A Global Crisis of Confidence in US Financial Markets

There’s a comprehensive and fascinating article in the January 3 issue of The New York Times that should be must-reading for all public relations (PR) and investor relations (IR) consultants who serve financial services companies, including private equity firms and commercial and investment banks. “The End of the Financial World as We Know It,” by Michael Lewis and David Einhorn, begins with a provocative statement: “Americans enter the New Year in a strange new role: financial lunatics. “

As proof of their thesis, authors cite “the strange story of Harry Markopolos,” a former investment officer who tried, for nine long years, starting in 1999, to explain to the SEC that Bernie Madoff, the man who engineered the biggest global Ponzi scheme ever, couldn’t be anything other than a fraud. In response, the SEC undertook a slapdash investigation of Madoff and pronounced him free of fraud.

The Madoff scandal is just one example of a systemic problem … and it’s not just a matter of insufficient oversight of the financial services industry.

According to Clusterstock, many of Madoff’s investors were well aware that his returns were impossibly good, so he had to be cheating. However, they never considered the possibility of a Ponzi scheme. They thought that the scam involved insider trading … and that’s precisely why they chose to invest with Madoff!

In many cases, the Wall Street swindler’s investors willfully chose to become complicit in their own defrauding by ignoring the old adage that “if it sounds too good to be true, it probably is. “

The Role of Blogging in Financial Communications

For PR and IR professionals interested in the role of blogging and the social media in financial services, private equity, and investment banking communications, check out the article by Davis D. Janowski in InvestmentNews that addresses the conflicting views of blogging held by financial advisors, the Financial Industry Regulatory Authority (FIRA) and the Securities and Exchange Commission (SEC).

Financial advisors see their blogs as “a harmless, inexpensive technology” that facilitates communication with their clients. FIRA views blogs as ads that require supervisory review. And the SEC contends that blogs should be treated as a company statement.

The bottom line? To avoid compliance problems, be aware of what you are saying in your blog. Keep your communications general and avoid mentioning specific transactions, products or equities by name. For more information, check out these links:

• Certified Financial Planner Board of Standards’ recently updated Standards of Professional Conduct
• “FINRA Provides Guidance Regarding the Review and Supervision of Electronic Communications”

• The SEC’s “Commission Guidance on the Use of Company Web Sites”

The Court Rules in Favor of Wikileaks

Last week, Federal Judge Jeffrey S. White withdrew his earlier order disabling Wikileaks, a website that allows the anonymous posting of documents to discourage unethical behavior in governments and corporations. He’d originally shut down the site at the request of Bank Julius Baer & Company, a Swiss banking company that serves the ultra-rich. They charged that Wikileaks had posted confidential information about some of its customers.

Wikileaks is designed to enable whistleblowers to leak documents, without fear of censorship or the risk of the political repercussions. Its founders contend that Wikileaks will “civilize corporations by exposing uncivil plans and behavior. Just like a country, a corrupt or unethical corporation is a menace to all inside and outside it.”

It’s still in its infancy, but Wikileaks is worth a careful look if you’re at all concerned with the possibility of adverse publicity or if you are involved in issues or crisis management.

Only 6% of corporate frauds are revealed by the SEC and 14% by the auditors, according to the Center for Economic Policy Research. More important monitors are media (14%), industry regulators (16%), and employees (19%).

As it develops, it’s likely that Wikileaks will become a useful source for the mainstream media … so it’s worth keeping it on your radar.