Category Archives: Wall Street Ethics

There are thousands of people in America who make hundreds of millions of dollars per year selling billions of dollars of bad investment products to people who believe what they are told by personable advisors. Like the political aristrocrats, the Wall Streeters are focused on perpetuating themselves. Other top priorities include big salaries, bonuses, stock options, extraordinary benefits, private planes, and lavish surroundings. Once they have it all they will do whatever it takes to keep it. Sounds kind of medieval doesn’t it.

Wall Street Executives Belong in Watchdog’s Ethics Doghouse

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Morgan Stanley CEO James Gorman had the partial fortitude to admit his firm belongs in the doghouse. Unfortunately, he also used two forms of standard Wall Street spin to dilute the impact of his comment when Bloomberg News quoted him saying, “Wall Street’s reputation will remain “in the doghouse” as long as trading scandals continue to plague the industry.” He went on to blame UBS for the latest scandal when he said, “The good works of the industry are ignored when some trader does some stupid thing like this guy at UBS did and goes to jail”.

Gorman is right about the doghouse. According to a Gallup poll last Summer, Americans’ confidence in U.S. banks fell to a record low of 21 percent; about half of what it was in 2007 before the Wall Street initiated crash in 2008. This was supported by Edelman Public Relations survey in January of this year that showed Financial Services & Banking were the least-trusted industries in America. Continue reading →

Corruption Runs Rampant on Wall Street

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Whistleblower law firm Labaton Sucharow released a survey on July 10, 2012 that showed 25% of Wall Street executives see wrongdoing as a key to success. The survey included 500 senior executives in the United States and the UK. 30% also said their compensation plans created pressure to compromise ethical standards or violate laws. The survey confirms something I already believed. Wall Street has to cheat to win because it cannot meet the investor expectations it created with slick marketing and personable financial advisors. Continue reading →

U.S. Senate Waters-down Insider Trading Law

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Late last week the U.S. Senate, following the House passed a weakened version of the “Stop Trading on Congressional Knowledge” (STOCK) Act, which aims to eliminate congressional insider trading. The bill doesn’t address the political intelligence industry, which collects non-public information from members of Congress for trading purposes.

Senate Majority Leader Harry Reid (D-Nev.) took a page out of House Majority Leader Eric Cantor’s (R-Va.) playbook by forcing the Senate to approve a watered-down bill that will supposedly ban congressional insider trading.

Wall Street lobbied hard to block the political-intelligence provision and found friends in Reid and Cantor, both of whom receive large campaign contributions from Wall Street firms. Cantor stripped the stronger version of the political intelligence and anti-corruption enforcement provisions and sent the watered-down House bill to Reid, who did much of the same to the Senate version.

Ethics and Financial Service Company Executives

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In the interest of keeping it real, company executives have three primary interests. One is to do what it takes to keep their jobs. The second is to move-up in their companies to positions of increasing prestige and power. And, third is to maximize their personal income.

Guess what? There is one answer for all three interests – maximize the amount of “revenue” they generate from their clients’ assets. Companies do not fire executives that produce a lot of revenue. In fact, they promote them so they can increase the productivity of other company employees. And, the more revenue they produce, the more money they make.

This is the culture of the typical Wall Street company. The only variable is the companies’ ethical treatment of clients. Based on recent headlines, the needs of clients are a distant second to the production of revenue at companies like Goldman Sachs and Citigroup.

Make no mistake this is a cultural issue that is deeply imbedded in Wall Street business practices. The only way this culture will change is new regulations. That is not gong happen. Wall Street bought the politicians who control the regulations a long time ago.

You cannot afford to assume companies are ethical because they are big. It is safer to assume someone is paying for the opulent offices, company jets, and private country clubs. Just make sure it is not you.

The Cost of Crony Capitalism

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Insider trading is illegal and morally wrong. Unless of course if you are a member of Congress. Then it is just “honest graft” which sounds innocent enough. Honest graft allows members of Congress to enrich themselves in a way that is legal and for which a politician would say is nothing more than taking advantage of the money-making opportunities that might arise while holding public office. Honest graft is as much an oxymoron as “harmless embezzlement.”

