) telecom analyst Jack Grubman was banned in December, and four former Datek Online Holdings Corp. execs were kicked out in January.
While it may sound like Wall Street's version of excommunication, a lifetime ban doesn't always spell the end of a financial-services career, as it should. Indeed, people often flourish in a closely related field because the bans apply to just one sliver of financial services. So moving from a brokerage firm to, say, selling investment advice through an insurance firm isn't that hard. And under the rules, that's okay, as long as the person stays out of trouble in the new field.
Consider Frederick H. Joseph, CEO of Drexel Burnham Lambert, the junk-bond house that was embroiled in an insider-trading scandal in 1989. He was barred from running a securities firm for life but later returned to the industry. After a stint as a consultant, he joined ING Barings as a managing director, specializing in corporate finance and merger advice. In May, 2001, he became the co-head of investment banking for Morgan Joseph & Co., a New York boutique. It's a matter of nuance: Joseph was barred from running a securities firm but not from having a managing position at one. A spokesman for him declined to comment.
The best-known figure in that scandal, Drexel trader Michael Milken, couldn't manage the same balancing act. He was handed jail time for securities fraud in 1990 and banned from the industry in 1991. Afterward, the government claimed he was violating the ban by providing advice on deals to Rupert Murdoch, Ronald O. Perelman, and others. He settled for $47 million, without admitting guilt. He hasn't been directly involved with the industry since. Last summer, a company he helped fund, educational-toy outfit Leapfrog, went public in the most successful offering of the year.
Do securities violators deserve a second chance? Some say yes. "Generally, they're rehabilitated by their ordeal," says Herbert J. Hoelter, head of the National Center on Institutions & Alternatives, a prison consultancy. That's particularly true of high-profile cases, he says; the negative publicity and tarnished reputations snap them back to the straight and narrow.
But the NASD bans between 400 and 500 people a year, and penitence and rehabilitation aren't always the outcome. "Most of the people that we prosecute have a long and storied history of reprimands," says a Justice Dept. prosecutor who specializes in securities fraud. "If brokers lose their license, they often drift down the market, from a semi-respectable brokerage to a bucket shop. There are not enough resources in the world to babysit all these people forever."
Indeed, a patchwork system of regulation hampers any real effort to keep tabs on them. Two years after a person stops being a registered securities representative, the records are closed to the public because the NASD no longer has jurisdiction. Investment advisers are regulated by the Securities & Exchange Commission and the states, not the NASD. And the insurance and securities industries aren't obliged to tell each other when they toss a violator out.
To tackle the problem, Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, is pushing a "coordinated antifraud computer system" that would allow regulators to share information. The House passed the bill in November, but it died in the Senate. He wants to revive the idea this year.
Something like it is needed, because the current balkanization lets some career violators fall through the cracks. Martin Frankel was banned from securities trading in 1992. But he quietly slipped into the insurance business, where state licenses are sometimes doled out without a background check with other regulators. Frankel went on to allegedly bilk $3 billion from investors, including the Vatican Bank, before he was caught in early 2001. He faces 24 counts of securities fraud and racketeering, and is scheduled to be sentenced in May. Maybe then he'll truly be banned for life. By Heather Timmons
With Mike McNamee in Washington