Ex-Jefferies Arrest Shows Continued Transparency Problems in Market

Recently, we published a blog entitled Former Jefferies & Co. Executive Charged with Defrauding Investors. It detailed a former executive of Jefferies & Co. and his fraudulent investment scheme centered on selling mortgage-backed securities with falsely inflated prices and fictional sellers. This case illustrates that investors far too often are kept in the dark about the true risks of investing. With regard to the Jefferies & Co.’s fraud, the victims had no reasonable way to determine the accurate prices of the mortgage-backed investments. This is not an isolated incident. It is a symptom of a larger problem. According to Marilyn Cohen, founder of Envision Capital Management Inc. in Los Angeles, “Wall Street’s mortgage investors remain largely at the mercy of middlemen, a decade after regulators forced brokers of other types of bonds to publish data electronically on a system called TRACE.” TRACE does not provide data on all types of securities, so investors are dependent on dealers who often mislead them on securities’ prices and quotes.

In 2002, FINRA started a program called Trade Reporting and Compliance Engine (TRACE). It is a system that provides online pricing data on corporate bond trading. The problem is that TRACE does not capture the entire bond market. According to Steve Joachim, FINRA’s executive vice president of transparency services, TRACE is currently starting to “provide trade data on government-backed mortgage bonds but, it’s still analyzing how to roll out the system in the $1 trillion market for so-called private label debt.”

Transparency is the key for investors and in the past, transparency has only increased trading and investor confidence. Joseph Fichera, CEO of a New York-based financial advisory firm echoed this in stating that, “in every other market we’ve seen since they’ve started bringing transparency, it has improved trading.” Fichera is also a supporter of expanding the TRACE system.