SEC suspected R. Allen Stanford of Ponzi scheme 12 years earlier, report says
Saturday, April 17, 2010
The Securities and Exchange Commission knew that Texas-based financier R. Allen Stanford was probably running a Ponzi scheme 12 years before it halted the fraud, potentially costing investors more than a billion dollars, according to the agency's internal watchdog.
The SEC's inspector general said that top officials in the agency's Fort Worth office favored pursuing as many simple cases as possible rather than taking on more challenging ones like that presented by Stanford.
The internal report also raised questions about a former head of enforcement in Fort Worth, Spencer Barasch, who played a "significant role in multiple decisions over the years to quash investigations of Stanford," but then "sought to represent Stanford on three separate occasions after he left the Commission."
A representative of Barasch called the report "disappointing" and said "he acted properly" in the Stanford matter.
The SEC and Department of Justice filed civil and criminal cases against Stanford last year accusing him of selling billions of dollars in certificates of deposit to investors that promised extraordinary returns. The SEC and Justice Department alleged that he was in fact using money from new investors to pay off earlier investors. Stanford, who has denied any wrongdoing, is now jailed awaiting trial.
Coming months after it was disclosed that the SEC had failed to stop Bernard L. Madoff's massive Ponzi scheme, the Stanford case marked another setback to the agency's reputation. It quickly became clear that the SEC had failed to thoroughly pursue leads when officials examined Stanford's business.
But until the release of the report Friday by SEC Inspector General H. David Kotz, it was not publicly known how often the SEC's Fort Worth office failed to follow up on credible concerns about Stanford's activities.
Despite warnings since 1997 that Stanford was probably running a Ponzi scheme, "no meaningful effort was made by Enforcement to investigate the potential fraud, or to bring an action to attempt to stop it, until late 2005," the inspector general wrote. But "even at that time, Enforcement missed an opportunity to bring an action . . . which could have potentially completely stopped the sales of the" certificates of deposit.
The inspector general didn't find outright wrongdoing by SEC officials in reviewing Stanford's business. But the report said problems in the Fort Worth office contributed to its failure to stop the fraud. Top agency officials in Fort Worth, according to the report, felt they were being judged by their superiors in Washington by the "stats" -- or the number of cases they filed -- and therefore avoided "novel or complex cases."
While it criticizes top officials, the internal report names frontline SEC examiners who discovered suspicious behavior at Stanford's business but were unable to continue to investigate.
For instance, as early as 1997 Julie Preuitt, a mid-level SEC manager doing a routine exam of Stanford's business, concluded the claims he made to his customers were "absolutely ludicrous" and urged the SEC to open a formal investigation.
Eight months later, the enforcement division of the SEC -- its investigative arm -- opened a probe. It asked Stanford for documents, the financier refused, and the agency dropped the matter.
The inspector general said that Barasch, the former Fort Worth enforcement chief who later asked to represent Stanford, made the decision to close the probe. The reason, according to the report, was that Stanford didn't have enough U.S. investors.
Preuitt and other examiners urged their superiors to pursue Stanford in following years, but a similar pattern was repeated.
SEC Chairman Mary Schapiro said Friday that the agency would try to draw lessons from the Stanford case. "Much has changed and continues to change regarding the agency's leadership, its internal procedures and its culture of collaboration," she said in a statement. "We will carefully analyze the report and implement any additional reforms as necessary for effective investor protection."