SEC Rebuked by Judge for Ignoring the Antics of FINRA Investor Education Fund

07/26/12

On Wednesday, U.S. District Judge William Pauley rebuked the SEC for a “lack of oversight” and “indifference” towards how a FINRA fund was managing money.


The FINRA Investor Education Foundation had been created in 2003 as part of a settlement with banks accused of publishing biased analyst research. The roughly $1.5 billion regulatory accord included Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co and some others. However, the SEC and the foundation is accused of noncompliance for the last seven years with 2005 directives that annual audits be filed, and that an accounting of receipts and expenses in “reasonable detail” be provided. However, the SEC continues to turn a blind eye to the expenses of the FINRA foundation and the foundation in turn does not file annual audits.

The creation of the fund, primarily engineered by Eliot Spitzer, the Attorney General of New York was meant to end the scandal over the issuance of positive research by analysts helping their employers win investment-banking business. But the fund, created to punish financial fraud, continues to engage in lavish and unaccounted for expenditure.

For instance, the judge expressed surprise and said “something arguably is amiss” about a full-day seminar for 130 attendees held by the foundation in Wheeling, West Virginia. According to going costs at the locality, the bill of $57,000 was “more than twice the price of an average wedding.”

The judge was exasperated to find a November 2011 financial fraud conference co-sponsored by the foundation held at Washington D.C.’s Sofitel hotel. Pauley wrote in his opinion, “It is concerning that an entity selected to disburse millions of dollars for investor education recovered by an agency of the United States government would choose to hold a conference at a luxury hotel in Washington, D.C., rather than at the SEC's headquarters or FINRA's offices in the same city.”

The judge could not agree with a two-year grant of $91,500 made to the Genesee District Library in Flint, Michigan, allegedly to teach “spending, sharing, and saving” to children between the ages of two to five. The judge wrote in his order,
“While there may be benefits to starting investor education early, toddlers seem beyond the pale.”

While noting that some of the funds were being put to use, the judge held the SEC at fault for tolerating the “opaque” and wasteful expenditure by the FINRA Investor Education Foundation and the “inadequacies” in its audits.