Monday, December 15, 2008

You Can’t Make This Stuff Up

You Can’t Make This Stuff Up
by Alexandra Lebenthal

This was going to be a tale about someone who embezzled to pursue and maintain a lifestyle that was no longer possible in the current economic environment. I planned to have it ready to run in January, which would give me plenty of time to put it together using bits and pieces of what I encounter in my world of New York City and Wall Street. In particular, I planned to focus on the world of money and investing and draw from a real-life case of a Financial Advisor at a well known firm who did just this some years back.

Marc Dreier
Then, out of the blue, the Marc Dreier story hit. My fictional account had been scooped by real life! The more I read, the more I was staggered at the ability of someone to lie and fabricate to the extent that Mark Dreier did. It’s like a movie where you know what’s going to happen and are cringing while you wait for the person to be found out. More shocking was the dollar amount involved. Besides the investors, there were also many other people affected by the story, including attorneys who worked for him who suddenly found themselves hiring their own criminal attorneys, and unable to access client escrowed funds which they needed to pay their own bills.

Then last Thursday evening while preparing to host a group of well known Wall Street women at my home, my husband emailed me a story from Bloomberg. As we both work in “the Industry” we often keep one another abreast of the latest news, especially this year.

As I read my Blackberry, I literally did a double take when I read about Bernie Madoff, whom I’d known for years (as did many of the women who were coming over that evening). Bernie was emblematic of the club “us girls” had somehow managed to become a part of over the years (with only a few shards of glass still sticking out of our heads). Needless to say that evening the conversation was one of utter disbelief and sadness. Someone commented that nothing is surprising any longer. But I am not sure. I was and am truly staggered by this story.

Clearly writing another tongue-in-cheek tale no longer seemed appropriate. My emotions run from sadness to bafflement to fear.

Of course, I am saddened by the losses borne by the investors, large and small, who entrusted their assets (some the substantial majority of their net worth) to Madoff’.
I truly am also sad, deeply so, about the devastation of this family, especially the two sons who had to deal with their father. In selfish moments this weekend I have wondered myself would people question me and my firm?

As some readers know, I am from a family that has persisted for generations on Wall Street, even as other firms became larger and larger, by staying true to what we know best. My family’s history on Wall Street goes back to 1925 when my grandparents started the original Lebenthal.

Jim Lebenthal
Generations have followed them into the business, beginning with my father, Jim Lebenthal, who is iconic himself on Wall Street, and my late Aunt Eleanor and Uncle Jerry who ran the business for decades. I have spent the majority of my career in my family business before selling it and starting it anew two years ago when I bought back my family name, brought back former and new colleagues , and was joined by my younger brother.

I have always associated my name being on the door as the ultimate governor on honesty. That has driven each generation of my family. Many firms started like my family company in the early part of the last century, and many of them grew much larger than we did and made much more money. Many of them are no longer around, of course some even disappeared in the course of the last year. I have and will always live with my name on my door, even for the two year period when I didn’t own my last name. At the end of the day I’d rather have my name and my family around me; it’s worth more than any of those riches.

I am sad for the people who have lost all or nearly all. The entities that will have to close. I am sad for my industry that looked the other way or didn’t notice the signs, not just about this but about the fire we built and fanned. We played with matches and a forest fire broke out.

I am baffled that the regulators and the supposedly sophisticated institutional investors didn’t ask the questions they knew they had to ask. The term “Regulators” fills me with a combination of fear and respect. The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA- formed several years ago from a merger of NASD and the regulatory arm of the NYSE) can walk in anytime to a firm and audit its books and records.

They watch over literally thousands of regulations that govern everything from the ridiculous to the substantive: what can be on the front door, appropriate capital levels , how to report trades in stocks and bonds, where you have to keep your records, trade confirmations, statements and for how long. Regulators have carte blanche to ask for anything. If they see a confirmation for a trade in a security on a particular day they can ask for every trade ever done in that security or every trade in anything done on that day. And the regulated entity, that’s me, has to deliver on the request. This audit process is often what uncovers violations, even unintentional ones. How could the regulators have missed this, especially with so many red flags raised? I truly do not understand it.

Institutional Investors are supposed to know better. But in truth many don’t follow their own rules. They were supposed to be the smart ones, but oftentimes reputation is the only due diligence performed. Perhaps the genius in this case is that the scheme didn’t promise outlandish results, just a simple and steady 1% a month. Any investor should know that there is no investment strategy, none at all, that can always deliver 1% a month.

Above all I am scared about what investors will think and do next. Keep investing out of fear and mistrust by putting their capital in T-bills that offer negative yields? I also question after all the talk of asset allocation over the years how many people still put all their eggs in one basket. Will this shake more people’s confidence in the financial markets? Hopefully the fear phase is a short term phenomenon.

Longer term, I hope that our country and our industry creates a stronger regulatory framework of the type that was intended with the implementation of the SEC and the Investment Advisors Act of 1933 and 1934. It needs to and this is a time when it has never been more critical. As a member of this industry I welcome any efforts to keep the honest people in business and the crooks out, help people invest their money and help this country get its economy back on track. Most who know me know that I’m an eternal optimist, so I still believe it’s not too late. In a few short weeks our nation will once again renew itself at a time when we need to believe that it is possible to do so. Lets not only hope but stand behind that process and welcome the change and laws that hopefully will come as a result and protect us all.
Alexandra Lebenthal learned from her Father Jim Lebenthal and Grandmother before that about the basics of finances and investments. Today she is the CEO of Lebenthal & Co., LLC and its wealth management division Alexandra & James Co.