer programmer here.

I reviewed Flash Boys in today’s San Francisco Chronicle. You can read my review here.

Wall Street Says It’s Classier Than “Wolf of Wall Street.” Really?

The depiction of stock brokers in that “Wolf of Wall Street” movie has the securities industry on the defensive. In my column today for Investopedia.com, I talk about how a faction that considers itself the “real” Wall Street is anxious to get the word out that it has no similarity to the thugs who appear in the movie with Leonardo DiCaprio.

Ask a pal at a Wall Street firm about the box-office hit The Wolf of Wall Street, and brace for one of those sour faces that suggests there’s a bad smell in the room. Those sex-obsessed, drug-taking thugs who ripped off investors in Martin Scorsese’s all-time, biggest-grossing film have nothing in common with the refined investment professionals who do business on real Wall Street, they will tell you.

But that’s not entirely true. The Wall Streeters who wear expensive suits and do business in Manhattan may not be tossing midgets around the trading room, as the perhaps less genteel Long Island brokers in the movie did. They aren’t above hurting investors, though.

“If people understood the similarities between Belfort and Wall Street, there would be a riot in this country,” says Dennis Kelleher, CEO of the investor advocacy group Better Markets Inc. Kelleher explains, for example, that Belfort’s operation dealt in barely-regulated penny stocks that came with either skimpy information or documents that twisted or obfuscated the facts. On conventional Wall Street, says Kelleher, firms bask in the convenience of the opaque, too, trading the kinds of over-the-counter derivatives that helped crash the economy in 2008.

Here’s a link to the story.

One in Five Senior Citizens Fall for Financial Scams

As many times as I’ve run across stories about financial ripoffs of the elderly, I still can’t help but be shocked at the cruelty it takes to fleece people who are so fragile. In my article yesterday for TheStreet.com, I wrote about how much worse the problem has become, and how it will only get worse from here.

While elder financial abuse is in some respects nothing new in the annals of fraud, the aging of the baby boom generation and Americans’ increasing longevity are coming together in a perfect storm that could cause the problem to skyrocket. A 2010 survey by the Metropolitan Life Foundation estimated that victims of elder financial abuse lost at least $2.9 billion in 2010, up 12% from 2008.

I begin with a story about 73-year-old Charles S. Bacino, who lay dying in a hospital bed in 2012 when the man he called his “financial affairs manager” came by to visit and persuaded him to invest $82,000 in a cocoa and banana plantation in Ecuador. Mr. Bacino, who was hooked up to a morphine drip to soothe the pain of his pancreatic cancer, gave his keys to the man so that he could fetch his checkbook. Less than a month later, Mr. Bacino was dead and the whereabouts of his money was a mystery.

You can read the full article here.

Sabew Commentary Award

Today, the Society of American Business Editors and Writers said that I won the “Best in Business” award for commentary in the news agency category for columns I wrote in 2013 for Bloomberg View.

Here’s a list of all the winners, including writers worth following on a regular basis, such as Jesse Eisinger of ProPublica and Michael Smallberg of The Project on Government Oversight (POGO).

If you’re looking for smart and talented financial journalists worth adding to your regular reading list, take a few minutes to go through the roster of Sabew winners.

Notes from the judges on my submission:

NEWS AGENCIES COMMENTARY

Winner: Susan Antilla, Bloomberg View, for her columns.

Terrific topics. Tough, engaging, enlightening, head-snapping. Well-reasoned arguments. Writes with authority and insight in a simple, declarative style that doesnt wander. No navel-gazing. Sophisticated humor used lightly in a way that advances the argument. Not humor for humors sake.

Here are links to the stories the judges considered:

Do Deutsche Bank’s ‘Prettier’ Women Get the Best?

JP Morgan’s Teflon CEO Glides Past Reputation Hits

Hate Follows When the Police Try to Do Their Job

Top Stock Picks of 2013 Lose Out to Honey Boo-Boo

The Agency that Helps Consumers, Irritates Republicans

When a Federal agency reins in sleazy debt collectors and slipshod mortgage servicers, that’s more than enough to get politicians enraged — at the agency, not the bad guys.

The two-year-old Consumer Financial Protection Bureau has already collected $3 billion to return to aggrieved consumers, and has done such good follow-up when consumers call to complain that lenders and others who fall under its jurisdiction are actually helping customers right away rather than face the ire of the CFPB.

In my story for TheStreet.com today, I talk about the bizarre reaction to CFPB from Republicans in the House of Representatives.

A gaggle of chest-beating Republicans has been in attack mode against the CFPB since before it even opened its doors, trashing the agency’s architect, Massachusetts senator Elizabeth Warren, and passing bills to try to weaken its authority. The latest effort, up for a vote in the House of Representatives in coming weeks: the Consumer Financial Protection and Soundness Improvement Act of 2013, which would reduce the agency’s pay schedule and make it easier to overturn its rules, among other curtailments.

