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PDFThere were benefits to this beyond the likely $500 million in compensation Fuld booked between 2000-2007 (although that did help in acquiring some trophies). All agree that he wore his reputation like a glove.
He saw and heard things that even the very well connected simply wouldn’t. There were quiet meetings with Senators and key staffers on provisions of legislations that were beneficial to “the firm.” His opinion mattered on the board of the New York Fed. Charities sought him and his checkbook for prestige. In a dozen different countries, it was “first names only” with the men who moved markets and effected policy shifts.
In the truest sense of the word, though, Fuld was in a club for almost 15 years that had perhaps several hundred other members. Things changed for 64-year-old Fuld, however, after Lehman’s inglorious collapse almost two years ago.
Since May 6, Fuld has kept his Financial Industry Regulatory Authority (FINRA) license at a small firm located at 45 Broadway in Lower Manhattan called Legend Securities. The distance between his former office and his current office is a lot more than the 4.1 miles that Google Maps indicates.
(Fuld has not commented publicly on the move. I sent a detailed email to his lawyer, Allen & Overy’s Patricia Hynes, but did not receive a reply. I spoke briefly to Fuld by phone at his Greenwich, Conn., house, but he declined comment, citing pressing family business. Legend’s executive officers did not respond to repeated inquiries, including emails and voice messages at the firm and other places where their FINRA licenses indicate they have business interests.)
On Wall Street, a FINRA license is your ticket to conduct business with customers or trade on behalf a member firm. Where you keep your license is traditionally where you professionally hang your hat.
This might be the exception, though, and here is why.
First, it is difficult to get a clear sense of Legend’s ownership structure. The firm has had three separate corporate identities since its founding in 1998 (unlike Lehman, which kept the Lehman name in one form or another since its founding in 1850). Filings indicate that an entity called The International Monetary Group -- which appears to have no operations -- currently controls 99% of Legend. In turn, The International Monetary Group is two-thirds owned by a corporation called StockTrade Network with the balance controlled by Legend Chief Technology Officer Mark Sulavka and firm President Salvatore Caruso.
In 2006, StockTrade -- whose primary operating asset is Legend and its securities operations -- filed a prospectus to go public on the OTC Bulletin Board, listing CEO Anthony Fusco as an almost 21% owner of the newly public firm, although it is unclear if the deal ever was completed. Nor is there any market for its shares at this point. StockTrade’s financials illustrate a venture that was embryonic, with $1.3 million in revenue and a $221,000 net loss.
Second, it is not really clear how Legend makes its money. Although its website advertises a full roster of “Institutional Services,” calls to Legend’s sell-side competition resulted in a fair amount of head scratching. Spokesmen at three large, global investment banks (who asked not to be identified given their firm’s long-standing policy of prohibiting comments on competitors) said their equity, option and corporate-bond trading desks had no electronic record of buying or selling securities where Legend was the counter-party. Two of these firms said their computer systems had no record of Legend at all.
Calls to a few hedge funds that are regularly active in the equity, equity-linked and corporate-credit sectors drew blanks. No one had heard of the firm.
There is business being done at Legend, to be clear. It just appears to be exceptionally different from the kind Lehman had ever done.
For a firm that lists five managers, Legend has a remarkably broad menu to offer the public. To begin, those products include: stocks, bonds, Ginnie Mae’s, collateralized mortgage obligations (mortgage-backed securities carved from mortgage-backed securities), private placements, mutual funds, real estate investment trusts and municipal securities. Legend also markets life insurance, health insurance, 401(k) plans and tax help.
Like every other financial firm, Legend seeks to attract a high-net-worth client base. The more one studies Legend, however, the less likely it seems possible that the firm actually serves a broad roster of clients with $10 million in assets ready to be put to work in the markets.
Like other brokers, Legend appears to generate a good slice of revenue from its network of “satellite” or “branch” locations. Unlike Lehman – which operated offices in Taipei, London and Chicago – Legend has established its presence in areas such as Brooklyn, Las Vegas, Westfield, N.J., Staten Island (two offices), East Hampton, Stroudsburg, Pa., and Jasper, Indiana, a town that is about two hours south of Indianapolis.
Public filings indicate Legend has executed three investment-banking transactions over the past year for OTC Bulletin Board-listed issuers: Ace Marketing & Promotions, ZTrim Holdings and Element 21 Golf. Two of those companies, ZTrim and Element 21 Golf, have going concern language in their filings.
Calls to management of the three companies were not returned.
The OTC Bulletin Board market is, to be very charitable, a Wild West of development-stage companies, promotions, rigs, scams and the occasional honest-to-goodness operating company. (In contrast, Fuld sat on the board of the New York Stock Exchange -- a prestigious market that admittedly has had its share of Wild West moments, too.)
Legend’s job as banker to the corporate wing-and-a-prayer set is fairly easy: raise money and clients stay alive until the next desperate capital-raising round. This strategy also has the salutary benefit of (possibly) boosting the value of the handsomely sized blocks of stock and warrants often awarded as payment for such services.
To be certain, under Fuld’s leadership, Lehman carried out dozens of deals that left much to be desired – Archstone-Smith is an especially lethal example -- but the instances where its capital-raising efforts were central to keeping its client alive (and its compensation intact) were virtually non-existent.
