Updated: Nov 20
After nine months of regulatory examinations on our company, a process I was told usually lasted an average of thirty to sixty days, I remember our long-term SEC contact phoning me to tell me the SEC had finished their review. Nevertheless, he told me the regulator FINRA had the lead on this audit since MICG Investment Management was an investment broker-dealer.
The SEC contact also said two things he would later deny saying. First, FINRA wouldn’t sign off on the regular audit because, in the wake of the missed warnings about Bernie Madoff, every regulator was scared to miss something and put their own career at risk. Second, FINRA was focusing so much regulatory pressure on MICG Investment Management because it was not too small and not too large. In other words, we were big enough to matter but not big enough to put up a real fight. My contact told me to prepare for them to find something.
Again, I naively considered we would have to pay a fine and accept a mark on our otherwise unblemished record. It would be a bitter pill to swallow, but as this appeared to be the world we now lived in, I could roll with it. I didn’t understand the behemoth, entrenched administrative state arrayed against us.
FINRA claims to be a quasi-government agency that operates as a private organization not held to government accountability actions, while at the same time receiving government immunity when challenged by ordinary citizens. It is a giant agency that generates a substantial stream of fines and penalties in its enforcement actions. In 2021, FINRA collected $91 million in fines, according to FINRA, while the CEO Robert Cooke earned a shocking $3.12 million in salary along with a long list of executives all earning over $1 million themselves. As such, FINRA operates as an entrenched technocratic state able to impose its own agenda. I was clearly losing to my first Goliath.
Some months later, unfortunately too late to help with our situation, a friend sent me Three Felonies a Day: How the Feds Target the Innocent, a 2011 book by Harvey A. Silverglate with a foreword by Alan Dershowitz. The book presents its own indictment and conclusion about the massive expansion of federal statutes. The premise of Three Felonies a Day is that the average professional in this country wakes up in the morning, goes to work, comes home, eats dinner, and then goes to sleep, unaware that he or she has likely committed several federal crimes that day. The book argues that as the volume of federal criminal laws and regulations has exploded in number, they have become impossibly broad and vague.
As a result, federal agencies and prosecutors can pin arguable federal crimes on any one professional for even the most seemingly innocuous behavior. The enforcement landscape becomes even more problematic for professionals as the statute books are augmented by the Code of Federal Regulations, which hands federal regulators an additional trove of vague and exceedingly complex and technical prohibitions to stick on their hapless targets. I wish I had read it sooner. I urge you to read it today!
Lesson: This realization came too late for me to understand the fundamental adversity risk to every successful CEO and entrepreneur: If they enter your business, it is impossible for them to not uncover a long list of violations, and even felonies, with which they may choose to indict you.
I had no idea what I was up against, and I failed such a great number of people relying on me. Be better prepared!
Have a great week!