The SEC’s Own Report Says that It Missed Tips and Clues in a Giant Ponzi

Remember Friday April 16 when the Securities and Exchange Commission filed its high-profile fraud case against Goldman Sachs? How could you not? Every media outlet covered that complaint as the SEC was publicly tooting its own horn. (“We got those evil Goldman people!”)

Were you also aware that on that same day the SEC’s own Office of the Inspector General (OIG) released the 159-page Report of Investigation, Case No. 01G-526 Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme (ROI)? You might recall the Stanford case, in which Allen Stanford was allegedly running a Ponzi scheme since as far back as 1997. Moreover, the SEC’s ROI suggests that Stanford's scheme was able to flourish because of questionable "institutional influences" within the SEC.

You missed that Stanford post mortem report? Course you did, the report was issued under the heavy flak provided by the Goldman case. Now the SEC Inspector General David Kotz will have to respond to U.S. House Representative Darrell Issa’s (R-CA) April 16 letter calling for a probe of the circumstances of the timing of the filing of SEC v. Goldman. Some have alleged improper political motives, which the SEC has denied.

Anyway, while you are pooh-poohing those off-the-wall conspiracy theories, consider this tidbit posted on the SEC’s website. It seems that on April 22, SEC Inspector General Kotz sent a Memorandum to SEC Chairman Mary Schapiro, and a copy to the SEC’s Ethic Counsel William Lenox. The Memorandum is part apology, part reiteration, part bizarre.

Red Flag Was Raised in 2002
Section IV of the ROI states that the SEC had received a letter dated October 28, 2002 from, a citizen of Mexico who raised concerns about Robert Allen Stanford and his companies, and their certificates of deposit in which the writer’s mother had invested. I have reprinted the relevant section below:

C. During the 2002 Examination, the FWDO Enforcement Staff Received a Letter From the Daughter of an Elderly Stanford Investor Concerned That the Stanford CDs Were Fraudulent

On December 5, 2002, [Harold] Degenhardt [then head of the SEC’s Ft. Worth office] received a letter dated October 28, 2002, from a citizen of Mexico who raised concerns about Stanford similar to those raised by the Examination staff. See October 28, 2002 Letter from to SEC Complaint Center, copying Degenhardt (the “Letter”), attached as Exhibit 76. The Letter stated:

My mother is an old woman with more than 75 years of age
and she has all her money my father inherited to her for his
life work in CDs of Stanford Bank. This is the only money
my mother has, and it is necessary for my mother, my
sisters and me for living. My mother put it in the United
States because of the bad situation in Mexico and because
the most important thing is to look for security. …
I am an accountant by profession and work for a large bank
in Mexico. I know some banking regulations of my
country that are very different from practices in Stanford
Bank and for that reason I am very nervous. Please look at
this bank and investigate if everything is honest and
correct. There are many investors from Mexico in this
bank. My questions and doubts are listed here.

1. Stanford says the CDs have insurance. My mother
receives two statements of accounts. One from Stanford
bank in Antigua with the CDs and another one from
Stanford and Bear Stearns in New York. I know Bear
Stearns is a very good company, but the statement of Bear
Stearns only has cash that my mother uses to take out
checks. This cash is the interest that the CD pays.
Is the bank in Antigua truly covered by insurance of the United States Government?

2. The CD has a higher than 9% interest and I know
other big banks like Citibank pay interest of 4%. Is this
possible and secure?
…
4. In December of 1999 the bank had a lot of
investments in foreign currencies and in stocks. In all the
world many stocks and foreign currencies came down in
2000. If a lot of money was in investments that came
down, how did the bank make money to pay the interest
and all of the very high expenses I imagine it has. …

5. The accounting company that makes the audit
(C.A.S. Hewlett & Co) is in Antigua and [no]body knows.
I saw the case of Enron with bad accounting and I am
preoccupied with another case of fraud accounting. Why is
the auditor a company of Antigua that [no]body knows and
not a good United States accounting company?

I know some investors that lost money in a United States
company named InverWorld in San Antonio. Please
review very well Stanford to make sure that many investors
do not get cheated. These investors are simple people of
Mexico and maybe many other places and have their faith
in the United States financial system.

Without responding to, or investigating the writer’s concerns, the SEC Staff forwarded the Letter to the Texas State Securities Board (TSSB) on December 10, 2002. No one called the writer back. No one communicated with her. Frankly, the SEC might just have well folded the letter into a paper airplane and tossed it out its window. Given that the letter was received by the SEC staff on December 5, it’s surprising that those dutiful industry cops sat with the missive for a full five days before passing it on to the State of Texas. Of course, December 5 was a Thursday, so, to be fair, the staff only had three business days to review the thoughtful warning (if you don’t include the date of receipt). And Christmas was only 20 days away. Then there was New Year’s . . .

