“Frank Gruttadauria, a star Lehman Brothers broker in Cleveland, siphoned an estimated $125 million from clients over 15 years, covering his tracks with forged account statements, federal regulators say. Where was the local Lehman official who was supposed to monitor his conduct? He reported to Mr. Gruttadauria,” writes Charles Gasparino in today’s Wall Street Journal.

“In Miami, R. Christopher Hanna used strikingly similar methods over 10 years to steal millions of dollars from his clients at Credit Suisse First Boston, regulators say. The former CSFB branch manager who was supposed to be overseeing Mr. Hanna may not have noticed because he was busy as a broker in his own right, handling accounts for wealthy customers.”

“These arrangements go a long way toward explaining why Wall Street’s broker monitoring, known as “compliance,” falls short. In regional offices, supervisors frequently are distracted or conflicted, or both. At headquarters, compliance officers typically lack the heft and paycheck needed to gain respect in the investment business.”

“Wall Street compliance has been notoriously weak for decades. But as commissions soared in the frenetic late-1990s stock market, monitoring of heavy-hitting brokers grew even more lax than usual, some industry officials say.”

“Now, the failures of Wall Street’s compliance efforts are coming under intense scrutiny — part of a growing awareness of how deeply flawed the U.S. financial markets really are. The watchdogs charged with keeping the financial world honest have all lost credibility themselves: outside auditors who bend the rules to please corporate clients, analysts who shape stock recommendations to woo investment-banking customers, and government regulators too timid or overwhelmed to keep track of the frenzy.”

“Wall Street’s compliance system — decentralized, privately operated and varying from firm to firm — will be front and center Thursday, when a U.S. House subcommittee convenes hearings on why that system breaks down so often. Separately, the Securities and Exchange Commission, New York Stock Exchange and the regulatory arm of the National Association of Securities Dealers have launched a joint “examination” of Wall Street compliance in the wake of the Gruttadauria affair, which came to light in January. Their plan: to canvass nearly 6,000 registered brokers in coming months, looking for gaps in monitoring.”