Did SEC Hide Botched Stanford Probe? I.G. Says Timing Is "Suspicious"

In the style of “Mad” magazine, it’s the season of con vs. con at the Securities and Exchange Commission — only no one’s laughing.

Word on the inside is that the Commission covered up — or at least ignored — an investigation of billionaire R. Allen Stanford, who is awaiting trial in a Texas jail on 21 criminal charges that his Antiguan bank allegedly sold questionable certificates of deposit with “improbably high” interest rates and was running a Ponzi scheme at the same time.

“They didn’t call him ‘Agile Allen’ for nothing,” according to a source familiar with the case.

The SEC apparently wasn’t nearly so agile.

A report by SEC Inspector General H. David Kotz claims the SEC was aware Stanford was running a $7 billion Ponzi scheme as far back as 1997, but waited until late 2005 to step in. The Commission filed civil charges in the case in February 2009.

Kotz noted that the Commission filed civil fraud charges against Goldman Sachs last April, on the same day it released his report critical of the Stanford investigation. The timing of the Goldman filing is “suspicious,” said Kotz, who went on to suggest that the Goldman charges diverted attention from the report of the botched Stanford probe.

The inspector general said the timing of the two actions in April “strains credulity.” Kotz made his suspicions public at a September 22 congressional hearing on the Stanford investigation before Senate Banking Committee.

Republican sources in Washington claimed the SEC made Goldman the poster boy for greed as a cover for the Stanford investigative foul up. These sources also suspect Goldman was sued to help boost support for the new regulatory reforms governing Wall Street’s occasionally bad behavior.

Though SEC denies the Goldman announcement was a cover-up of the Stanford probe, Kotz wondered out loud if in fact the timing might have been politically motivated.

Republican speculation aside, Mr. Kotz told the committee that top officials at the SEC’s Fort Worth office were “being judged on the numbers of cases they brought, so-called ‘stats’,” the obvious and easy cases. “Complex cases were disfavored,” Mr. Kotz explained, because they were not “slam dunks.” Mr. Allen’s case is a rat’s nest of allegations including, but hardly limited to, the purchase of a Caribbean island. In other words, it didn’t add up as a “stat” or “quick hit” case.

Robert Khuzami, director of SEC’s Enforcement Division, and Carlo di Florio, director of the Office of Compliance Inspections and Examinations, said they are moving to implement the reforms demanded by Mr. Kotz.

Mr. Khuzami said he was alerting what he called “rank and file” SEC inspectors that quick hits do not drive enforcement. He said the divisions are now coordinating their efforts and stepping up the pace.

So what does it take to make the SEC do the right thing? Among the suggestions by Mr. Khuzami and Mr. di Florio is to expand training programs and modernize the management structure. In addition, they added, it’s time to place “seasoned investigative attorneys back on the front lines and improve examiners’ risk management techniques.” No one on the Senate panel bothered to ask where these “seasoned attorneys” have been hiding.

The Kotz report landed on SEC Commissioner Mary Schapiro’s desk in March. The Senate hearing gave the lawmakers a chance to vent their dissatisfaction with the Commission, but it’s anyone’s guess if substance will come out of the Senate probe. Last year, for example, the House Financial Services Committee held hearings on the $336 billion auction rate securities scandal, but no legislation or regulations followed. When Rep. Barney Frank (D-MA) was asked about this failure, he replied, “The (’08) meltdown got in the way.” It now remains to be seen if the Senate Committee can find a clear path to financial reform of the SEC’s enforcement process.

The hearing produced notable contradictions. Sen. Richard Shelby (R-Ala), the committee’s ranking republican, said the Bernard Madoff $65 billion Ponzi scheme had caught the SEC flatfooted though at least one part of the Commission had been aware of the Stanford case for years. Sen. Shelby was obviously unaware that there had been warnings about Madoff as far back as the late 1990s.

“I believe this should mark the beginning of our review of this troublesome episode,” Sen. Shelby said, referring to Mr. Stanford. “We need to know exactly why evidence of this fraud was not more thoroughly pursued.”

He added that Mr. Khuzami had brought to light “a colossal failure of the SEC.”

Observers wondered why Sen. Shelby was so outraged. “Is he living on another planet?” asked one source. “Is this the first time it crossed his mind that the SEC is maybe a little slow off the mark?”

Another open question: Why was no one fired because of the incompetent handling of the Stanford affair? It seemed a rhetorical question, given that no one was fired in the wake of the Madoff scandal, which was a much larger fraud. Lawmakers also expressed concern that the head of the Fort Worth division later offered to defend Mr. Stanford before the Senate committee.

“It takes time for a culture to change,” Mr. Kotz said. “It takes time to trickle down the line.”

