Legal News

SEC Watchdog Bites Agency For Failing to Catch Allen Stanford

By Amir Efrati

On Wednesday we gave you a preview, courtesy of Reuters, of a mortar that would be launched at the Securities and Exchange Commission by its watchdog, Inspector General David Kotz, for failing to uncover the allege $8 billion Ponzi scheme run by Allen Stanford.

Now the mortar has landed, and it appears that Kotz doesn’t disappoint:

[T]he SEC's Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme…. We found that over the next eight years, the SEC's Fort Worth Examination group conducted four examinations of Stanford's operations, finding in each examination that its sale of CDs through SIB could not have been "legitimate," and that it was "highly unlikely" that the returns Stanford claimed to generate could have been achieved with its purported conservative investment approach. While the Fort Worth Examination group made multiple efforts after each examination to convince [the agency's enforcement division] to open and conduct an investigation of Stanford, no meaningful effort was made by Enforcement to investigate the potential fraud…until late 2005.

Click here for the 159-page report.

Last year, of course, the SEC and Justice Department filed civil and criminal charges against Stanford (pictured). A criminal trial is set for 2011.

In the report, Kotz found that the agency received multiple complaints from confidential sources that claimed Stanford was running a Ponzi scheme, but it didn’t open an investigation. Kotz also said the former head of the SEC’s enforcement office in Fort Worth, Texas, “who played a significant role in multiple decisions over the years to quash investigations of Stanford,” later sought to represent Stanford once he left the SEC. (For more on the SEC’s revolving door and ethics concerns, click here.)

The report found that Forth Worth SEC officials felt “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. As a result, cases like Stanford, which were not considered ‘quick-hit’ or ’slam-dunk’ cases, were not encouraged.”

The SEC responded to Kotz’s report by saying, among other things, that for years it has been revamping the way it handles complaints about firms it oversees, that it long ago stopped evaluating offices by the number of cases they brought.

We’re not saying it was planned, but it’s interesting that the SEC brought its case against Goldman Sachs on the day the Stanford report was released. No doubt the case could blunt some of the impact of Kotz’s mortar.

Full post as published by Law Blog - WSJ.com on April 16, 2010 (boomark / email).