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It is hard to know who to trust on Wall Street these days. Each month, it seems, another scandal rocks the securities industry. First, it was how investment banks handled initial public offerings of once-darling, now largely defunct dot-coms. Hundreds of lawsuits allege the banks manipulated trades to artificially ratchet up stock prices. Then, it was the collapse of Enron Corp. and the discovery that its accounting statements were not much better than pure fantasy. Most recently, research practices are under attack. Merrill Lynch & Co. just agreed to pay a $100 million fine to settle claims that it misled investors with overly bullish analyst reports on its banking clients, a practice that many say is systemic in the industry. At least you can still trust the regulators, right? Wrong! says Edward Siedle, a former lawyer for the Securities and Exchange Commission. He claims the National Association of Securities Dealers, the industry’s front-line regulator, is also guilty of pulling the wool over the eyes of the investing public. “Investors should never think the NASD is their friend,” Siedle said. Siedle’s cause for complaint is the NASD’s public disclosure program, which provides disciplinary information on its members. He says that, unlike what one may think, only a fraction of disciplinary events are actually disclosed. An NASD spokeswoman declined to comment for this article, citing a lawsuit brought by Siedle claiming that the group tried to block publication of a report he has written that criticizes its disclosure practices. Amal Aly, a lawyer with the Securities Industry Association, a New York trade group, defended the program. “The system provides an exceptional amount of information, more so than for any other industry,” she said. “Frankly, I’d love to know as much about my doctor, lawyer or accountant as you can know about a broker.” But Siedle is not alone in his view. “Securities lawyers know the system is really untrustworthy,” said Jenice L. Malecki, a New York lawyer who represents both claimants and defendants. “But if you don’t know any better, you’d think that it’s all there, and it’s not.” The problem lies with the conflicting responsibilities of the NASD, Siedle said. As a regulator, it is responsible for day-to-day policing and protecting the investing public. (The SEC, in turn, oversees the NASD.) At the same time, as the trade group for the industry, the NASD exists to promote the interests of its members, he said. Siedle said this conflict of interest permeates virtually every aspect of the NASD’s regulatory structure, at the expense of the investing public. But the problem is most glaringly apparent, he said, in the public disclosure program. “The NASD has created so many loopholes that only a small minority of disclosable events actually get reported,” he said. “It fails completely as a device for investor protection and education.” Siedle, who also conducts private investigations of suspected fraud cases in the brokerage industry, has gathered some compelling evidence to back up his claim. In his report, he details the extent to which the NASD omits information from its disclosure program. On their face, the findings are alarming and not very flattering to the NASD. For instance, Siedle found that for four large brokerage houses, the organization disclosed about 750 regulatory actions total, or less than a third of the nearly 2,400 disciplinary events reported for the same four firms by state securities regulators. The disparity stems largely from a byzantine system by which the NASD sorts the data submitted by each brokerage firm to the Central Registration Depository (CRD), which includes regulatory actions and “customer dispute information,” such as complaints, arbitration claims and court filings. Both the NASD and the states have access to the data and in turn determine what information to disclose to the public. The states are generous, disclosing everything. But they are slow — reports can take months to produce. “You really have to goose them,” said David E. Robbins, a securities lawyer with New York’s Kaufmann, Feiner, Yamin, Gildin & Robbins. Data from the CRD itself is only available through subpoena to the NASD. Thus, for most purposes, the NASD’s public disclosure program is it. But unlike the states, the NASD limits itself to so-called reportable events, which make up only a small portion of the CRD’s database. An event is considered non-reportable for any number of esoteric reasons, Siedle explained, such as being out of date, or reported in error, or if “some change occurred in either the disposition of the underlying event after it was reported or in the question on the form that elicited the information.” How the NASD reports arbitrations — the standard forum for a dispute between a customer and his broker — can also put a finer gloss on a brokerage firm’s track record. Basically, “only the final decisions of an arbitration panel are reported,” Siedle said. Since most cases are settled, only about 15 percent, or some 9,000 of the 64,000 arbitrations filed since 1990, show up in the NASD’s firm listings. Customer complaints against firms, which Siedle estimated number in the millions, do not get disclosed at all. The brokerage industry says the line-drawing makes sense. “The question is what is meaningful information,” said the SIA’s Aly. “It’s not meant to be a vehicle for a fishing expedition.” She added that much of the states’ data was duplicative, since a single event can fall into more than one category. Much more information is officially available on individual brokers, including written customer complaints, settlements and arbitrations, which is where the focus should be, Aly said. “You do business with a broker,” she said, “and they move from firm to firm all the time.” But another problem crops up with complaints against brokers, stemming from the NASD’s practice of relying on the brokerage firms themselves to report events. Firms are given 30 days to report complaints to the CRD. Simply put, “despite the firms’ obligation to report, they don’t do it,” Siedle said. “They’ll delay and delay or use every possible interpretation to argue against disclosure. If they can quietly settle a complaint, they won’t disclose at all.” Malecki, the New York securities lawyer, agreed. “I can’t tell you how many times I’ve gone to a hearing and the brokerage firm will say, ‘we’re clean and our broker is clean,’ and then I find out from other lawyers that several other complaints have been filed.” “I’m in the middle of an arbitration right now in which my own complaint, filed two years ago, isn’t listed,” she said. Malecki said the problem puts a real burden on a complainant, who is forced to conduct an independent investigation of previous complaints against a broker. The NASD is authorized to enforce the firms’ duty to disclose and some lawyers said it was ratcheting up its efforts on this front. Siedle brushed such assertions aside. “Every now and then, they’ll take a look at a broker’s records but they don’t really do anything,” he said. The system does have its fans. “It’s a great first step,” said Kaufmann Feiner’s Robbins. He added that until a few years ago, “you couldn’t get any information at all about brokers.” Yet even Robbins admitted that he did not rely on the NASD Web site. “The state provides a lot more information,” he said. Unlike the states’ disclosure programs, the NASD limits itself to so-called reportable events, which make up only a small portion of the CRD’s database.

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