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Clearing Firm Faces SEC Charges, Small Firm Movement Tarnished

Small firms struggling against what they see as an unfair regulatory regime may have lost a leader this week.

Small firms struggling against what they see as an unfair regulatory regime may have lost a leader this week. Richard Goble, a leading critic of FINRA and vociferous supporter of gentler regulation for small brokerage firms, has been hit with serious charges of fraud from the SEC.

On Tuesday, the SEC filed civil fraud and other charges against North American Clearing, an independent Florida-based clearing firm and three of its executives: Richard Goble, founder and owner of the firm; Bruce Blatman, president; and Timothy Ward, the firm’s former financial and operations officer. A U.S. District judge also granted the SEC’s request that the firm’s assets be frozen, and that a temporary restraining order be placed on the executives.

“This case arises from a fraudulent scheme [by defendants NAC and the three executives] to conceal North American’s financial crisis and illegally use customer funds to cover its operating expenses,” says the SEC complaint. It goes on to say that the troubles began in early 2008 when the firm lost a large client due to that client’s exposure to collateralized mortgage obligation securities (CMOs) and also incurred a multi-million dollar loss in connection with customer transactions in a penny stock company.

“As a result, North American secured a bank loan using customer securities as collateral,” says the complaint. At that time the defendants allegedly began liquidating customer money market funds to help pay NAC’s operating expenses. To read the SEC press release and litigation complaint, click here.

While Goble and the others are presumed innocent, the allegations have hurt more than just Goble’s name and that of his firm. Goble, along with the former president of his firm, John Busacca, were leaders of a small-brokerage firm movement that has been fighting for regulatory reform to make sanctions less punitive and more instructive, with fewer fines and more guidance. The group, made up of small-firm members of FINRA, created FIA (Financial Industry Authority) to organize their interests and give a voice to their grievances. Small firms, folks like Goble say, are being forced out of business as a result of what many in the industry, whether large firm or small, refer to as “regulation by enforcement.” (Click here to read a Registered Rep. story that examined their viewpoint.)

When FINRA held its regular elections for seats on its district committees, the FIA effectively lobbied the small firm constituency of FINRA, and challenged official FINRA nominated candidates for open seats in a handful of districts. Without the endorsement of FINRA, these “dissidents” as they are known, collected hundreds of signatures and got on the ballot. And in the end, several of them were elected.

In the meantime, the FIA—and especially Goble and Busacca—got a lot of attention from the press (including this magazine) for a concerted effort to bring the alleged biases of FINRA to light. In 2006, as the NASD and NYSE were about to merge their regulatory structures, FIA called for the resignation of Mary Schapiro, the current CEO of FINRA who was then CEO of NASD, alleging the merger would tilt further the bias of regulators in favor of large firms. They even thought they found a smoking gun of sorts, written evidence, they said, of bullying on the part of the regulators (click here to read that story.)

Then, last November, after his initial bid failed, Goble was the only dissident candidate among a slate of six to win a vacant FINRA seat. It was a disappointing showing for FIA-backed candidates, but Goble filled a significant vacancy. He was elected to fill one of the three seats—the only one vacant—on FINRA’s board of governors reserved for representatives of small firms, defined by FINRA as those firms with fewer than 150 brokers.

In light of the charges against Goble, that seat is almost certainly in jeopardy. A FINRA spokesman says the board will have to decide the fate of Goble’s seat—a two-thirds majority vote is needed to remove him. Bill Singer, a securities attorney, columnist for this magazine and fellow founder of the “dissident” movement, says Goble’s seat should be put up for reelection (read his blog entry on the topic here). But he also recognizes the damage the allegations—true or untrue—have done to Goble and the small firm movement. “It has certainly been tarnished by this,” he says. Singer says he supported much of FIA’s platform and criticism of FINRA, and adds that regardless of what happens with the case, Goble’s efforts on behalf of small firms helped improve the industry.

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