Jeb Hensarling, chairman of the House Financial Services Committee, actually makes a good point when he criticizes CFPB for collecting extensive consumer data that is a worry in these times of compromised personal information, but he’s so over-the-top in his condemnations that his constructive criticisms could get lost.

A favorite practice of Hensarling’s is to introduce CFPB Director Richard Cordray at official hearings with taunts about the agency being “accountable to no one,” which is always kind of funny since the CFPB chief is sitting across from his cantankerous questioners precisely because he is being held accountable. Hensarling managed to squeeze references to Cordray as “credit czar” and “national nanny” and “benevolent financial product dictator” in a single sentence at a hearing in September.

You can read my story here.

Do You Really Want to Learn Investing From These Guys?

“Customers first,” I always say, and who knew that the securities industry would actually come around to saying the same? The lobbying group for Wall Street, the Securities Industry and Financial Markets Association, unveiled some new battle cries for 2014 at a meeting in New York in November, “Customers First” and “Helping Main Street Prosper” among them.

I wrote about Sifma’s upcoming efforts to plant seeds of goodwill with the public in my new column for Investopedia.com this week:

The financial industry’s trade group is on a mission, and the public relations tour de force begins this month with the launch of a capital markets literacy effort that SIFMA calls “Invest it Forward.”

Sifma actually has a financial literacy winner in its popular “Stock Market Game” that gives school kids $100,000 in virtual money to trade. Kids who play the game improve their  literacy scores, but the champions can be a tad precocious:

A fifth grader from East Brunswick, N.J., took to the stage at the Marriott to receive her SIFMA award for investment prowess, and said the teamwork approach to investing sometimes cramped her style. “I hated when my team was arguing because we were just wasting time, and time wasted is virtual money lost,” she said. Could somebody spring for a copy of Graham and Dodd’s “Security Analysis” for this child?

You might check to see if your wallet is still in your pocket when you’re listening to Sifma’s pro-investor pitch. You can read the column here.

About that Reformed ‘Wolf’ of Wall Street

Jordan Belfort, who did jail time for fleecing investors at Stratton Oakmont, the Long Island brokerage firm he founded, has put himself out there as a reformed man. Indeed, he has been making money legitimately, giving speeches to audiences enthralled with the idea of spending an hour or so in the same room as a convicted felon who claims to have seen the light.

Belfort is, of course, the author of the 2007 book “The Wolf of Wall Street,” which was made into a movie starring Leonardo DiCaprio (playing Belfort) that was released last month. He’s taken to social media to inform the public that he’s a good guy who is giving all the movie proceeds back to the investors he defrauded. But the prosecutors who put him in jail say he’s not telling the story just right. I write about it in my story today in The New York Times.

 

 

Is Your Stockbroker Smart Enough to Understand the Product He’s Selling You?

Brokerage firms spend big bucks on TV and print ads that depict their stockbrokers as informed, sophisticated professionals who are looking out for clients. So it might come as a surprise to know that when investment products blow up, brokers have been known to complain that they had no way of knowing that the product was bad.

In my story for The New York Times tonight, I show how brokers wiggle out of responsibility  when they sell customers a product that turns out to be garbage. You can read the story here.

Investors’ Story Left Out of Wall Street ‘Wolf’ Movie

You’ve seen the trailers.  A convicted stock fraudster played by Leonardo DiCaprio parties it up on his 170-foot yacht and entertains his office of crooked stock brokers with a half-naked marching band that celebrates the group’s  latest money haul from their clueless clients.

Paramount’s “The Wolf of Wall Street” is a 3-hour movie that opens Christmas Day. I saw a screening in New York on Wednesday night. The mostly 30-something crowd loved watching the hard-partying life that comes when you perfect a method to steal from the public.

My prediction: Young people will be wowed by DiCaprio’s character, Jordan Belfort, just as they were by Michael Douglas aka Gordon Gekko (remember “Greed is Good?”) in the movie “Wall Street.” Douglas said in this story that he was “shocked” that young people decided to work on Wall Street after watching him play a Wall Street bad guy.

Ask your college-aged kids what they think when they see the movie, and let me know.

It was sort of bothering me that amid all this hard partying and cocaine-snorting that nobody had bothered to mention that people actually got hurt by the funny brokers who throw midgets at a bullseye for fun. Thus, my story in today’s New York Times: “Investors’ Story Left Out of Wall Street ‘Wolf’ Movie. You can read it here.

Black Marks Routinely Expunged from Brokers’ Records

Stock brokers who settle with an aggrieved customer are able to get the go-ahead to delete the customer’s complaint from their records almost every time they ask, according to a study released Oct. 16. I wrote about it in today’s New York Times.

