I admittedly have not been watching the circus taking place in Washington, DC about ratings agencies and the role they played in our current financial cluster on display in front of Mr. Waxman's House Oversight & Government Reform Committee.  That said, it seems eerily reminiscent of the last period of excess, Wall Street "greed", and financial services run amok.

Anybody remember Henry Blodget (now of Silicon Alley Insider), Jack Grubman, equity research conflicts of interest, and the smoking gun emails?  After a $1.5 billion settlement, no shortage of new rules (Sarbanes-Oxely for starters), loads of additional people, process, and technology for compliance, and a focus on removing conflicts of interest, we found our next problem where we weren't looking – bond/credit ratings.

Here's an instant messenger exchange from Standard & Poor's. Note the "it could be structured by cows and we would rate it" remark.

Those of us who appreciate and frequently use sarcasm in our daily lives understand why this phrase was used – that's the way it is done, so do it.
The good news is that all the technology and compliance investments of the past several years made sure this exchange was logged and archived for ediscovery purposes.  The bad news is that putting rules and controls in place that do not view the problem systemically (if at all) are bound to fail.  It's not the fault of Moody's or S&P any more than Enron's house of cards was Arthur Andersen's fault.

In a case that highlights both the excess of the dot-com era and the perils of both sending email as well as basing a criminal investigation solely on it, all the remaining charges against former CSFB investment banker Frank Quattrone were dismissed by a federal judge.  Here’s the NY Times story on it and MarketWatch’s commentary on this ‘quiet’ ending.

In an era defined by "smoking gun" emails, federal prosecutors thought they had nailed him with six little words – "time to clean up those files"

Not so much…

Or according to Frank himself – "The legal system has rendered its final verdict. … The opera is over."

Four years, who knows how much in legal bills, and untold levels of legal maneuvering bring this much hyped case to a quiet conclusion.  Mr. Quattrone is free to return to the securities industry and do his thing – namely print money for himself and whatever firm he calls home ($200MM personally from 8/98 to end of 2001…good for him).  I think it is fair to assume that he would rather of not sent these six words in an email.

I remember reading the original complaint filed against him and the snippets of emails that were used to build the case around obstruction.  Although highly suspect, the email contents alone did not make a clear and convincing case.  Email records provide lots of information however intent is not one of them.

When we address an email we get to choose between "To", "CC", & "BCC."  Wouldn’t it be more worthwhile and call out more clearly what you are trying to accomplish by adding ‘CYA’ and ‘FYI’ fields?   

In all seriousness, during our work with customers on interpreting their email patterns we see scenarios where emails with more than 3 recipients are generally informational and not actionable (or viewed as such).  How do we know this?  These types of emails are rarely replied to indicating a one way push of information or FYI.  On the CYA front, blind carbon copies are good indicators of this type of communication as are looking at an organization’s hierarchy.  A subordinate including a supervisor (or even higher up) can be an indicator of someone covering their rear end, looking to project support, or even make a formal complaint. 

I imagine this was the logic behind former Morgan Stanley CFO Stephen Crawford asking to only receive email from certain senders vs. the entire corporate population.  Or as this story from InformationWeek highlights:

"(the) main issue is that he gets sent too many E-mails that put him in a disadvantaged regulatory position. He does not get to read most of it yet he has no deniability that he received it." 

Can’t say that I blame him if the very act of being included as a recipient makes me accountable for (and complicit in) the message content.

As I stated in an earlier post, I felt there were some additional things that needed to be addressed in this joint guidance. In the spirit of open communications and the NYSE’s receptiveness to feedback on the proposed guidance, MessageGate submitted comments.  They are posted on our website and will be posted on the NYSE’s site at some point.  Here are the highlights:

There are challenges related to supervising electronic communications including:

1. False positives resulting from binary keyword rules
2. Duplicate messages in the review queue
3. The burdensome review of internal messages which account for 70-80% of total volume
4. A significant cost of knowledgeable staff and infrastructure to perform the reviews

The second part details what technology can do to enable supervision beyond lexicon (keyword) or sampling based approaches including:

1. Segmenting electronic communication flows
2. Identifying "of interest" or suspect communications
3. Suppressing duplicate messages during review
4. Enforcing departmental/business unit controls and exceptions
5. Providing selective pre-send review

Here is a recent Q&A article with IT Business Edge where I lay this out from a business process perspective and one of our Instep Podcasts that covers the points above in more detail.

Download Instep_JointGuidance_final.mp3

I must say that after reading this document, I am pretty underwhelmed.  I spent several years working directly with many of the Wall Street firms on the issues related to electronic communication, supervision, and archiving in the wake of the landmark $1.4 billion conflict of interest settlement in the 2002-2004 timeframe and we still do a good bit of business there today.  During that time, I saw first-hand the costs, inefficiencies, and confusion about what to do/not do regarding adhering to the regulations that govern broker/dealer electronic communication.

So, after a couple years of work by the NYSE, NASD, lawyers, and the brokerage firms we have these broad "guidelines" published for comment. 

My favorite sentence has to be the last one in the document:

"…members are advised that this guidance does not serve to establish a safe harbor with respect to potential supervisory or compliance deficiencies."

Gee…thanks.

A key takeaway is that if a firm can’t supervise or review the messages (or if the sender can’t be identified), they should consider blocking them outright.  "Consider" now that is some strong language…even deciding how to define "electronic communications" took three hours according to this article on it in the New York Times.

It breaks down communications into external vs. internal with specific discussion of non-company email (personal), message boards, and e-faxes as well as the best approach to supervise them – lexicons, random review, or some combination thereof.

Wait…that’s what they have been doing all along.   Although now they have at least broadened the definition of what you have to monitor a bit further (personal email, personal phones, blogs, etc.) if they are used for business purposes.  Entertaining commentary on that via DealBreaker.

Regulation is important for sure especially in the securities industry where information flows alongside capital but I would have hoped for a little more clarity and forward thinking after this much effort.

Couple of stories have come up here recently about insider trading from an investment banker at CSFB to two sets of dynamic duo husband and wife teams – one at Morgan Stanley and the other in Hong Kong.

So, after Sarbanes-Oxley was suppose to make it all better while heaping loads of compliance costs on companies.  After the major Wall Street firms ponied up $1.4 billion to settle conflict of interest charges.  After new procedures, technologies, and staff were added to increase compliance and oversight.

Some guy at a bulge bracket firm on the deal team can make undetected phone calls to a residence and mobile phone in Pakistan from his office phone and a compliance officer at Morgan Stanley can be in on a separate scheme.

Fabulous. 

Good thing they are saving all those emails for years and have armies of people deployed to run NASD 3010 mandated 5% samples on email correspondence because that seems to really be helping.

Maybe it is a good thing that folks are getting caught albeit after the fact.  The SEC seems to be able to identify suspicious options trading volume or that an $8MM pay day is a bit out of the norm.

At least Spitzer got elected Governor and we get to see a sequel to Wall Street.