The Securities and Exchange Commission

[thepennyking]

The Borg Attacks Wall Street! Humans on the run!

By Bill Singer - Contributing Columnist

I don't get it and probably never will. You know, the little guy gets hammered and the big guy gets treated with kit gloves, the same old double standard that always seems to apply.



November 19, 2003 - Okay, let me put it bluntly. I don't get it. Never did. Still don't. Likely never will. And I've hated the practice for as long as I understood it --- and will continue to. What am I talking about? Simply, the double standard that always seems to apply for smaller businesses regulated by government or so-called quasi-governmental regulators. You know what I mean --- all things being the same, the little guy gets hammered and the big guy gets the kid gloves.

Consider this November 17, 2003, headline on the United States Securities and Exchange Commission's (SEC's) website: "SEC Charges Morgan Stanley With Inadequate Disclosure in Mutual Fund Sales Morgan Stanley Pays $50 Million To Settle SEC Action."

In commenting on the settlement, the release criticizes

Morgan Stanley's firm-wide failure to adequately disclose to customers at the point of sale the greater costs associated with large purchases of certain B shares and the potential greater returns associated with A shares made the brokers better off and their customers worse off . . .

Equally impressive is the November 17th headline on the NASD's website that trumpets: "NASD Charges Morgan Stanley with Giving Preferential Treatment to Certain Mutual Funds in Exchange for Brokerage Commission Payments." Virtually, parroting the SEC, the NASD announces that it sanctioned Morgan Stanley DW Inc. for

giving preferential treatment to certain mutual fund companies in return for millions of dollars in brokerage commissions. This is the second action brought by NASD against the firm for mutual fund violations in the last two months and is part of NASD's broader effort to crack down on sales practice abuses in this area. In conjunction with a related action filed by the Securities and Exchange Commission (SEC), Morgan Stanley agreed to resolve the NASD and SEC actions by paying $50 million in civil penalties and surrendered profits.

Now $50 million in fines is admittedly no chicken feed. However, for a global financial services firm of Morgan Stanley DW's stature, it's not going to bankrupt the company either.

Consider this October 16, 2003, Press Release from NASD proclaiming that "NASD Charges Long Island Firm, its President, and Two Former Managers as a Result of Fraudulent "Boiler Room" Sales Practices: Eleven Others Barred in Related Conduct". The salient facts in this matter were that a small firm, --- described by NASD as an unsavory "boiler room" --- its President, and a former branch manager were charged with engaging in high-pressure sales practices that defrauded investors of $8 million. NASD also permanently barred 11 other individuals involved in the misconduct.

Interesting. The small firm engages in Fraudulent "Boiler Room" Sales Practices but the giant Morgan Stanley DW was only involved in Inadequate Disclosure or Preferential Treatment. My, oh my, ain't words wonderful --- and particularly in such skilled hands! Just imagine. A small firm engages in $8 million worth of fraud and over a dozen human beings are barred. You know --- flesh and blood, breathing, earthlings. And then this other humongous firm pays a $50 million fine for inadequate or preferential practices but nary a homo sapien was suspended as a result. You see, it's sort of like the Matrix movie or the Terminator --- there are we humans and there are the monolithic machines (the latter apparently run larger firms because the regulators don't seem to name any individuals). Oh sure, maybe in a few more weeks or months the SEC or NASD will suspend a bunch of folks at Morgan. But it will probably be in a less highly-publicized press release. And that release will likely take pains to play down the affiliation of the bad boy with his former august firm. And that release may get issued on a quiet Friday news day or an equally dull holiday eve. Regardless, it just didn't make it into today's much ballyhooed press conferences.

So, what's the point? Simple. Wall Street's regulators don't realize how dangerous and unfair their large-firm preference is. The watchdogs diminish the import of misconduct at major firms by euphemizing whatever was done. You can almost see them sitting around a table --- much like my wife and I do on Sundays with the crossword puzzle . . . honey, what's a twelve-letter word for fraud? Worse, the regulators lessen the public's concern for improper conduct at larger firms by giving the impression that it happened solely on a computer or as the result of some non-human action. Meanwhile, the SEC and the SROs make life miserable for smaller firms by giving the equally false impression to the investing public that fraud only occurs at modest sized broker-dealers --- or that you can't trust the salesforce or management of your local stockbroker. Frankly, it's unfair and it stinks. But, like what else is new about regulating Wall Street?


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