In the meantime, the investing public will just have to wait on trickle-down ethics to kick in before trust is restored.

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SEC monitor: Only "slam-dunk’ enforcement cases were encouraged

Inspector general says prosecutions were driven by “stats’

Securities and Exchange Commission officials tried to assure Congress last week that the SEC’s examination and enforcement divisions are working together more effectively to catch and prosecute rogue advisers such as Robert Allen Stanford, who allegedly bilked clients out of $8 billion.

In a hearing before the Senate Banking Committee, SEC Inspector General H. David Kotz said that the examination staff in the commission’s Fort Worth, Texas, office raised red flags as early as 1997 about certificates of deposit that Mr. Stanford was offering with unusually high interest rates.

But the enforcement staff refused to pursue the matter.

“We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought, so-called stats, and communicated to the enforcement staff that novel or complex cases were disfavored,” Mr. Kotz said. “As a result, cases like Stanford, which were not considered “quick-hit’ or “slam-dunk’ cases, were not encouraged.”

Mr. Stanford’s tangled web of alleged fraud included complex international dimensions, such as the purchase of part of a Caribbean island. The SEC finally filed a case against him in February 2009.

Among Mr. Kotz’s recommendations to the SEC: Change the commission’s mindset to ensure that potential harm to investors outweighs concerns about litigation risk in pursuing fraud cases and improve coordination between inspection and enforcement.

Robert Khuzami, director of the SEC Division of Enforcement, and Carlo di Florio, director of the Office of Compliance Inspections and Examinations, said that they are implementing reforms called for in Mr. Kotz’s report.

“I am telling the rank-and-file that quick hits and numbers are not what drive the division,” Mr. Khuzami told lawmakers. “It’s not the standard today, I assure you.”

Mr. di Florio and Mr. Khuzami, both of whom assumed their current positions after the Stanford case was filed, said that their divisions are working more closely.

“Both OCIE and enforcement are committed to reforms,” Mr. di Florio said.

In prepared joint testimony, Mr. Khuzami and Mr. di Florio said that they have expanded training programs, streamlined management, “put seasoned investigative attorneys back on the front lines” and improved examiners’ risk management techniques.

The Stanford case is making the SEC more willing to take on big, complex cases with uncertain outcomes, according to Robert Mintz, a partner at the law firm McCarter & English.

“It was a major wake-up call to the SEC to act more like prosecutors and less like regulators, and to dig deeper and ask tougher questions as they execute their oversight,” said Mr. Mintz, a former federal prosecutor. “The message from the highest levels of the SEC is filtering down — to increase collaboration and to make sure that information about regulated entities is being shared more effectively.”

Mr. Kotz delivered his report to SEC officials in March. It was released April 16, the same day that the SEC filed a lawsuit against The Goldman Sachs Group Inc. for alleged fraud involving mortgage-backed securities.

The Senate hearing Tuesday gave lawmakers a chance to vent their frustrations with SEC lapses in policing securities markets.

Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate Banking Committee, noted that unlike the $50 billion fraud perpetrated by Bernard Madoff, which caught the SEC unawares, one part of the commission had raised concerns about Mr. Stanford for years.

“I believe this should mark just the beginning of our review of this troublesome episode,” Mr. Shelby said.

“We need to know exactly why evidence of fraud was not more thoroughly pursued,” he said. “This is a colossal failure of the SEC.”

Senators on both sides of the aisle wondered why no one at the SEC had been fired in the wake of the Stanford episode and expressed dismay that the head of the Fort Worth enforcement division later tried to represent Mr. Stanford before the commission.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, was more generous toward the SEC, saying that “there are thousands of people in the SEC who do an incredible job every day.” But he pressed Mr. Kotz on whether the statistics-oriented approach to enforcement is undermining potentially large fraud cases in other SEC regional offices.

“To what extent were examiners frustrated across the country?” Mr. Dodd asked.

Mr. Kotz said that he wasn’t aware of specific cases but that the SEC’s leadership is trying to move enforcement away from a focus on statistics toward one that emphasizes impact.

“It takes time for a culture to be changed,” he said. “We need to make sure that trickles all the way down the line.”

More Charges Coming Against Allen Stanford Executives

HOUSTON, Texas, Fri. Sept. 24, 2010: Several former executives of the company founded by 60-year-old R. Allen Stanford could soon be in hot water with the Securities and Exchange Commission.

The SEC has reportedly notified several that fraud charges will be filed against them, Rose Romero, director of the Securities and Exchange Commission`s Fort Worth office, said.

The disclosure came during her appearance this week before the Senate Banking committee. Romero, however, did not say who would be targeted by the charges, or when they would be officially filed.

Accountants Mark Kuhrt and Gilberto Lopez, and Leroy King, head of the financial services regulatory commission in Antigua – where Stanford`s bank was based and where he was also a naturalized citizen –may be the individuals who will face charges related to the fraud.

