The SEC Doesn't Care About Your Ponzi Schemes

How corrupt, cartelized, and conflict-ridden are industry oversight and enforcement practices in the financial sector? You could set about answering that question by poking through the lurid headlines surrounding Goldman Sachs-the latest being the release of Goldman emails openly contradicting the firm's alibi of first resort, that it lost money on the collapse of the housing market and therefore couldn't have been defrauding investors in its short-shelling Abacus fund, as the Securities and Exchange Commission alleges. Or you could look at the ridiculously conflicted status of credit-rating agencies-which collect their fees from the very investment concerns they're supposed to be clinically and impartially sizing up, and which, in the latter stages of the housing bubble, saw said investment firms hire a steady stream of their former employees to structure their stake in the CDO market. Oh, and these newly minted fund analysts would typically come bearing their own intimate knowledge of the computer models that credit raters employed to grade risk-exposure in the investment world-an arrangement that, as the New York Times' Gretchen Morgenstern notes, "gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings."

Still, to get a real close-up and personal sense of the deeply rigged game of financial oversight, it's hard to beat the SEC's Inspector General's report on the agency's flubbed investigation of R. Allen Stanford, the Texas-born, Antiguan-knighted lord of an offshore Ponzi scheme that bilked investors of more than $7 billion. That report, as it happened, dropped the same day that the SEC announced its fraud complaint against Goldman, which would explain why you haven't heard much about it since.

As detailed in the IG report, the Stanford fund operated pretty much on the same basis that the operatic frauds of Bernie Madoff did, promising investors returns on Antiguan certificates of deposit that far outstripped normal market returns. And much as was the case in Madoffland, there was simply no there there in Stanford's business model-he was just using the money of new fund investors to artificially inflate returns for their forerunners.

The shadiness of the Stanford operation first caught the eye of an SEC investigator named Julie Preuitt back in 1997-yes, twelve years ago, in the Clinton era. She investigated the returns Stanford claimed for the fund, pronounced them "absolutely ludicrous," and recommended that the agency launch a formal probe.

The good news is that the SEC's enforcement division tried to do that, eight months after Preuitt's recommendation. The bad news is that when Stanford refused to comply with any of the SEC investigators' requests for documents, they simply let the matter drop

It gets worse, of course. Spencer Barasch, the director of the SEC's Fort Worth office-which had jurisdiction over securities cases in Texas and three other states– reportedly told a fellow SEC attorney that he declined to green light the initial Stanford probe in 1998 after he called Stanford's own attorney, Wayne Secore (himself a former lawyer with the SEC) to ask if there was a case against his client. When Secore, astonishingly enough, replied in the negative, that was evidence enough for Barasch, according to the IG report-though Barasch, solicitous to preserve a reputation for minimal professional competence, told the IG's office that he had no memory of such an exchange, and that it sounded "absurd."

Despite Barasch's best efforts, the Stanford case wasn't going away, though. Investor complaints surfaced against the fund in 2002 and 2003, and Barasch duly shrugged them off. Likewise, when his staff attorneys made fresh pitches for investigations in 2002 and 2005, Barasch declined to pursue them. In the latter instance, Victoria Prescott, the lawyer presenting the case for a Stanford probe, recalled that Barasch looked "annoyed" during her talk, and told her he had "no interest" in the idea. "And I no sooner sit down, shut up and the meeting ended, but then I get pulled aside and was told this had already been looked into and we're not going to do it," Prescott told the inspector general's office.

There were institutional reasons behind the Fort Worth office's dilatory handling of the case, the report notes-the division's managers liked more direct and simpler prosecutions that helped boost its enforcement stats, and the challenge of getting subpoenas executed in an offshore investment haven like Antigua promised a number of grinding procedural headaches.

Still, the principal inconvenience a Stanford investigation seemed to present was to Barasch's resume. He left the agency in 2005 to follow the Wayne Secore career path in white-collar criminal defense work-and according to the IG report, made three separate pitches to represent Stanford himself. After the second such pitch in 2006, Stanford indeed hired Barasch on, and the lawyer billed the fund manager for analyzing "documentation received from company about SEC and NASD matters." Barasch even called his former assistant director, who by this time was trying to revive inquiries into the Stanford fund, with the ham-handed request "[c]an you work on this?" The patient soul on the other end of the line then told Barasch, "I'm not sure you can work on this." Barasch's interlocutor was right: When he belatedly put in for ethical clearance from the SEC to represent Stanford, it was denied.

Barasch was undaunted, though-he actually contacted Stanford a third time, in 2009, after the SEC finally got around to swearing out a complaint against the fund manager. Again, an ethics official at the SEC refused to clear the arrangement-telling the inspector general that "he could not recall another occasion when a former SEC employee had contacted his office on three separate occasions trying to represent a client on the same matter." As he pushed to get the request approved, Barasch assured the agency that the 2009 case "was new and was different and unrelated to the matter that had occurred before he left" the SEC-somehow neglecting to note that his consistent posture regarding Stanford during his tenure was to deny each and every request for any Stanford-related "matter" to proceed in the first place. Barasch was at least admirably candid in his reply when the ethics official asked him to explain his persistence in seeking to sign on Stanford as a client: "Every lawyer in Texas and beyond is going to get rich on this case. OK? And I hated being left on the sidelines."

It's hard to imagine any better summing-up of a regulator's dominant worldview during the deregulatory binges of the Clinton-Bush age. Unless, that is, one were to choose the testimony of Hugh Wright, Barasch's predecessor as head of enforcement in the SEC Fort Worth office. "Spence was a real bright guy," Wright told Dallas Morning News reporters Eric Torbenson and Dave Michaels, "but I didn't trust him, because he lied a lot."