To understand the history of these broker shenanigans, take a look at an earlier story that I wrote for The Times on June 10: A Rise in Requests From Brokers to Wipe the Slate Clean.

It’s a topic I’ve been watching for some time. Eleven years ago, brokers were on an earlier push to make their bad records look good, and I wrote about that for Bloomberg Markets Magazine — How Wall Street Protects Bad Brokers. So when Wall Street’s self-regulators at The Financial Industry Regulatory Authority (Finra) tell you this problem emerged in 2009, consider this article from 2002:

Schwab Case Could Mean Even Fewer Chances for Investors to Get Into Court

If you’re an investor who’s lost money at the hands of a broker who may have broken securities laws, you are pretty much stuck. In 1987, the Supreme Court said in Shearson v. McMahon that a brokerage firm had the right to force investors to forego court — and instead use industry-run arbitration — in the event of a grievance. Brokers did that by including a so-called “mandatory arbitration” clause in their customer agreements.

That means no public filings, no judge, no jury and no members of the public permitted in your private courtroom. Once the McMahon ruling came down, virtually every brokerage firm raced to add a mandatory arbitration agreement.

The only way since then that the investing public could get before a judge and jury has been in egregious cases where multiple investors claim to have been ripped off in the same way — a class action. Those cases, up to now, have been allowed to proceed in public view.

In 2011, though, Charles Schwab & Co. added a provision to its customer agreements saying that its clients couldn’t partake in class actions, either. Finra, a regulatory organization funded by Wall Street, objected to that. I write about what it all means in my story tonight for The New York Times. You can read it here.

Jury Largely Sides With Bank in Madoff-Related Case

A Hartford jury said Wednesday that the Connecticut bank that was custodian for two investors in Bernard Madoff’s Ponzi scheme was not liable for their losses.

I wrote about the Alice-in-Wonderland-style trial in a story for The New York Times on July 8. The bank’s former president said he didn’t know what due diligence the bank might have done to be sure the customer’s assets existed, and didn’t know how the bank maintained accurate records. The president, who’d been in the banking business for 36 years, had a degree in finance from Georgetown University.

Another doozy in the trial was the bank’s former custodial manager, who said he would get three or four “very thick envelopes” of trade confirmations from Madoff some weeks. He put them in a file drawer and never reviewed the documents. (Except that he occasionally took a peek because he was curious about what Madoff might be buying or selling, but not curious enough to do any checking on behalf of the bank’s customers.)

The Hartford trial began in June as a consolidation of three lawsuits with similar allegations. But two of those cases settled for $7.5 million just before the jury began its deliberations, leaving the jury with only the case of two elderly Florida investors to decide. You can read my story about the verdict today for The Times here. Take a lesson from this: When a financial outfit tells you it is your custodian, don’t make the mistake of assuming that means they have custody of your money.

Custodians don’t always take custody: investors beware

Custodial banks typically earn their fees based on a percentage of the value of the assets they’re holding for you. But do they have any obligation to confirm whether there are any assets there in the first place?

A Hartford jury is deliberating over that and other questions in a case brought by former customers of Bernard Madoff. Westport National Bank was custodian of the investors’ accounts. But, as it turns out, when the bank took over the accounts in 1999, no assets existed, and the bank didn’t bother to check.

The custodial issue is becoming ever-more important as investors increasingly put “alternative” investments such as hedge funds in their retirement accounts. Pricing those investments can be dicey, and you shouldn’t expect that your custodian is doing any analysis to ensure that the prices they show on your statements are realistic.

I attended several days of the trial against Westport National Bank in Federal court in Hartford in June. Here’s a story I wrote about it for The New York Times.

How to be a problematic broker with a good record

Don’t believe everything you read – or don’t read — when you check up on your stockbroker.

Brokers and Wall Street executives with black marks on their public records are working hard to get those blemishes deleted, a topic I got into in my story for The New York Times last week.

In “A Rise in Requests From Brokers to Wipe the Slate Clean,” I summed up some of the more egregious examples of Wall Street employees persuading arbitrators at the Financial Industry Regulatory Authority (Finra) to recommend expungement of their peccadilloes.

Kimon P. Daifotis, for example, managed to get arbitrators in eight different cases against him to recommend expungement since last August – a remarkable feat considering that on July 16, the former Charles Schwab executive had agreed in a settlement with the Securities and Exchange Commission to be barred from the business and to pay $325,000 in penalties and forfeited profits related to his role the Schwab Yield Plus fund, in which investors had lost millions of dollars.

He didn’t admit or deny wrongdoing in that case and will be allowed to reapply for Finra membership in 2015.

