The Past Is Prologue: Lessons from the Stock-Parking Events of the 1980s
Cagan, Penny, The RMA Journal
History is rife with fraud-based operational risk events--trading frauds, pyramid schemes, regulatory investigations, and securities laws violations--and their attendant lessons learned. We might think a situation in 2005 is completely different from one in 1985, but the underlying issues never really change.
Market practice issues are receiving a whole new level of attention from regulators, shareholders, and the media. In many instances, these issues are not clear-cut violations of securities laws, yet they have still prompted legislative action. The focus is on how financial firms do business and the type of information they share with their clients.
Market practice events can be difficult, but not impossible, to plan for. To some extent, they can be predicted by examining the things that regulators and shareholders have focused on in the past. For instance, market timing in the asset management industry, research analyst "Chinese Wall" breaches, and the payment of contingent commissions all point to conflicts of interest. So risk management staffs should be on the alert for any instances and permutations of conflict of interest.
A $6-billion industry settlement, such as the one made to WorldCom bondholders, is something no financial institution ever wants to face. Postmortem analysis of negative events that have befallen other entities can be a powerful tool for avoiding problems within one's own institution (Figure 1). Certainly, it's a better approach than waiting to perform such an analysis after your own institution has attracted the attention of regulators and shareholders.
Let's examine an event from the late 1980s--the conviction of the now deceased Boyd Jefferies, the founder of Jefferies and Company, on charges of securities fraud. It's easy to say that the 1980s' corporate raids and hostile takeovers, insider trading, stock parking, and manipulation of the high-yield market are not relevant to the present. Michael Douglas in the movie Wall Street showed us the black-and-white nature of greed, good guys, and bad guys. Weren't the 1980s inherently different from our own time? The answer is both yes and no.
The 1980s were inherently different from our own time, but there were control, management, and operational failings within Jefferies & Co, including behaviors that straddled the line between standard market practices and illegality.
This was not a case of a bad guy doing wrong. Boyd Jefferies was a highly respected industry insider who overlooked securities regulations governing stock parking that the regulators themselves were not enforcing. Credited with inventing the "third market," Jefferies was characterized in his August 2001 obituary as "a leader and innovator in the securities industry" and "one of the first to recognize the institutionalization of the equity markets."
The problems experienced by Jefferies & Co. show how a corporate culture can suffer from a lack of checks and balances and an over-concentration of power with-in a single individual. They also suggest the importance of balancing service to clients, fair treatment of all classes of investors, and corporate values and ethics. What is remarkable is how much can be learned from a single institution.
The Stock-Parking Events of the 1980s
Jefferies was fined in 1989 over stock-parking allegations and banned from the securities industry. Considered a form of market manipulation, stock parking--the practice of holding stocks in other accounts to hide their true ownership--artificially raises the price of stocks, benefiting large investors at the expense of smaller, retail ones.
There was debate at the time of the Jefferies case whether parking stock was a gray-area issue--a byproduct of electronic stock trading--or an outright felony. This is not unlike some of the discussions around the propriety and legality of market timing, late trading, and self-dealing in the asset management industry. …