Romero`s comments came as angry senators grilled her and top officials of the SEC on Wednesday, citing the agency`s delays in taking action against accused swindler Stanford despite repeated red flags about his financial firm`s operations.
Committee chairman Chris Dodd, D-Conn., described the situation as one in which `you had an examination office yelling `fire, fire, fire` and an enforcement branch yelling `no fire.`

Sen. Kay Bailey Hutchison, R-Texas, called the revelations `stunning` and said that she hoped something is being done to make sure such a lapse doesn`t happen again.
An inspector general`s report concluded that Fort Worth SEC officials harbored suspicions that Stanford was acting illegally as early as 1997, two years after his company`s broker-dealer arm, Stanford Group Co., registered with the SEC but did nothing.

The new charges disclosed by Romero would add to those filed against the company`s head honcho, the Texas-born, Antigua-based Stanford, his chief investment officer Laura Pendergest-Holt and James Davis, the former chief financial officer of Houston-based Stanford Financial Group. Davis pleaded guilty last month to charges including fraud while Pendergest-Holt has pleaded not guilty to allegations of fraud and conspiracy to commit money-laundering.

Stanford, the former flamboyant billionaire and cricket mogul has pleaded not guilty to 21 counts of fraud, money laundering and obstruction. He faces up to 375 years in jail if convicted. A trial date has not yet been set for him.

The scheme involved the sale of Certificates of Deposit (CDs) offering unheard-of returns.

Senators probe inaction against Stanford

WASHINGTON — Angry senators grilled top officials of the Securities and Exchange Commission on Wednesday, citing the agency’s delays in taking action against accused swindler R. Allen Stanford despite repeated red flags about his financial firm’s operations.

Lawmakers sharply questioned Rose Romero, the director of the SEC’s Fort Worth regional office, and Robert Khuzami, the agency’s national enforcement director, about a report from the agency’s independent inspector general.

It found that the Fort Worth compliance office decided at least four times not to act on findings by SEC staffers that Stanford appeared to be operating a Ponzi scheme.

Committee chairman Chris Dodd, D-Conn., described the situation as one in which “you had an examination office yelling ‘fire, fire, fire’ and an enforcement branch yelling ‘no fire.'”

Sen. Kay Bailey Hutchison, R-Texas, called the revelations “stunning” and said that she hoped something is being done to make sure such a lapse doesn’t happen again.

Stanford, 60, and three other executives of Houston-based Stanford Financial Group are accused in federal indictments of running a $7 billion investment fraud scheme using certificates of deposit issued by a Stanford bank on the Caribbean island of Antigua.

Stanford is being held without bail in Houston as a flight risk. He has denied wrongdoing and is scheduled for trial in January. The others will be tried separately and are free on bail.

The inspector general’s report concluded that Fort Worth SEC officials harbored suspicions that Stanford was acting illegally as early as 1997, two years after his company’s broker-dealer arm, Stanford Group Co., registered with the SEC.

Over the next eight years, the compliance branch of the Fort Worth office conducted four separate examinations of Stanford’s investments and reported each time that the high returns and low volatility were “highly unlikely” and inconsistent with a “legitimate” fund.

All four times, Fort Worth’s enforcement team chose not to act on the findings. The enforcement team first opened a formal investigation into Stanford’s company in 2005.

The SEC filed a civil fraud suit in February 2009 against Stanford and his companies, which were placed in receivership. A federal grand jury handed down the criminal indictments four months later.

In testimony Wednesday, SEC Inspector General H. David Kotz blamed the agency’s culture, saying senior SEC officials thought they were being judged by the number of cases they processed, not on the number of investors affected or the size of the fraud.

As a result, Kotz said, the Fort Worth office focused on cases considered “quick hits” or “slam dunks.” Complicated cases such as Stanford’s were put off or handed to state securities boards.

Romero, who joined the Fort Worth office in 2006, expressed regret that the SEC had not acted more quickly to limit investor losses.

Khuzami, the top SEC enforcement official in Washington, said the SEC believed that it had not gathered enough evidence at the time of the earlier warnings. He said losing in court would have given Stanford “a Good Housekeeping seal of approval” to call his investments safe because a judge had rejected the SEC’s claim. But Khuzami conceded, “We did not pursue the evidence as hard as we should have.”

Cassie Wilkinson, a Houston resident who lost her savings when Stanford’s companies were placed into receivership, attended the hearing with other Stanford investors. She called the SEC’s testimony an effort to “cover their backsides” and said it needs a “housecleaning.”

“There were obviously people who did not do their jobs, and no one has been fired. Investors have lost $7 billion. That seems wrong,” she said.