The Securities Bazaar: Destabilizing the U.S. Markets?

by Dr. Rachel Ehrenfeld and Alyssa A. Lappen
Human Events | Jan. 23, 2008

All presidential candidates promise to fix our economy, but no one discusses the need to better safeguard our financial markets. The Committee on Foreign Investment in the U.S. (CFIUS), approved Bourse Dubai’s purchase of 20% of the America’s largest electronic exchange, New York-based Nasdaq, on Dec. 31, 2007.

This may soon give Dubai access to the troubled Boston Stock Exchange (BSE), through Nasdaq’s proposed BSE acquisition, which is now pending before the Securities and Exchange Commission (SEC).

“Foreign ownership of our capital markets may make it more difficult for shareholders to obtain information about the inner workings of the stock market,” notes Brent Baker, a former SEC Special Counsel. Nasdaq, like most U.S. exchanges, 5,100 brokerage houses and registered securities representatives, is regulated by the Washington, D.C.-based Financial Industry Regulatory Authority (FINRA). The Philadelphia Stock Exchange (PHLX), however, and the problematic BSE with its rather murky track record of non-compliance, retained their independent self-regulatory organization (SRO) status. Now, Nasdaq plans to purchase both.

“What do the regulators currently do to monitor the BSE, which up until now had been sanctioned several times for failure to regulate itself?” Baker wonders. Indeed, the SEC sanctioned the BSE in 1999 and 2007 for illegal practices. The September 5, 2007 sanction was for the BSE failure to enforce its own rules or comply with a 1999 SEC directive, and for illegal trading activities - including forward trading, from 1999 through 2004. On the same day, the U.S. District Court for the District of Massachusetts ordered former BSE President James Crofwell, to pay a $75,000 penalty “for aiding and abetting the Exchange’s failure to enforce its rules.”

The BSE history raises especially thorny questions about market manipulation and the possibility that unsupervised foreigner investors and securities firms may borrow or manipulate U.S. company stocks, adversely affecting domestic markets and further eroding investor confidence.

Since Bourse Dubai promotes its status as the world’s first and leading Islamic securities exchange, its influence could affect the listings on Nasdaq. Dubai might leverage the “sovereign immunity” of both the BSE and PHLX to list and delist companies on Nasdaq. SEC rules in that case could be irrelevant, and the effects on the U.S. capital markets and economy could be enormous. For example, pharmaceutical companies producing Viagra and contraceptives could be delisted, as could companies based in or doing business with Israel.

“This is a slippery slope,” says Baker, “if the SEC approves the Nasdaq’s purchase of the BSE and PHLX, and they both keep their SRO licenses.”

American regulators “believe in honest and complete disclosure and people invest with the understanding that they will make or loose money depending on their judgment, the markets and the economy,” says John W. Moscow, former Assistant District Attorney and Deputy Chief of Investigations under New York District Attorney Robert Morgenthau.

“In England,” where Dubai will shortly acquire Nasdaq’s 28% stake in the London Stock Exchange, he says, “the governing philosophy is that if God did not want [investors] shorn, he would not have made them sheep.”

The integrity of regulations in Dubai is a more important problem. To attract business, “they are willing to omit the costs of regulation and compliance that exist elsewhere.” Dubai traders deal in arms, women, drugs, and money laundering. “As long as [traders] deliver the money, and so long as the market does what it is supposed to do, it is sufficient,” says Moscow.

The U.S. markets are already in big trouble, says Moscow, given the high trading volume between U.S. and foreign exchanges through shadow accounts to the Federal Reserve Board’s Depository Trust Corporation (DTC), Euroclear and other clearing systems. Nasdaq’s acquisition of the BSE only worsens the problem.

The same owner, through many different foreign corporate entities, can buy majority stakes in many companies and manipulate the market. With no regulation of these trades, no one would be the wiser. “The bad guys are going to eat us alive,” Moscow says.

Indeed, SEC chairman Christopher Cox has now proposed allowing foreign exchanges to sell directly to U.S. investors through U.S.-based brokerage firms. Exchanges with “comparable” regulatory oversight would no longer need to register with the SEC, under the new proposal. But of course, having comparable regulations alone in no way ensures that foreign exchanges enforce their regulations with the same rigor as the SEC.

The U.S. markets remain the most highly and efficiently regulated in the world, according to Moscow. Clearly, that is still not good enough.

— Rachel Ehrenfeld, author of “Funding Evil,” is director of the American Center of Democracy, and a member of the board of the Committee for the Present Danger. Alyssa A. Lappen, a senior fellow at ACD, is a former editor of Institutional Investor, Working Woman , Corporate Finance and Forbes. Her website is http://www.alyssaalappen.org.

Comments

[Aaron Eitan Meyer]

Nice hatchet job, spammer.

[Ilan Weinglass]

I have deleted some comments from this and other posts. We at the TF Blog welcome honest debate. But repeatedly posting the same rambling comment on four different articles is unacceptable.

[Aaron Eitan Meyer]

Now my lonely comment makes no sense...

Turning to the subject of the article. I've had occasion to work on an SEC filing, and it was torturous, repetitive, and excruciatingly dull. For all of that, however, the fact remains that the documents available through the SEC's EDGAR system are an invaluable tool for anyone interested in a corporation.

Talk about 'comparable' regulatory oversight might sound good, odds are that the term comparable would be forced to cover a significant range in practice. Considering that places such as Dubai are involved, that range of oversight should be extremely worrying.

[Alfred O. Forsberg]

JP Morgan Chase along with Lexon Insurance company and Always
Consulting Inc. have been allowing investors money to be diverted to
Afganistan, Al Quada, and the Columbian drug cartels. JP Morgan
never opened segregated accounts (to this date) and Lexon insured
ficticious gas and oil well projects.
They operated in collusion with each other, knowingly and willingly
participating in a racketeering scheme to defraud innocent Americans
out of their life savings.
They are all complicit in treason, murder, perjury, armed robbery and
much more.
You can visit http://www.banking-fraud.com to get more details. This site
is updated twice a day. We will be including court records, telephone
numbers, email addresses, of all those in and out of government that
either knew or still now do know of these crimes.
Apparently they are being protected by various government groups, and
a slow moving court system that must take partial responsibility for the
ongoing damage that people like Bruce Griffith, Michael Yorba, DW
Lewis, Thomas A. Markham, et al have been causing to the American
way of life.
JP Morgan Chase and Lexon have a long history of this type of thing and
have - in the past - gotten away with a slap on the wrist. Our
investigations have found 4200 such scams in Texas alone - currently.
We have 5 other cases which will name JP Morgan and Lexon in gas and
oil fraud...in addition to '06 civ.13488 - Robinson/Smith/Briaent in the
Southern district of New York.