We Got Nuthin’ From Nobody
Based upon interviews with TSSB Commissioner Denise Crawford, and with a TSSB employee whose name was redacted in the official report, the OIG was advised that the TSSB had searched its files and found no record of receiving the Letter. Crawford stated that she was confident that the TSSB had not received the Letter from the SEC because the TSSB's internal tracking system for such correspondence would have evidenced its receipt. Further, Crawford and the unnamed TSSB employee all stated in interviews that they had never seen the letter.

That’s pretty much the fate of the letter as of the end of 2002. Eight years later, the tale takes an odd twist. Turns out Crawford’s staff at the TSSB found the letter sometime after talking to the SEC’s OIG. Guess how the letter—something like the Harry Markopolos letter warning the SEC of Madoff’s Ponzi—was found? A TSSB administrative assistant was cleaning out a file cabinet that contained "miscellaneous information" and stumbled upon it.

TSSB noted that the letter should not have been filed in the cabinet where it was found and that it clearly had not been handled properly or in accordance with TSSB's procedures for handling such correspondence. TSSB staff provided no further information or explanation for the mishandling of this letter or their failure to locate it during the course of our investigation.

Final Thoughts
Although it’s the little suspicions and minor leads that often build into the historic cases, someone has to painstakingly stack the bricks, slap on the mortar, and build the wall . . . brick by brick by brick. In short, someone has to do some work and build the case bit by bit. Unfortunately, the regulators seem to need the fully gift-wrapped evidence to bring a case.

Peter Morganstern Letter to IMF Regarding Loan to Antigua

Click on the link below to view the letter from Morgnstern & Blue to the IMF regarding the Loan to Antigua.

http://caribarena.com/attachments/22%20Apr%202010%20IMF%20follow-up%20letter%20with%20enclosure.pdf

Magistrate Orders King’s Extradition

Former administrator of the Financial Services Regulatory Commission (FSRC) Leroy King leaves the court, Monday, after Chief Magistrate Ivan Walters ordered his committal for extradition on allegations of fraud related to R Allen Stanford’s alleged US$8 billion ponzi scheme. King, who was on bail since his arrest in June last year, underwent surgery on his right eye. To King’s left is a senior police officer. (Photo by Julian Rogers)

Almost 10 months after he was arrested on several fraud-related charges in connection with an alleged US $8 billion ponzi scheme perpetrated by R Allen Stanford, and after several adjournments, Chief Magistrate Ivan Walters ordered the committal for extradition of Leroy King, former chief executive officer of the Financial Services Regulatory Commission (FSRC).

Minister of External Affairs Baldwin Spencer has to approve the decision that will allow the one-time FSRC boss to be returned to the United States to answer the charges in a court of law.

Meanwhile, the court informed the accused that he has 15 days to exercise his right to file a writ of habeas corpus seeking to set aside the magistrate’s ruling. Reliable reports are that the writ has already been drafted. Should the application be filed, the matter could be tied up in the courts for months to come.

The highly anticipated court decision on the extradition request made by the US last year was delivered yesterday in the St John’s Magistrates’ Court in the presence of King’s relatives and friends.

Following his decision, Magistrate Walters ordered King remanded to Her Majesty’s Prison to await the decision. However, the magistrate later granted King bail under section 11(9) and (7) of the Extradition Act upon application by King’s lawyer, Queen’s Counsel Dane Hamilton, with no objections coming from the Director of Public Prosecutions (DPP) Anthony Armstrong who had conduct of the extradition request.

Hamilton made the bail application on medical grounds.

The lawyer told the adjudicator that King, who appeared in court yesterday with a bandage over his right eye, underwent surgery on Saturday April 24 to reattach the retina in his right eye and the ophthalmologist, Dr Ian Walwyn, who performed the surgery recommended that he return for regular treatment and remain in a safe, clean, healthy and secure environment, among other stipulations.

The attorney submitted medical reports in support of information that King’s surgery to the eye, without proper follow-up care, would result in blindness.

He further gave the court additional documents, from different doctors, in support of other medical conditions, which place restriction on physical activities.

In light of the application, Magistrate Walters said bail would be extended to the accused but instead of the $500,000 with a $100,000 cash requirement which King was granted on his first appearance in court last June, the magistrate increased the amount.

Now, King’s bail is $600,000, making it necessary for an additional $10,000 cash deposit to be paid to the court before he was released.

