Owen Cheevers, 51, was head of high-yield bond research at the Bank of Montreal in New York when he wrote a cautionary report on companies in the radio industry. An experienced analyst, Cheevers was asked by investment bankers at his firm to make his report more glowing. He refused and pleaded with the bank's compliance department to intervene. He received no help. Two months later he was fired.
Joseph Mulder, 59, was a brokerage firm auditor with decades of experience, including identifying two money launderers who later went to prison. But soon after Mulder alerted his superiors to what he said were serious violations by a broker at Donaldson Lufkin & Jenrette, Mulder was fired. More than a decade later, the broker in question was accused by regulators of stealing US$3.2 million from clients.
It has become a well-worn refrain after scandals at Enron and other companies that if people want to deceive accountants, employees or shareholders, it is awfully hard to stop them.
But even though both the institutions involved deny wrongdoing in the terminations, the stories of these two men, although very different, raise an even more troubling proposition: what if the people who want to do the right thing can get no support, especially from executives hired to make sure regulations are followed? What if people like these are in fact punished for speaking out?
Federal regulators are asking such questions as they undertake a series of examinations of brokerage firm compliance departments. After several prominent cases in which illegal activities of brokers slid past compliance departments, the Securities and Exchange Commission is scrutinizing compliance at firms from the top down, not the bottom up, as has been its custom.
The new focus comes not a moment too soon. Investors' faith in the financial markets has been shaken by failures in safeguards intended to protect the public. As a self-regulated industry, the brokerage business employs cops inside its walls as a first line of defense for investors.
But regulators and investors are wondering if those cops are encouraged to identify wrongdoing by an individual or group that produces significant revenues.
"If you are a revenue producer or your importance to revenue production exceeds that of the compliance component that is dealing with you, it's very likely that compliance is going to be secondary," said Jeffrey L. Liddle, a lawyer at Liddle & Robinson in New York, who often represents brokerage employees in wrongful termination cases and who represents Cheevers.
Compliance professionals on Wall Street number about 150,000, according to the National Association of Securities Dealers. These people are charged with scrutinizing the activities of 650,000 securities representatives in 90,000 branch offices at 5,500 firms.
An especially embarrassing breakdown came to light earlier this year when Frank Gruttadauria, a branch manager and producing broker at Lehman Brothers in Cleveland, was sued by the SEC, which accused him of stealing more than US$40 million from 50 clients over six years.
But equally disturbing is that compliance executives at major firms under investigation for conflicts of interest were apparently unable or unwilling to prevent investment banking executives, eager to drum up new offerings with upbeat research reports, from interfering with analysts.
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