Brokers have to take their expungement recommendations to court to be approved once an arbitration panel has recommended deletion, and Pasadena, California broker Debra Reda-Cappos will be doing exactly that on August 15. Investors Howard and Karen Snyder accused Reda-Cappos of breach of fiduciary duty and fraud in a complaint filed with Finra on October 12, 2010, and the two sides told the panel on October 3, 2012 that they had settled.

Neither Reda-Cappos nor her lawyer Kasumi Takahashi responded to my email queries. But in granting a recommendation that the Snyder case be expunged, the arbitrators noted that the claim was “false” and that the couple “did not prove their claim.”

It’s a no-brainer that they would not have proven their claim: There was no hearing to prove or disprove it.  So it’s more than a little weird that the arbitrators would use that as a way to justify cleaning up a broker’s record.

The Snyder case settled for $116,000, according to Reda-Cappos’ Finra records.

Before those arbitrators recommended the expungement, a lawyer for the investors, Leonard Steiner, told the panel that his clients were willing to say under oath that everything in their claim was true, according to the arbitrators’ award. But the panel didn’t ask the Snyders to do that, and gave the go-ahead on the expungement anyway, Steiner says.

Plaintiffs lawyers have been getting steamed that brokers are strong-arming investors to endorse expungements before they’ll settle. There’s a “disturbing trend” of firms routinely asking investors to agree that they won’t oppose expungement, says lawyer Brett Alcata of San Mateo California.

Those arrangements put the plaintiff’s lawyer in a box. They have an obligation to get the best settlement possible for their clients, but cringe at the idea that the next investor who comes along won’t get the full story on the errant broker. Finra shouldn’t allow settlements to include provisions that the customer won’t oppose expungement, says Steiner.

Sometime this summer, Finra will propose new rules that will make it even easier for brokers to expunge their records. Brokers have been irritated by a Finra rule enacted in 2009 that forces them to reveal complaints even when they are not named in a lawsuit. So if John Smith’s firm is sued because of fraud that Smith allegedly committed, the broker now has to list that on his BrokerCheck even if he isn’t a defendant.

Under pressure from the industry, Finra is expected to propose  a new “expedited” process to clean up black marks: The broker would be able to ask a panel for expungement at the end of an arbitration hearing, and the arbitrators would have the power to approve – but not deny – the request. Should that not work, the broker could take another stab at getting an expungement in a separate proceeding.

The proposals were mapped out in a Dec. 6 Finra memo to members of its National Arbitration and Mediation Committee. “We cannot comment on Board deliberations or confidential memos to Finra committees,” Finra spokeswoman Michelle Ong told me in an email.

Stockbrokers say the darndest things

I was at a local bank this morning, filling out the paperwork for a Certificate of Deposit, when I overheard a stockbroker in the next cubicle trying to answer questions from a worried elderly couple who’d come in with an account statement that had alarmed them.

“As long as you hold the CMO to term, you can’t lose money,” the broker said, referring to their investment in a collateralized mortgage obligation. I couldn’t help but wonder which would happen first — the maturity date of the CMO or the year of the couple’s estimated life expectancy.

I looked up at the bank officer who was doing the paperwork for my CD. “You guys sell CMOs?” I asked. Yes, indeed, she told me, not the least bit taken aback when I asked “Why are you selling risky stuff like that at your bank?”

He’s doing great!” she said of her huckster colleague, and I could hardly argue with that. “I’m sure he is,” I replied, my sarcasm going totally over her head.

I’d begun to scribble notes as the back-and-forth continued between the seniors and the broker. “It’s backed and guaranteed by the U.S. government,” the salesman told his customers. But the husband kept coming back with questions. “But the value’s gone down,” he said.

No sweat, the broker told him. That’s just partial return of your principal, he said. “This valuation number means nothing.” But no, the value’s gone down more than the amount of the principal repayment, the husband countered. “Pay no attention to the losses,” said the broker. “I have no concerns. This is the best buy in the industry.”

Best buy in the industry for the broker, maybe. Even if that investment winds up working out fine for the couple, they clearly didn’t understand what they’d purchased. And if they wind up losing, smart money says that broker will swear he never told those customers that anything about their CMO was “guaranteed.”

Are you a lowly Main Street investor? Well, nobody cares what you think about financial reform

It’s never a great time to be a lowly member of the investing public looking for protection from the sharks of finance. But today? Well, try to lower your expectations a tad more.

Deep-pocketed banks are dominating the process of writing the new financial rules mandated by the Dodd-Frank Act. It isn’t that there’s nobody advocating for small investors. It’s just that the few organizations that make a case for the public are outgunned by the well-funded financial industry.

“Despite a significant expansion in the number of foot soldiers out there working in the public interest on these financial issues, we are still completely overwhelmed by the industry lobbyists,” Dennis Kelleher, chief executive officer of Better Markets, told me.

I wrote about the lopsided battle to influence the new financial rules in my Bloomberg View column tonight. You can read it 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.