The court also asked for a copy of the title deed to the property that King’s surety said was valued at $200,000 and further asked that a caution be placed on said property.

The other bail conditions previously ordered remain the same.

The accused must continue to report to the St John’s Police Station twice daily and must not leave his home unless accompanied by one of his two sureties except in the case of a medical emergency. His travel documents will remain in police custody.

Before he made his decision on the bail application known, Magistrate Walters noted that King’s co-accused, some of whom also have medical conditions, are all in jail in the US awaiting trial.

He however stated that he is cognisant of the conditions of the local prison where the cells are overcrowded and conditions not conducive to the type of medical care King would require.

King, who was also the FSRC administrator, is accused of 10 counts of conspiracy to commit mail fraud, seven counts of conspiracy to commit wire fraud, conspiracy to commit money laundering and conspiracy to obstruct the SEC as an accomplice to Allen Stanford’s alleged crimes.

The complaint accuses King of conducting sham audits and examinations of Stanford International Bank (SIBL), an offshore bank located in Antigua, in exchange for large sums of money and other bribes while he allegedly made sure that the SEC did not peruse the offshore bank’s investment records.

The DPP had submitted that King had sought advice from Stanford’s lawyers on what to say in response to inquiries being made by the Eastern Caribbean Central Bank (ECCB) as the investigation into the alleged scheme got under way.

Armstrong said that King prepared letters in his handwriting, addressed to one Nigel Streete, bearing the fax number for Maurice Alvarado the general legal counsel for Stanford Financial Company (SFC), seeking advice on matters raised by the ECCB concerning the supervision of SIBL, Stanford Trust Company Limited (STCL) and other affiliate companies.

Armstrong said the nature of the correspondence shows that there was more than a “good friend” relationship between the SFC counsel and King.

In the letter King allegedly wrote, “To America’s best and greatest attorney, Mr MA, I am sending you two versions. One short, one with a little more knock-out punch. I prefer the shorter version; a little more subtle and diplomatic.”

Armstrong told the court that King had written to the SEC stating that the FSRC had concluded that “any further investigation of ‘possible’ fraudulent activity of SIBL is unwarranted. The FSRC is very concerned as to why the SEC would impute such serious allegations against SIBL. It is the opinion of the FSRC the SIBL has conducted its banking business to date in a manner the FSRC considers to be fully compliant.”

The DPP submitted that the correspondence shows that the accused knew of and facilitated the ponzi scheme.

In a second letter, said to be in King’s handwriting, he wrote, “I would like to include but it does not seem to flow well with the above. Don’t want to over-kill or seem too arrogant. Any other ideas? Must conclude tomorrow. Will send package to include a copy of the annual reports for SIBL and STCL. I am sending a message to these guys that institutions concerned are not run of the mill, they are great quality institutions and the numbers speak for themselves. Thanks a million. Lee.”

The DPP said that the letter, statements from James Davis, the former chief financial officer of SFC, as well as substantive independent data are corroborative that King supported the scheme.

Davis is also an accused in the matter and he has pleaded guilty.

The court had heard that between February 2, 2005 and February 2, 2009 there had been quite a number of cash deposits made to one of King’s two accounts at JP Morgan Chase whilst similar deposits were made into the other account between January 9, 2003 and February 4, 2009.

The prosecutor had also said that evidence obtained from an independent auditor into SIBL’s financial statements showed that the investments the company alleged to have made, did not exist or were grossly inaccurate having been overstated.

However, Armstrong said that King reported to SEC officials that the offshore bank was solvent and a good quality institution which was fully compliant with the requisite offshore banking regulations.”

In response, Hamilton QC had argued that while King is accused of making false assurances that there was no cause for concern about SIBL and collaborating with Stanford to withhold significant information requested by the SEC, that could not be so because King was never the supervisor of banking and therefore could not influence the proper or improper examination of SIBL’s books.

Further, the Queen’s Counsel stated that King’s alleged refusal to divulge information was not a crime, his actions were in fact “within the four corners of the law.”

Hamilton also said that the statements given by the accused Davis are incapable of establishing that King was involved or that he took part in “the ludicrous blood oath ceremony” for the stated purpose, or that he received bribe money from Stanford to obstruct the SEC investigation. The Queen’s Counsel had made several other submissions, as did the DPP.

Under the Extradition Act, persons can only be extradited following a bilateral agreement for crimes which carry a penalty exceeding 12 months in prison.

