Illegal Conduct Is Critical to the Survival of the Securities Industry

How ironic that the industry that wants us to trust it with our funds can't manage its own money and is rife with illegal conduct.
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It was a typical week on Wall Street.

Peregrine Financial Group collapsed and filed for bankruptcy. Regulators are searching for $200 million in unaccounted for customer assets. The founder of Peregrine, apparently attempted suicide and is recovering in an Iowa hospital.

Ex-Wall Street trader Michael Marin died in a Phoenix courtroom after apparently taking pills laced with cyanide. Mr. Marin was a banker, art collector and former millionaire. He made his money working in finance and as a Yale educated lawyer. He was allegedly broke and unable to pay the mortgage. Mr. Marin had been convicted of arson for setting his $3.5 million mansion on fire. He was facing seven to 21 years in prison.

A Georgia banker, Aubrey Lee Price, disappeared after boarding a ferry in Key West, FL. The FBI and federal prosecutors believe Price embezzled $17 million in bank funds. Whether he is dead or just faking suicide is anyone's guess.

JP Morgan reported that the losses caused by its London "whale" trader had increased to $5.8 billion. That is almost three times higher than original estimates.

Speaking of "whales", the scandal over the manipulation of Libor may reportedly become "one of the most costly and consequential in the history of banking." A number of banks are under investigation in Europe, Japan and the U.S. Libor is the London interbank offered rate, which is an interest rate used in agreements worth trillions of dollars globally.

I could go on, but you get the drift.

How ironic that the industry that wants us to trust it with our funds can't manage its own money and is rife with illegal conduct.

While you and I may find this difficult to understand, Wall Street executives "get it." In a recent survey, a quarter of Wall Street executives viewed wrongdoing as "a key to success." Sixteen percent indicate they would engage in insider trading if they knew they would not be caught. Almost a third said they felt pressured to "compromise ethical standards or violate the law."

I was surprised these percentages were so low. As recent convictions for insider trading demonstrate, some hedge fund managers fully understand the only way to "beat the markets" is to engage in illegal insider trading. I am unaware of any credible, peer-reviewed data indicating the daily grist of brokers and most advisors (stock picking, market timing, fund manager picking) adds value. When you are selling an expertise you don't have, you understandably are under pressure to bend or break the rules.

Wall Street executives may feel they have no choice other than to engage in illegal conduct, but you do. Don't use them to manage your hard earned money. They will always have an endless supply of gullible clients who can't figure out they are emperors with no clothes. Don't be one of them.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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