"Exaggerated and Unwarranted?" How Widespread is Illegal Pension Fund and Money Manager Conduct?
Originally intended for release in June, was a Benchmark Alert entitled: Hidden Crimes; Too Many Secrets: How Money Managers Hide Illegalities From Investors. That report, now scheduled for the end of July, will examine the existing regulatory framework applicable to the money management profession, requirements to disclose violations to the SEC and the more limited public disclosure obligations. The report will explore devices available to money managers to avoid disclosure of damaging information to the public and the permissive attitudes of regulators which result in selective disclosures.
However, certain recent developments suggest the need for commentary on the threshold question of whether illegal conduct is commonplace among pension funds and their money managers. We have long been of the opinion that unethical, as well as illegal activity, is widespread. In fact, we expressly state this belief in the section of the Benchmark website entitled, "Consulting Services and Special Investigations."
The National Association of Securities Dealers, Inc., in its review of the Benchmarkalert.com website, objected to our opinion. The NASD wrote in a letter to the firm that our statements, "Pension funds and their money managers become involved in unethical and even illegal activity far more frequently than the general public is aware" and "federal and state securities regulators all too often fail to detect violations and enforce the law" were "exaggerated and unwarranted." The NASD instructed us to delete these claims, as their inclusion, the NASD said, violated the standards set forth in the NASD Conduct Rules. Of course, the NASD regulates brokerages, not money managers or pension funds and so one might ask how much they really know about the illegalities to which we referred. A copy of our response letter to the NASD defending our statements is provided below.
On June 15, 2000, in a case that federal authorities called one of organized crime's most aggressive forays into the stock market in recent years, involving brokers, union pension funds and money managers, prosecutors charged dozens of people with using stock manipulation, outright fraud and violence to steal from thousands of investors across the U.S. It is said to be the largest criminal securities case ever brought. Are our statements still "unwarranted and exaggerated?" Are we vindicated by these revelations? Yes and no.
Unethical and criminal activity involving pension funds, money managers and yes, brokerages, occurs daily. As we said to the NASD, we know it because we've seen it happen time and again. The case referred to above is the easiest and most obvious. It allegedly involves well-known organized crime families operating through brokerages and money managers that are hardly household names. But that's only the tip of the iceberg. The greatest threat to investors and far more commonplace, is wrongdoing by pensions and money managers that appear credible only because they have the resources to conceal their crimes. Don't waste your time worrying about organized crime operating in bucket shops. Business-as-usual - the conflicts of interest and self-dealing practices the industry accepts, yet conceals from the public and which regulators choose to ignore - that's where the real money's being stolen.
Letter to the National Association of Securities Dealers (NASD) Regarding Illegal Activity In the Pension Fund and Money Management Industry.
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Robert S. Sondheim NASD Regulation, Inc. 1800 K Street, NW Suite 800 Washington, D.C. 20006-1500
June 7, 2000
Dear Mr. Sondheim:
Recently you and I discussed on the telephone the contents of your May 16, 2000 letter to me, in which you reviewed the proposed language for this firm's website, benchmarkalert.com, for compliance with the applicable standards of the National Association of Securities Dealers.
Specifically, in your letter you objected to certain language in the section of the website entitled, "Consulting Services and Special Investigations." As you noted, this section states that "Pension funds and their money managers become involved in unethical and even illegal activity far more frequently than the general public is aware" and "…federal and state securities regulators all too often fail to detect violations and enforce the law." In your letter you state that unless the basis for these statements can be disclosed, these claims must be deleted, as their inclusion is "exaggerated and unwarranted" pursuant to the standards set forth in the NASD Conduct Rules.
As I indicated to you, the basis for these statements is my professional experience as a former Securities and Exchange Commission investment management attorney, former legal counsel to one of the largest international money management firms in the world, and as an owner/operator of institutional brokerage, investment banking and consulting services firms (all NASD members) for over a decade. In the almost twenty years I have been involved in the money management business, I have known of countless cases of illegal and unethical practices which were never fully and promptly disclosed to the public. On occasion, I have personally referred such cases to securities regulators and law enforcement.
As a nationally recognized expert in securities law matters, I believe that the statements in our website referred to above cannot be considered "exaggerated or unwarranted." Rather, the language plainly states what is commonly known. The language prudently warns investors that the regulatory scheme does not ensure full and timely disclosure of all violations, illegalities and unethical practices of money managers and pension funds. I find it remarkable that the NASD would take the position that a NASD member firm that warns the public of the prevalence of wrongdoing is in violation of NASD Conduct Rules. What is the "harm" investors are subjected to as a result of the warning? And what is the standard of conduct the NASD is seeking to uphold-insider silence?
In my professional opinion, the NASD and securities regulators may be misleading investors by suggesting that the regulatory scheme adequately protects investors from harm. If I am wrong with respect to the language in my firm's website, I challenge the NASD to prove that the statements I have made are, as you say, "exaggerated and unwarranted." Until such time, we will continue to warn investors of the prevalence of illegal and unethical conduct in the industry.
Very Truly Yours, Edward A. H. Siedle, Esq.
Setting Standards For The Investment Management Industry
