Who was Ferdinand Pecora?
Pecora was one of the very first commissioners of the SEC. He railed against the evil he discovered on Wall Street, including insider trading. While insider trading sometimes gains big headlines, a recent article in the Wall Street Journal disclosed roughly half of insider-trading defendants net less than $60,000.
Early in his career, as an assistant district attorney, Pecora successfully shut down more than 100 bucket shops. But that was only the beginning.
Bucket shops were storefronts where speculators could make bets on the price (or the direction) of stocks and commodity prices. The “man on the street” could place bets on stock and commodity prices, without investing big bucks. The bucket shops would not place actual trades to buy or sell stocks. Instead, the shops would accept wagers on the movement of the stock prices.
After the stock market crash in 1929 (and the subsequent depression), President Hoover appointed Pecora as counsel to the Senate Banking Committee.
That committee was asked to investigate the causes behind the stock market crash, the collapse of the banks, and the depression. As counsel to the Senate Banking Committee, Pecora got to work.
Pecora made a name for himself when (over a ten day period) he interrogated (among others):
- JP Morgan Jr.,
- Albert Wiggin (head of Chase National Bank), and
- Charles Mitchell of National City Bank.
At the time, National City was the second largest bank in the country. Today we call National City a different name: “Citibank.”
During questioning, Pecora dismantled these celebrity rock star bankers from the previous decade. He uncovered details like the fact Morgan and Mitchell both paid zero income taxes in 1931 and 1932. He also discovered Morgan maintained a “friend of the firm” list for special deals. Pecora was able to get Mitchell to disclose he had access to interest-free loans. National City Bank set up these loans for Mitchell and other officers. The loans were set up to help executives through some lean years.
Pecora learned Wiggin pulled off something even more remarkable. The head of Chase National Bank was able to sell short his own company stock. This meant Wiggin was massively profiting as his company’s shares collapsed. The worst part about Wiggin’s actions – they were legal at the time.
How banks marketed and sold securities raised additional questions. Mitchell admitted that sales incentives at National City Bank wrongly influenced bank employees to push securities to customers. The banks instituted this sales practice regardless of the clients’ suitability.
Wall Streeters complained Pecora was “destroying confidence” in the stock market. President Roosevelt retorted that bankers “should have thought of that when they did the things that are being exposed now.”
Many Americans in the 1930’s became unemployed, strapped for cash and otherwise down on their luck. But Ferdinand Pecora worked at taking down those high-rolling Wall Street bankers.
What Pecora – and the rest of the country – gleaned from the testimony of the bankers was morally and ethically sickening. Yet much of what Pecora unearthed was technically legal, at the time. But that would soon change. His work led directly to:
- Passage of the Securities Act of 1933,
- The Glass-Steagall Act of 1933, and
- The Securities Exchange Act of 1934.
The Securities Exchange Act of 1934 formed the SEC.
Fast forward to 2019. We can still find bad behavior in the industry. It’s common to hear folks say “no one went to jail” after the “Great Recession” ten years ago. (what was great about it?)
Additionally, employees of brokerage firms are (still) not required to act in the best interests of their clients. And the brokerage community has fought hard to maintain their non-fiduciary status. Unlike brokers (who are employees of brokerage firms), investment advisors have a fiduciary duty their clients at all times.
Investment professionals ought to be required to act as a fiduciary. It has been ninety years since the 1929 stock market crash, numerous bank runs and a nationwide depression. Yet, we still see resistance to a fiduciary standard.