Putting an End to Broker Cockroaching

In my 2012 book, Backstage Wall Street, I spend about a quarter of my word count talking about the stuff I’d seen at some of the brokerage firms I’d worked at. I even reprinted the scripts they were teaching us, in the hopes that the reader would be better prepared for the next incoming cold call (yes, they still cold call).

Anyway, in a Wall Street Journal story today about some of the worst brokers from the Wolf of Wall Street era, I came across an amazing stat that defies logic (emphasis mine):

Stratton Oakmont, a Long Island penny-stock-pushing firm that cost investors more than $200 million, was closed by regulators more than 18 years ago. But 166 of its 904 brokers were still in the industry last year, according to an analysis by the Journal of about 500,000 brokers’ records.

Many of the former Stratton brokers seem drawn to troubled employers, moving from one problem firm to another, a practice known in the industry as “cockroaching.”

At least 39 of them, or almost one in four, went on to work for one or more other brokerages expelled by Finra from 2005 to 2012, the Journal’s analysis found. That is more than 25 times the rate for the typical broker in the analysis.

It’s amazing.

To be clear, not everyone who’s worked at a firm with a bad reputation deserves to be painted with that brush for the rest of their lives (what I’ve referred to as the industry’s Jean Valjean problem). When you’re a young person and you get a job in the business, you cannot possibly know for sure what you’re getting involved with. You don’t know what the owners of the firm are really doing either. Think about how many normal, innocent rank-and-file brokers and traders have “Bernard L. Madoff Securities” on their resume for the rest of their lives…

But cockroaching is a real issue.

The good news is, I can clean this problem up in 30 seconds: Go after the clearing firms.

Every bad broker who preys on the public has the same enabling tool in common – the legitimate clearing firm that allows him (it’s almost always a him) to become legitimized in the eyes of the mark. “Don’t worry, your money will be held at Bear Stearns, one of the largest financial institutions in the world!” went the old scripts. It was the perceived connection to Bear or Fidelity’s National Financial Services or Pershing or Oppenheimer that enabled a lot of the scumbaggery of these brokers and their firms.

The bucket shops were able to make their victims feel comfortable opening an account with them because there was a reputable third party in the mix – despite the fact that the third party had nothing to do with the client other than enforcing margin calls and collecting a piece of every transaction ticket. Clearing firms were not doing the compliance at the shops, nor were they tasked with this.

If they were more responsible for the actions of their clearing firm customers, there would be less bad actors, plain and simple. If you want to get the bad guys out of the business, make the clearing firms responsible for which brokers they’ll allow to be clearing correspondents. There’s precedent here – as soon as Bear was nailed for enabling some of the IPO chop shops of the 1990’s, they stopped.

It’s amazing how that happens.


Watchdog’s Hunt Is Short on ‘Wolves’ (Wall Street Journal)


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