The case addressing this question, Standard Chartered v FINRA, has been appealed to the highest court in our land. As such, one might think that most Americans would care to learn if our nation’s top financial regulator did, in fact, engage in a fraud which had a monetary value of between $175-$350 million. Not exactly chicken feed.

I believe this case belongs on the front page of every business section in our country. It is about Wall Street-Washington incest, and a situation in which major Wall Street firms and select FINRA execs benefited at the expense of smaller broker-dealers. More importantly, it alleges that Ms. Schapiro and her FINRA colleagues signed an inaccurate proxy statement used for the merger of the NASD with the regulatory arm of the NYSE to form FINRA.

Let’s navigate and review a recent commentary written by Dan Jamieson of Investment News. Dan writes, B-D Wants Supreme Court to Rule on FINRA Suit,

Standard, an investment banking boutique, insists that the proxy used by the NASD in soliciting member approval for the merger was fraudulent. NASD since has been renamed the Financial Industry Regulatory Authority Inc.

Government entities, including private organizations with government-delegated authority, generally enjoy absolute legal immunity in performing official duties. Court cases have granted protection specifically to securities self-regulatory organizations.

Absolute immunity covering a financial transaction? Sniff, sniff. Do you smell something? Me too.

Standard argues that the merger was not a legally protected regulatory function of Finra. The brokerage firm wants the Supreme Court justices to hear that case because it claims that lower courts have issued conflicting opinions on immunity for SROs and other state actors…

For its part, Finra insists that there is no issue with immunity for SROs. “Every court of appeals to consider the issue has agreed that SROs are absolutely immune from private lawsuits for money damages attacking conduct that falls within the scope of their regulatory functions,” Finra said in a filing with the Supreme Court.

While FINRA’s lawyers have continually embraced their position on immunity, not once have I ever heard or seen these lawyers or Ms. Schapiro address and categorically deny the premise of a fraudulent proxy. What say you Mary? Did you and your colleagues willingly and intentionally misrepresent, that is LIE, in regard to the facts presented in that proxy?

Finra spokeswoman Michelle Ong declined to comment.

No surprise there. No transparency there either.

The 2007 merger required NASD members to approve bylaw changes that significantly reduced their voting power in the new organization.

NASD was able to get the changes approved with the help of a one-time $35,000 payment. Standard claims that NASD lied in its proxy and other communications when it claimed that $35,000 was the most it could pay under IRS rules.

An IRS opinion letter laying out permissible amounts that could be paid to broker-dealers to approve the merger has been subject to a court-ordered seal, but in a 2009 hearing, one of Standard’s attorneys said the letter indicated that member firms could have received an additional $35,000 to $76,000.

An additional $35-76k multiplied by 5100 member firms equates to a cool additional $175-350 million. Plus!

If the Supreme Court takes the case and rules for Standard, the dispute could go back to lower courts for rehearing, and member firms could possibly get a larger payout, Mr. Anderson said.

One would think a ruling for Standard would also expose Ms. Schapiro and the other defendants in this case for having perpetrated a fraud. What are the ramifications of that? Or is that potential too explosive and unseemly for our nation in its current state? Are we that weak and pathetic?

But some doubt that the Supreme Court will let that happen. “SROs are immune — that’s the law,” said Jonathan Kord Lagemann, a veteran industry defense attorney and founder of the Lagemann Law Offices. “Whether it should be that way is another story.”

Of course it shouldn’t be that way. Providing the cover of absolute immunity for misrepresentations within proxy statements by senior financial regulators is no way to run a country. Remember, absolute immunity without total transparency is a license to steal….perhaps even as much as $175 million.

Larry is a Wall Street veteran, having worked at such banks as First Boston, Bear Stearns and Union Bank. He blogs at www.senseoncents.com