Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, April 17, 2010

SEC's Inspector General: Fort Worth Enforcement Knew of Stanford's Ponzi Scheme Since 1997

I mentioned yesterday that the SEC Chair issued a response to the SEC Inspector General's critical report on the handling of the Stanford matter.  Here is the report itself.  The OIG was charged with looking into what, if any, indications the agency had prior to 2006 that Stanford was operating a Ponzi scheme and what, if any, were its responses.  Here's a brief summary of the sad saga:

Examination teams at the SEC's Fort Worth office suspected illegal activity at Stanford as early as 1997, two years after the Stanford Group Company registered with the SEC.  Over the next eight years the examiners conducted four examinations of Stanford's operations, finding in each examination that it was "highly unlikely" that the returns Stanford claimed could have resulted from the purported investment strategy and concluding that Stanford was likely running a Ponzi scheme.  While the examination group endeavored to persuade the Fort Worth enforcement office to conduct an investigation, no meaningful effort was made by Enforcement until late 2005.  However, even then, Enforcement missed an opportunity to bring an enforcement action against SGC, in part because the new head of Fort Worth enforcement was not apprised of the findings in earlier examinations.  The report states:

The OIG did not find that the reluctance on the part of the SEC’s Fort Worth
Enforcement group to investigate Stanford was related to any improper professional,
social or financial relationship on the part of any former or current SEC employee. We
found evidence, however, that SEC-wide institutional influence within Enforcement did
factor into its repeated decisions not to undertake a full and thorough investigation of
Stanford, notwithstanding staff awareness that the potential fraud was growing. 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. As a result, cases like Stanford, which
were not considered “quick-hit” or “slam-dunk” cases, were not encouraged.

The OIG goes on to make serious allegations against the former head of Enforcement in Fort Worth:

The OIG investigation also found that the former head of Enforcement in Fort
Worth, who played a significant role in multiple decisions over the years to quash
investigations of Stanford, sought to represent Stanford on three separate occasions after
he left the Commission, and in fact represented Stanford briefly in 2006 before he was
informed by the SEC Ethics Office that it was improper to do so.

The report states the former head of enforcement in Fort Worth apparently violated state bar rules:

The OIG investigation found that the former head of Enforcement in Fort Worth’s
representation of Stanford appeared to violate state bar rules that prohibit a former
government employee from working on matters in which that individual participated as a
government employee. Accordingly, we are referring this Report of Investigation to the
Commission’s Ethics Counsel for referral to the Office of Bar Counsel for the District of
Columbia and the Chief Disciplinary Counsel for the State Bar of Texas, the states in
which he is admitted to practice law.

SEC Action | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference SEC's Inspector General: Fort Worth Enforcement Knew of Stanford's Ponzi Scheme Since 1997:


Post a comment