The investment portfolio of the Financial Industry Regulatory Authority (FINRA) benefited from insider trading, according to Larry Doyle, author of In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

Finra

FINRA is “Wall Street’s private police force”

“The documentation I put forth (in the book) going back to 2003 provides significant support to that accusation of insider trading,” Doyle said in an e-mail statement to ValueWalk. Doyle says FINRA is really “Wall Street’s private police force,” a private corporation documented to be owned by the major banks that regulates markets to the benefit of their ownership while engaging in enhanced prosecution of smaller firms, he says.

Doyle makes these charges, all documented in the book, as a man coming from inside an industry.  As a former JPMorgan Chase & Co. (NYSE:JPM), UBS AG (NYSE:UBS), First Boston and Bear Stearns mortgage backed-securities trader – you know, the instruments of mass destruction that blew up the economy in 2008 – Doyle has a unique insight into Wall Street.  But Doyle isn’t blowing the whistle out of spite.  In the book he says he “loves Wall Street” and wants to help clean up what is considered an environment of Wall Street “lawlessness,” as major hedge fund manager Paul Singer recently described it.  Ignoring the problems and providing cover to criminal activity is part of the problem that will only encourage further criminal activity.

Doyle makes many salacious charges, pointing to specific independent proof to support his charge of a Wall Street conspiracy.  The author tackles issues typically discussed in whispers behind the scenes, including how certain people are “blacklisted” for speaking up and how FINRA targets people it regulates with an eye towards big bank objectives.  This includes the charge a whistleblower testifying about big bank knowledge of fraud was told by committee investigators not to reveal damning information against top management; how top FINRA regulators have personally enriched themselves by allowing the big banks to operate with a separate standard of justice; but most ominous is the charge of insider trading to benefit FINRA’s investment portfolio, estimated at $2 billion.

How is it that a regulator has a $2 billion portfolio invested with companies they regulate?

What’s a stock market regulator doing with an investment portfolio it manages itself?  It is more than odd that a stock market regulator, charged with policing the largest hedge funds, banks and brokerage firms, manages an investment portfolio and makes trading decisions on its own – investing with the same banks, hedge funds and in the same markets it regulates.  Doyle charges that FINRA is given special consideration and information before the general public.

But you won’t get much information from FINRA on the matter, Doyle writes, as they aren’t talking.  As a private organization, they are not subject to Freedom of Information Act requests, Doyle notes, they don’t respond to requests for information and Congress doesn’t appear interested in asking tough questions.

ARS market risk disclosure insufficient

At issue are interest rate products called Auction Rate Securities (ARS) that were marketed to individual investors as a liquid, cash-equivalent investment with a slightly higher yield suitable for retirement accounts.  The truth was very different.  They were highly risky and non-liquid investments – a wolf in sheep’s clothing.

Jefferson County bonds underneath “low risk, highly liquid” securities sold into retirement accounts

One somewhat humorous example of a “safe” ARS investment were the highly controversial structural bonds of Jefferson County, Alabama – bonds that had a maturity of 2042.  Jefferson County imploded under the weight of the credit default swaps packaged by JPMorgan Chase & Co. (NYSE:JPM), as somewhat famously profiled in Rolling Stone Magazine, now held up as a classic example of criminal fraud in the SWAPs market.  JPMorgan agreed to pay fines in the case, but charges of bribery of a pubic official didn’t make the cut. This is an example of what was underneath the “ARS” securities, considered risky by Doyle based on an objective formula to measure risk he proposes in the book.  How ironic that the securities initially outed as a fraud were repackaged as part of what Doyle characterizes as a “Ponzi scheme?”      

“FINRA knew that the securities themselves were not cash equivalents, even though they were marketed as such by Wall Street,” Doyle writes.

ARS market freezes but the market timers inside FINRA didn’t get hurt

Just like the mortgage derivatives were to implode in less than 10 months, on February 14, 2008, Valentine’s Day, a surprise to some: the ARS market froze and money could no longer come out of the now worthless investments. Investors who didn’t get out just before the crash were irate.  They had been sold a bill of goods, but according to Doyle should not have been surprised.

“Disguising risk is an art form on Wall Street,” the Wall Street insider Doyle writes, and then makes a logical recommendation for hedge fund risk disclosure that would end many of the typical shenanigans.  Breaking down the complexity to simplicity is unlikely to be adopted because it would eliminate the competitive advantage owned by the large banks, and this leads to a critique of the book.  What Doyle suggests will never make it as regulatory policy — the suggestions are too simple and transparent.  Wall Street fraud thrives like a mold in the complex, opaque shadows.  What Doyle proposes no longer gives the most sophisticated banks a market advantage; it would be too effective, that’s why it won’t be implemented.

ARS is “Ponzi scheme bigger than Madoff”

The ARS market is no exception.  Here the Wall Street banks were primary buyers in a thin market and had artificially manipulated outcomes, Doyle charged.  What they had done now was withdrawn their offers to buy and pulled the rug out of what he calls a “Ponzi scheme bigger than Madoff.”  After investors lost their capital there was a regulatory response against the banks, who were required to pay a $13 million fine without admitting or denying guilt.  Doyle says FINRA acts as a “meter maid,” handing out a nuisance fine that was only a small fraction of the revenue generated while bringing down the hammer on smaller firms.

FINRA pulls 1/3 of its investment portfolio before crash

With the new year, 2008 underway and approaching Valentines’ Day, the SWAPs derivative market was shaky — and warnings were delivered to regulators.  For instance, Hank Paulson, then Treasury Secretary, provided the Bush Administration a warning that the SWAPs could implode the economy — and the US Federal Reserve had received similar warnings. It is unclear if warnings were passed to regulators, although whispers were known to abound.

The SWAPs being underneath the ARS market was really the first warning for the coming derivatives implosion that had been predicted by former CFTC Chairwoman Brooksley Born.

When the ARS market collapsed, not all investors were caught off guard.  A select group of institutional insiders were able to exit the market before the rug was ripped from under general investors.  But traditional hedge funds were not the only insiders to exit early.  FINRA, which regulated the ARS market and invested $650 million, over 1/3 of its portfolio, in ARS was smart enough

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