Tags: Senators | Probe | SEC | Stanford | Investigation

Senators to Probe SEC's Stanford Investigation

Wednesday, 22 Sep 2010 09:26 AM

A federal watchdog's report accusing the Securities and Exchange Commission of bungling its investigation of Allen Stanford's alleged $7 billion dollar Ponzi scheme will be the subject of a U.S. Senate hearing on Wednesday.

The report authored by SEC Inspector General David Kotz said the regulator had suspected as early as 1997 that Stanford was running a Ponzi scheme, but did nothing to stop it until late 2005.

The SEC filed charges against Stanford in February 2009, accusing the Texas financier and three of his companies of selling billions of dollars of fraudulent certificates of deposit.

But the report went largely unnoticed as it was released mid-April, on the same day the SEC filed civil fraud charges against Goldman Sachs.

"This report has not received the attention that it deserves and it is unclear what changes have been made at the SEC as a result," Senator David Vitter told SEC Chairman Mary Schapiro in a recent letter.

The Senate Banking Committee has scheduled testimony from SEC Enforcement Director Robert Khuzami; Carlo di Florio, director of inspections and examinations for the agency; and Rose Romero, regional director of its Fort Worth, Texas, office.

The SEC, still recovering from missing Bernard Madoff's $65 billion Ponzi scheme, is under pressure to root out fraud after the U.S. housing collapse and Wall Street's ensuing meltdown.

The Goldman suit, the SEC's highest-profile case stemming from the financial crisis, has put Wall Street on notice that no one is off limits.

The regulator has also filed securities fraud and insider trading charges against Angelo Mozilo, who had built Countrywide Financial into the largest U.S. mortgage lender before liquidity dried up in 2007.

Kotz's report found that the SEC's Fort Worth office had examined Stanford in 1997, 1998, 2002 and 2004, "concluding in each case that Stanford's CDs were likely a Ponzi scheme or a similar fraudulent scheme."

In 2005, the enforcement arm of the SEC finally agreed to seek a formal order from the commission to investigate Stanford. But Kotz said it failed to conduct due diligence on Stanford's investment portfolio, missing an opportunity to bring action against Stanford Group Co.

Stanford is in a Texas jail awaiting trial on 21 criminal charges related to what is now alleged to have been a $7 billion scheme involving the issuance of CDs with improbably high interest rates by his Antiguan bank.

Schapiro has said that most of Kotz's seven recommendations have been implemented. She also said that the SEC would carefully analyze the report and implement any additional reforms as necessary for effective investor protection.

Kotz's report says that even after SEC examiners identified multiple violations of securities laws by Stanford in 2002, the SEC's enforcement division did not open an investigation.

Kotz has said that senior officials in the Fort Worth office perceived they were being judged by the number of cases they brought.

"Novel or complex cases were disfavored," he concluded. "As a result, cases like Stanford, which were not considered 'quick-hit' or 'slam-dunk' cases, were not encouraged."

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