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Part Three Securities self-policing comes under scrutiny

As seen on CNBC & MSNBC

Aug 13 – Within the world of the securities industry there is debate over whether investors’ rights are adequately protected. The regulatory arm of the National Association of Securities Dealers, for one, says its budget is up 45 percent over the last three years and that it has taken a number of measures to help investors. But investor groups argue that the outlook for brokerage customers remains dark. The advocates say the enforcement system is difficult to maneuver within, slow to respond and, sometimes, skewed against the public.

CNBC SPOKE to 16 investors’ rights attorneys from every NASD regional district in the United States for their views on investor safety. Fourteen of the lawyers said they have noticed no significant improvement in the overall regulatory situation since 1996, when the SEC publicly and harshly criticized the NASD.

“The NASD is just not doing its job. [It] may fine some of the individual principals. The states may fine them,” said Diane Nygaard, president, Public Investors Arbitration Bar Association. But she said the states “slap” the hands of bad brokers, without any salutary effect.

Nygaard, an attorney, has represented victimized investors for more than two decades. “I cannot tell you how I wish the regulators were not the foxes guarding the chicken coop,” she said.

Virtually every brokerage customer in this country signs away the right to sue – no matter how egregious the violation. Even if a broker outright steals from a customer, the investor can’t file suit. Instead, the charges must be settled through arbitration with arbitrators selected by the securities industry. The system has been that way for the last decade.

This policy bothers New York State Attorney General Dennis Vacco. “The waiver of your rights is certainly something that is deeply disturbing to me and I think it has, in some fashion, shielded the bad actor for some time. I think it’s something we have to take a look at,” said Vacco.

Critics have long suggested that an independent body that is not part of the industry should arbitrate disputes. Some suggest an impartial, outside group like the American Arbitration Association.

“The NASD, which, of course, is paid for by fees assessed to brokerage firms therefore has little independence…It’s the securities ‘business.’ Until we get a non-biased watchdog regulatory organization or the SEC steps in and changes the way the NASD functions or replaces it, we will have a problem,” said Nygaard.

Regulators deny those allegations and research indicates that, in arbitration, customers have won more than 58 percent of all arbitrations.


In addition to concerns about self-policing, critics charge that the securities industry metes out punishments that are too lenient.

Joe Borg directs the Alabama Securities Commission and is considered a national leader in microcap stock fraud reform. He says the securities industry needs more criminal punishment. “You know, it’s a shame, but let’s face it, if all I do is fine somebody and they steal $5 million and I take $3 million away, that still leaves $2 million. It’s a cost of doing business,” said Borg.

The NASD says it has no power to prosecute criminally. All it can do is fine and censure. It can, and does, refer the worst offenders to federal, state and local prosecutors. But across the industry many agree that those agencies are overwhelmed.

“The size of the industry and the growth in the industry and numbers of new less-sophisticated investors are really straining the system and the systems just can’t keep pace,” said Neal Sullivan of the North American Securities Administrators Association.

Radiologist Clark Gardner may have been a victim of an overtaxed securities regulatory system. He claims that a broker named Sam Weber, formerly of the Oakmont Stratton firm, defrauded him. Arbitrators awarded Gardner $184,000. (Weber declined CNBC’s request for an interview.)

“We sued Mr. Weber in October 1997 and we barred Mr. Weber within the last two months,” said Barry Goldsmith the head of the NASD’s regulatory arm.

Attorney Philip Aidikoff represented Gardner. Aidikoff says his client was victimized mostly after regulators had taken action.

“Dr. Gardner was defrauded primarily after Stratton Oakmont was under a permanent injunction by the U.S. District Court in Washington D.C. not to engage in this activity…[The firm was] violating an SEC complaint that resulted in a permanent injunction issued by the District Court in February 1995. Clark Gardner lost the majority of his money between February 1995 and April 1995,” said Aidikoff.

He says the NASD finally managed to hear Gardner’s case – two years later.