Monday, September 16, 2019

Panelists reflect on NASAA’s role in taking on Prudential at annual conference

By Jay Fishman, J.D.

The North American Securities Administrators Association, Inc. (NASAA) celebrated its 100th year as the states’ investor protecting umbrella organization by, among other things, relaying an egregious case of fraud from the late 1980s/early 1990s involving Prudential that ultimately propelled NASAA into becoming the most prominent “local cop on the beat” for protecting investors. The story serves as a reminder of NASAA’s role in combatting fraud, as it has more recently through a coordinated cryptocurrency crackdown.

New Jersey’s Securities Bureau Chief, Christopher Gerold, became NASAA’s new President for 2019-2020, and NASAA revamped its website to make it more investor-friendly.

Aside from the conference. Important NASAA events surrounding the conference that occurred in August/September 2019 included the following:
  • On August 7, NASAA updated its implementation of a coordinated cryptocurrency crackdown; 
  • On September 8, NASAA’s state investment adviser examinations uncovered rising cryptocurrency deficiencies; and
  • On September 11, the last day of the conference NASAA’s 2018-2019 President and Vermont’s Financial Regulation Commissioner Michael Pieciak testified before Congress’s House Subcommittee on Capital Markets, Securities, and Investment, urging that no further action be taken to expand the nation’s private securities markets until a more careful study of the impact on public markets and investor protection can be conducted. Pieciak stated that “NASAA is concerned that our current regulatory regime has gone too far in favoring private capital raising over public markets.” 
It therefore appears that new President Gerold’s concerns for 2019-2020 will involve, among other matters, cryptocurrency, the need to not expand U.S. private securities markets, and the impact that Regulation Best Interest will have on state securities regulation once the SEC rule takes effect in June 2020.

Regarding cryptocurrency and fintech, on October 29, 2019, NASAA will hold a fintech and cybersecurity symposium at the Spire Event Center in Washington, D.C., or virtually in your home or office. Find more details on NASAA’s website.

David and Goliath story. NASAA’s panel celebrating its 100-year anniversary, entitled “True David and Goliath Story: How State Securities Regulators Tackled a Wall Street Giant,” involved how NASAA brought down Prudential Securities Inc., forcing it to initially pay $330 million in a 1994 settlement and then much more money following a late 1980s scheme to swindle nearly 340,000 investors nationwide. The four panelists who were the most active advocates for the investors at the time opined that from its New York headquarters on Wall Street, Prudential was positively evil because it sent many brokers across the country with marketing materials falsely promoting Prudential’s limited partnership investments as “guaranteed” and “safe.” Many of the brokers were new to the job and had no idea they were selling the investors totally fraudulent products. Furthermore, throughout the time period NASAA was investigating the case, Prudential’s executives continuously denied any wrong doing and continued the scheme to wipe out investors’ entire life savings. Moreover, Prudential threatened and carried out the threat to destroy the working lives of those brokers who said they were going to report the fraud to the SEC and NASAA. Panelist Kurt Eichenwald, a journalist for the New York Times, who tenaciously worked around the clock to uncover the scheme, rose to prominence as a writer of corporate financial fraud books, including “The Informant” which became a 2009 motion picture.

He and the other three panelists—Matthew Neubert, the Arizona Corporate Commission’s Executive Director, and Nancy Smith and Wayne Klein who were New Mexico’s and Idaho’s Securities Directors at the time of the crime—all stated that this case made NASAA the prominent state investor protector because in the late 1980s, the SEC was only investigating matters where the victims were corporations, not individual retail investors, and did not, therefore, take a proactive role in this investigation.

When the story began, various state securities commissioners started getting complaints from a handful of their respective resident investors about the worthlessness of purchased Prudential limited partnership products. But later, when the commissioners realized this was a nationwide fraud, and that they individually were not equipped financially or staff-wise to go after Prudential, and that the SEC was not sufficiently addressing the issue, they reached out to NASAA to form a collective task force. In 1994, Prudential continued to deny any wrongdoing but agreed to a $330 million settlement which was immediately used to begin compensating the unfortunate investors. But NASAA said $330 million was not enough money to financially restore all of the 340,000 victims. As a result, for the first time ever, a company—Prudential—agreed to pay an open-ended amount of money which ultimately became the largest-ever settlement paid out at the time, $1.4 billion.