Should we allow college athletes to bet and gamble on games in which they are playing? Is it acceptable for Tiger Woods to wager on PGA tournaments in which he is competing? Of course not. It would undermine the integrity of the game. People would scream with outrage that these athletes have a stake in the outcome and staggering financial conflicts of interest. But this is exactly what we are allowing politicians in Washington to do. Currently, members of Congress are allowed to introduce a piece of legislation and then trade on the company’s stock that will benefit or be hurt by this legislation. Insider trading in Congress is not only routine but apparently legal. Committee members frequently participate in sweetheart IPOs and make trades in stocks on the companies they regulate.

If you are a federal judge who owns more than $25 worth of stock in a company, you are required to recuse yourself from any case involving your company because of a possible conflict of interest or lack of impartiality. Yet, we allow members of Congress who own millions of dollars of healthcare or energy companies to write bills that affect their respective industries they regulate and subsequently make trades based on what’s in these bills before this information is released to the public.

Two or three lines in an energy bill can have a massive effect on a company’s stock price. If politicians possess this information and are allowed to trade on it before anyone else, they have an unfair and powerful advantage. It damages the integrity of the markets; it undermines any sense of fairness; and it puts the average investor at an extreme disadvantage.

The much ballyhooed (by politicians) “Stop Trading on Congressional Knowledge” (STOCK) Act would be an attempt at prohibiting Members of Congress, employees of Congress, and all federal employees from using any nonpublic information derived from the individual’s position as a Member of Congress or employee of Congress.

Both chambers almost unanimously passed the STOCK Act, but there is still no law. And according to experts even if it becomes law there appears to be sufficient holes in the STOCK Act such that those who wish to circumvent it will be able to do so. For instance, House Majority Leader Eric Cantor stripped a provision requiring those that collect financial information and sell it to Wall Street to register the same way lobbyists do, which means it’s still okay to provide insider legislative knowledge to ultra-high-net worth investors.

With a Congress like this who needs Bernie Madoff?

Goldman Sachs on Most Hated List

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According to 24/7 Wall St.’s research, Goldman Sachs has made it onto its 10 Most Hated companies list.

I am not surprised. The greed of GS executives has become legendary and their actions severely damaged investors and the U.S. economy. Exposure started in 2010 when the company was sued for fraud and settled for $550 million – a small percentage of annual profits. Fraud accusations against GS actually accelerated after the settlement and fines became a cost of doing business. GS is facing a number of suits for toxic mortgages it sold to individual and institutional investors.

Being on a Most Hated list must rankle GS executives, but they have made hundreds of millions of dollars in compensation and they know Americans have short memories. Eventually this will be old news and it will be business as usual.

What is truly amazing is that GS defrauded investors and caused major damage to the U.S. economy and not one company executive went to jail. Why not? These executives have purchased Get Out of Jail Free cards from politicians who care more about re-election than protecting Americans from greedy executives.

This cycle will repeat itself over and over again until the executives who made the decisions to rip-off the public begin joining Bernie Madoff in jail.

Full Transparency Scares Wall Street Executives

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What is full transparency when you buy investment advice, recommendations, and products?

Transparency occurs when investors are provided an easy-to-read document that contains all of the facts they need to make an informed decision when they select advisors and invest their assets.

Wall Street spends millions of lobbyist dollars per year fighting transparency. Corrupt politicians who are more interested in Wall Street money than serving the interests of the American public make sure regulations favor companies and not investors.

What is Wall Street afraid of? In a nutshell, companies are afraid investors would not buy what they are selling if they knew the truth. Transparency would damage revenues and profits of companies and the bonus compensation of the executives who run the companies. Wall Street’s solution is to keep investors in the dark.

So what are they hiding?

How about financial advisors who lack experience, education and certifications? Or, advisors who have numerous investor complaints on their compliance records?

How about financial advisors who use deceptive tactics in verbal sales pitches so investors have no written record of what was said to them.

How about investment products that that have excessive expenses and poor performance?

How about “beat the market” investment products that have never beaten the market?

In January, 2012, Investor Watchdog is going to begin providing free tools that investors can use to obtain the information they need to select and monitor quality advisors who are willing to practice full disclosure. Watchdog tools will also expose advisors who withhold important information from investors.