Still, Fuld’s battered reputation cannot be helped by the track records of those serving on Legend’s management team. Based on FINRA BrokerCheck records, none of Legend’s executives has even half of Fuld’s 40-plus years of experience in the capital markets. In and of itself, that’s no cause for concern. The nature of that past experience could raise some eyebrows, however, and help explain the selective disclosures offered on the firm’s website.
As Legend’s current CEO, Fusco has omitted his previous stints at notorious investor slaughterhouses L.T. Lawrence and Continental Broker-Dealer Corp. (L.T. Lawrence was tossed from the National Association of Securities Dealers -- FINRA’s predecessor – and Continental is understandably classified as “inactive.”)
Fusco’s official biography does mention a past job at Lieber & Weissman Securities LLC, a former subsidiary of Legend itself. Presumable, Fusco was hoping that prospective clients would not look into his BrokerCheck report (or he simply assumed that typical Legend clients would not bother with such details), which spells out the 1999 censure that the Colorado Division of Securities placed on Lieber & Weissman for having unlicensed sales agents peddle securities to investors in the state.
That Colorado settlement required the firm’s principals -- Legend’s website proudly notes that Fusco was one of the unit’s senior managers -- to sign a consent decree barring them and the firm itself from doing business in the state. Fusco was specifically named as a principal in that consent decree.
Caruso, Legend’s president and CFO, has an interesting background as well. A former bank branch manager with dreams of peddling mortgage-backed securities to individual investors, Caruso doesn’t have any FINRA black marks against him personally. But he did spend more than two years (1996-1998) at American Investment Services, an Oklahoma City-based firm that was expelled from the NASD in 2003 for a ream of violations.
(Note: This is not an exercise in the theory of "collective guilt." Of the 35 violations and arbitrations that the firm was enmeshed in, roughly half occurred during the two years when Caruso worked there. Still, for a firm to get expelled in that period was no mean feat.)
Caruso, who is in charge of Legend’s compliance efforts, does not have his stop at American Investment Services listed on the website’s biography for him.
Carl Martorano, Legend’s head trader, might wish to have portions of his background overlooked as well. As the firm’s website notes, Martorano spent more than four years at Bear Stearns. He also worked two years at Lexington Capital Partners & Co., a shop perhaps better known as First Hanover Securities. Even if First Hanover did not help leaders of the Gambino family diversify its revenue streams, as suggested by government records, the firm still had a fairly epic record of regulatory mayhem.
Although Martorano has a clean FINRA record, a broker or trader who worked for First Hanover/LCP in the mid-1990s – the golden era of penny-stock fraud – could surely tell a few tales. (I called Martorano for a comment, but he declined and said that he would have “someone” else call me back instead. Nobody ever did.)
Fusco, Caruso and Martorano are of a part with the firm they run. They appear to be upstanding citizens of the capital markets, but they have no shortage of breathtaking career stops. Indeed, it is unmistakable: Legend has largely drawn its brokers, bankers and traders from the ranks of the dubious, the censured and the outright corrupt penny-stock brokerages of the recent past.
To illustrate this, I created an Excel spreadsheet with the names of more than 30 current and former Legend employees (that is, those Legend employees who have or previously had brokerage licenses, more formally known as CRD’s), which I culled from various Internet searches. The firms that previously employed these brokers should cause the blood to chill. Those companies – including Goldmen, Hanover Sterling and Joseph Stevens – perfected the black arts of client impoverishment.
Some might take a lenient view of this situation, noting that the violations racked up by those firms occurred in the past and are now consigned to an era when regulatory oversight was (if possible) even more passive than it is today. Back then, a number of questionable practices – such as churning accounts, unauthorized trading, dishonest and high-pressure sales tactics, excessive markups and outright refusals to execute sales orders – were all considered technical issues that should be handled within the self-regulatory framework. That’s why the raping of the individual investor was such a lucrative growth industry for much of the 1990s.
Moreover, those brokers appear to be playing by the rules at Legend. Save for one technical violation earlier this year, the firm’s record at FINRA and on PACER remains clean.
The situation should be examined in a more critical manner, however. Basically, Legend is the penny-stock brokerage made modern. Its revenue-generating base is not drawn from the major brokers – whose “wealth advisors” now emphasize asset management, rather than trading, as the key to investment returns – that, for all of their regulatory problems, spend hundreds of millions of dollars annually on training and compliance.
Rather, Legend seems to have taken the easy road. It has grown from the legions of small client-trading shops and penny-stock brokerages that cluster around in lower Manhattan, New Jersey and Florida. These firms offer big commissions for their brokers to trade in low-priced stocks that their internal trading desks frequently control. Many of the brokers almost certainly knew each other from brokerages that were in varying degrees utter disasters.
Fuld pays a lot of lawyers a lot of money to keep him economically and socially viable in spite of his many, many mistakes. If he were unwilling to personally research his business associates, then his attorneys should have handled that for him.
It must be hard – very hard – far a fallen investment-banking titan to make his way in the day of the universal bank. The club he once stood astride longer than most is now closed to him, and one by one, the trappings of real power and vestiges of a 40-year quest fall away.
That has to be the case: Why else would a man lend his name and honor to men whom he would not have let near his building just two short years ago?