King is the second person whose extradition to the United States has been ordered this year. Last week Newfield resident Gordon Weston was taken to the United States on allegations he attempted to murder Earl Matthias, among other related offences committed some five years ago

Antiguan Charged in Stanford Case Ordered to U.S.

Antigua’s former top banking regulator, Leroy King, was ordered extradited to the U.S. to face charges he helped financier R. Allen Stanford conceal a $7 billion fraud scheme, Antigua’s top prosecutor said.

Director of Public Prosecutions Anthony Armstrong said that Chief Magistrate Ivan Walters ordered King removed to the U.S. in a decision issued today. Armstrong, who argued for the removal, said King has 15 days to appeal the decision to the nation’s High Court.

King was formerly chief executive officer of Antigua and Barbuda’s Financial Services Regulatory Commission. He has been under house arrest in Antigua since June, when he was indicted by a federal grand jury in Houston for allegedly accepting bribes from Stanford to mislead U.S. securities regulators.

His lawyer, Dane Hamilton Sr. of St. John’s, Antigua, did not immediately return a call seeking comment on the court’s ruling. Andy Laine, a spokesman for the U.S. State Department, said he could not immediately comment.

U.S. prosecutors allege Stanford and his co-conspirators took money from new investors to repay earlier investors who bought allegedly bogus certificates of deposit from the Antigua- based Stanford International Bank Ltd.

Blood Oath

King and Stanford took a blood oath in 2003 to support the alleged fraud scheme, which netted King hundreds of thousands of dollars in bribes, according to a document signed by former Stanford chief financial officer James M. Davis when he pleaded guilty to criminal charges in the probe last year.

Stanford, who is being held without bail pending a January 2011 trial, has denied all allegations of wrongdoing. He also faces parallel charges in a civil enforcement action filed by the U.S. Securities and Exchange Commission.

The criminal case is U.S. v. Stanford, 09cr342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09cv298, U.S. District Court, Northern District of Texas (Dallas).

SEC says its ex-Fort Worth official let R. Allen Stanford off hook

Is Spencer Barasch the man who single-handedly let alleged Ponzi schemer R. Allen Stanford off the hook three times, costing investors more than $7 billion?

Or is he an honest Dallas defense attorney unfairly blamed for the failings of a government regulator?

The Securities and Exchange Commission's inspector general has a 151-page report that says he was the former. It skewers Barasch, former head of the SEC's enforcement efforts at its Fort Worth office, as a poster child for an agency that critics say missed one of the biggest investor scams of our generation.

The report said that over a seven-year period Barasch rebuffed repeated pleas from agency staff to investigate Stanford's offshore bank and his oversized investment claims. An SEC inquiry likely would have stopped the alleged Ponzi scheme as early as 1998, the inspector general said.

Barasch's supporters at the SEC and now in his world of white-collar private practice say he's being scapegoated.

"He didn't do anything illegal – I guess the worst you could say about him was that he had used poor judgment," said Mary Lou Felsman, a retired SEC attorney who worked with Barasch in Fort Worth.

The 52-year-old partner at the Dallas office of Andrews Kurth LLP isn't talking. His firm issued a supportive statement after last Friday's detailed report, saying Barasch had served the SEC with "honor, integrity and distinction."

But his actions raise questions about the culture of the SEC's Fort Worth office, charged with regulating securities trading in Texas and three other states.

The office was tarnished previously when one of its top trial attorneys, Phillip Offill, was convicted of masterminding penny stock fraud after he left the commission. Offill, a former pal of Barasch's, was sentenced to eight years in federal prison Friday.


Outrageous claims

Federal officials contend that Stanford orchestrated a Ponzi scheme by advising clients to invest more than $7 billion in certificates of deposit from the Stanford International Bank on the Caribbean island of Antigua.

Stanford's lure, according to authorities, was a promise of outlandish returns – more than 10 percent a year. In 2002, when worldwide markets fell 25 percent, Stanford said his portfolio returned better than 12 percent, which SEC lawyers thought to be fraud.

In 1998, Barasch's first year as enforcement chief, an SEC examiner recommended pursuing evidence that Stanford was promising investors unlikely rates of return, the inspector general's report said. Barasch declined.

Felsman said she was stunned by the decision. For an enforcement chief to turn down an examiner's recommendation was unprecedented, she and two other former SEC lawyers said.

"They almost always said yes," said Felsman.

According to the inspector general, Barasch told an SEC attorney in 2009 that he discounted the 1998 request after he called Stanford's Dallas attorney, Wayne Secore, asked if there was a case and was assured that there wasn't.

Barasch told investigators he didn't recall saying that and said taking an opposing counsel's word at face value would be "absurd." Secore, a former SEC attorney, didn't respond to calls.