Watchdog tools have the potential to change the game in favor of investors.

Why Do Wall Street Companies Pay Fines Without Admitting Guilt?

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If Wall Street companies admitted guilt, they would lose a large number of investor lawsuits.

For example, Citigroup sold investors $1 billion of a CDO that contained toxic subprime mortgages. Investors lost $700 million. Citigroup made $160 million from fees and bets that the CDO would fail. Citigroup agreed to pay a $285 million fine without admitting guilt. If you deduct the $160 million, the net cost to Citigroup is $125 million, a fraction of the $700 million of investor losses.

If Citigroup admitted guilt they would still have to pay the fine and no doubt face a class action lawsuit from the investors who incurred the massive losses. Because they admitted guilt they would be in a very difficult position to defend their actions.

New laws should establish a fiduciary standard for all companies that sell investments to investors. The standard already exists for Registered Investment Advisors, but does not cover brokerage firms and stockbrokers.

Guess which type of company is ripping off investors on a regular basis? That’s right the broker/dealers.

Wall Street spends a lot money fighting a fiduciary standard for its brokerage activities.

Unfortunately, politicians have to fix this problem. That is not going to happen. They are paid large sums of money by Wall Street companies to maintain current regulations that protect companies at the expense of investors.

It is also unfortunate that investors do not have an organization that is strong enough to convince politicians to change the regulations.

Investors Have Short-Term Memories

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Wall Street companies cheat investors to maximize earnings, share prices, and executive bonuses.

When they are caught, companies pay fines to make the problem go away.

The latest example is Citigroup’s agreement to pay a $285 million fine to settle an SEC action that stated it sold investors $1 billion of a CDO then bet against the performance of the CDO. Investors lost $700 million and Citigroup made $160 million.

Citigroup is one of the biggest financial institutions in the world. If you can’t trust Citigroup, who can you trust?

Citigroup agreed to pay the fine without admitting guilt. If they didn’t do anything wrong why did they agree to pay the fine?

First of all, fines are a cost of doing business for Wall Street firms. They probably have a contingency fund to pay fines.

Second, they want the “problem” to go away as quickly as possible to minimize adverse publicity.

Third, Wall Street knows investors have very short-term memories. Very shortly, Citigroup’s alleged fraud will be yesterday’s news and it will be business as usual. I bet not one investor pulled their Citigroup accounts because the “problem” did not impact them.

What about the investors who lost the $700 million? Can they still afford to retire when they want to? Can they maintain their desired standard of living during retirement?

What about the executives who made millions from their decisions to package toxic assets and sell them to investors?

What about the fiduciary responsibility to always put investor interests first? I know the answer to this one. Brokerage firms are not held to fiduciary standards. Shame on FINRA and the SEC.

How Good is That AAA Quality Rating?

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S&P’s parent company, McGraw-Hill Cos, told investors it had received a notice a Wells Notice from the SEC stating the regulatory agency may institute a civil injunctive action against S&P that included civil monetary penalties and disgorgement of fees.

As reported by Carrie Bay at DSNews, a Wells Notice from the SEC signals the recipient is the subject of a formal investigation.

This case involves S&P’s AAA rating for a CDO known as Delphinius. S&P issued a AAA rating in the Summer of 2007. By the end of 2008 it had downgraded the CDO to junk status. Moody’s also provided a AAA rating and subsequently downgraded the CDO to junk.

A Senate subcommittee found evidence that analysts at both rating agencies were aware of the increasing risk of mortgages due to lax lending standards, poor quality loans, and unsustainable housing prices.

It is safe to assume that both agencies were pressured by Wall Street and they were paid big fees to issue the inflated ratings.

Meanwhile, investors have lost billions of dollars. The impact has been devastating.

The executives who made the decisions to package toxic assets and pay rating agencies to issue inflated ratings belong in jail. The executives at the rating agencies who succumbed to the pressure and took the money belong in adjoining cells.

Based on history, the companies will be paid fines and they will promise to clean-up their acts. Their executives will be free to develop the next scam that drives company earnings and stock prices.

Investors don’t stand a chance, until Wall Street executives are accountable for their decisions.

Fines are cost of doing business for these companies. At best they are an inadequate deterrent.