Saturday, April 22, 2017

Sorry, you don’t get a toy with that “Super Sized” FINRA fine

By Jack J. Kelly

We have a little work-hack for our regulatory friends.

Often times the media, regulators, politicians and law enforcement look at the CEO and executive management when companies are found to have committed fraudulent activities.  The theory is that the tone is set at the top and everyone follows their lead.   For example, US senators viciously attacked Wells Fargo (13)CEO John Stumpf  over the banks’ widespread practice of opening fraudulent customer accounts. “It’s gutless leadership,” senator Elizabeth Warren told Stumpf. “This is about accountability. You should resign.”

A cottage industry of researchers have attempted to apply CEO metrics from pronoun usage (It’s All about Me: Narcissistic Chief Executive Officers and Their Effects on Company Strategy and Performance) to their personal finance management (Suspect CEOs, Unethical Culture, and Corporate Misbehavior – Harvard Law Study)  to determine which leaders are likely to encourage deception on their watch.

Now, a new report concludes that the way to find out if a company is engaging in inappropriate behavior  is pretty simple.  According to Quartz, an online publication of The Atlantic magazine, researchers from the Hong Kong Polytechnic University and George Washington University studied feedback from  1.1 million employees of some 4,000 companies left on the job site GlassDoor between 2008 and 2015, and found that the lower these employees rated a firm’s “culture and values,” and their own job satisfaction, the more likely the company was to be the subject of a Securities and Exchange Commission fraud investigation or a securities fraud class action lawsuit.

The research gets better. The report suggests that job satisfaction and company rankings by its employees significantly drop before the fraud occurs.  It makes sense, managers push employees to achieve unrealistic targets, people feel the pressure and stress, some cross the ethical boundaries, and the result is a disaffected workforce that turns to outlets such as Glassdoor to vent their anger and frustrations. (14)Perhaps regulators should have checked the Facebook pages and Twitter feeds of  Volkswagen employees.  Today, a judge ordered Volkswagen to pay a $2.8 billion criminal penalty in the United States for cheating and perpetrating a “massive fraud” on diesel emissions tests.

Volkswagen pleaded guilty to conspiracy and obstruction of justice in a bold scheme involving nearly 600,000 diesel cars in the U.S. The German carmaker created a program in their automobiles to turn on pollution controls during testing and off while on the road.

According to Assistant US Attorney, John Neal, “It was an intentional effort on the part of a major corporation to evade U.S. law and lie to U.S. regulators”.

Separately, VW is paying $1.5 billion in a civil case, mostly to settle allegations brought by U.S. environmental regulators, and spending $11 billion to buy back cars and offer other compensation.

Seven employees have also been charged with crimes in the U.S., but five are in Germany and are unlikely to be extradited.

The Bank of England Governor, Mark Carney, didn’t get the VW memo.  He recently said that regulators must end an “excessive reliance” on mega-fines for banks. Speaking at the Institute of International Finance’s Washington Policy Summit, Carney said a greater emphasis should be put on individual responsibility for bankers.


“Authorities cannot and should not try to legislate for every circumstance, watch every transaction, or anticipate every market innovation. So while fines and sanctions have roles in deterring misconduct, they will not, on their own, bring about the cultural change we need.”

He added: “We must move from an excessive reliance on punitive, ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals, and ultimately a more solid grounding in improved firm culture.”

FINRA is certainly not on team Carney.  Last year the self-regulatory body for the financial industry set a record for collecting fines from member firms. (15)A New York law firm, Eversheds Sutherland,  analyzed the regulator’s 2016 enforcement actions and found that while the total number of cases the industry regulator brought last year dipped slightly from 2015, the monetary fines it assessed nearly doubled to $176 million.

That figure was a record for FINRA penalties, and amounted to a 529% increase since 2008, according to the law firm’s  analysis.

The dollars started rolling into FINRA’s coffers as the organization became a proponent of “super-sized” penalties of $1 million or more — in some cases, much more, such as the $20 million fine the regulator levied against MetLife Securities. I know you want to ask; no, the offending brokerage firms did not receive a toy or happy meal with their “super sized” fines.

There is talk that FINRA will get even more aggressive  given the possible enforcement void at the SEC under the new administration which has made deregulation a centerpiece of its domestic agenda.

Have a happy weekend!

The post Sorry, you don’t get a toy with that “Super Sized” FINRA fine appeared first on Compliancex.

April 22, 2017 at 01:39AM

from The Compliance Exchange