The report also said Barasch dismissed investor complaints about Stanford in 2002 and 2003 and quelled two other staff efforts to investigate Stanford – one in 2002 and one immediately before he left the SEC in April 2005.

In 2005, the report said, an SEC staff attorney presented the agency's latest findings at a regional meeting of securities law enforcers attended by Barasch. The audit showed growing concern that the alleged Ponzi scheme was growing and putting billions of dollars at risk.

During the presentation, Barasch was said to look "annoyed." Afterward, he reportedly told the attorney he had "no interest" in bringing action against Stanford.

"I thought I'd turned in a good piece of work and was talking about it to significant players in the regulatory community," Victoria Prescott, the attorney, said in the report. "And I no sooner sit down, shut up and the meeting ended, but then I got pulled aside and was told this has already been looked at and we're not going to do it."

In April 2005, Barasch announced he was leaving the SEC for Andrews Kurth. After he left, examination lawyers resubmitted the case to enforcement staff and pleaded with them to go after Stanford.

A formal investigation was started in 2006, but agency red tape and internal squabbling prevented the SEC from actually filing a civil lawsuit against Stanford until February 2009.

Among the reasons given by Barasch and others for why Stanford wasn't looked at:

•Stanford initially had few U.S. investors.

•Getting subpoena power to access Stanford's offshore bank's financial documents was considered difficult.

•The case initially didn't have victims complaining about losses because Stanford was still taking in enough money to pay returns.

It also was perceived to be a difficult case to make work. The report blames a short-sighted mentality at the Fort Worth office, citing lawyers there who said a quest for "stats" on convictions made officials gun-shy on tougher cases. That approach, the report said, came from Barasch and now-retired director Harold Degenhardt, who didn't return calls for comment.


Personality clashes

Barasch's management style and ego clashed with some coworkers and drove some out of the SEC, say former coworkers.

"Spence was a really bright guy, but I didn't trust him because he lied a lot," said Hugh Wright, whom Barasch replaced as head of enforcement in Fort Worth. Wright, who is now retired, headed up the regulatory side of the SEC office after Barasch took his job. "He told you want you wanted to hear."

Others who worked with Barasch at the SEC said making enemies came with the territory.

"Animosity toward Spence was more a function of what his job was at the SEC instead of who he is," said Jeffrey Ansley, a partner at Bracewell & Giuliani LLP in Dallas. Barasch hired Ansley to work at the SEC's Fort Worth office, where he stayed for three years before moving to the Department of Justice around 2003.

"When you look at how many people Spence supervised, the odds statistically say there are going to be people who are going to take issue with him," Ansley said.

More recent coworkers laud Barasch's professionalism, though they recognize that he's not always easy to work with.

"He doesn't pull punches with the attorneys who work for him, but his criticism was always constructive and professional," said Kara Altenbaumer-Price, who worked with him at Andrews Kurth for more than two years. "It was the sort of constructive criticism that makes young lawyers better."

Alan Buie, an assistant U.S. attorney who worked under Barasch at the SEC, said Barasch was a sharp and dedicated enforcement chief who "was truly passionate about protecting investors and serving the public."

"We took on plenty of big cases, and anybody who thinks we didn't just really isn't looking at the whole picture," said Buie, who left the SEC in October 2005. Buie and other current SEC attorneys cited complex trading cases against Houston-based Dynegy Inc. and Royal Dutch Shell Group as examples.


Finding new work

Barasch's choices after leaving the SEC also rattled regulators.

Just two months after leaving the agency, he asked its ethics branch for permission to represent Stanford, which was denied. Agency officials believed that Barasch's involvement with the Stanford deliberations while at the SEC permanently barred him from doing work for Stanford.

Despite that, Barasch did do a small amount of work for Stanford in October 2006, in apparent violation of rules. The SEC has referred the matter to the State Bar of Texas.

Stanford personally wanted Barasch for his legal team in 2006, instructing his advisers to find him and bring him on board. Informed about the SEC's ethics decision, Stanford wrote in an e-mail: "This is bs and I want to know why the SEC would/could conflict him out."

Barasch currently supervises three attorneys at Andrews Kurth in a growing securities law practice. Partner pay at Andrews Kurth ranges wildly, attorneys familiar with the firm say. The most successful can see $2 million in annual pay, though none could say how much Barasch earns.

Barasch's efforts to represent Stanford reflect the constant pressure to find new revenue as a new partner at a firm, said Michael Hurst, a Dallas attorney who has hired Barasch as an expert on cases. "Stanford is a rainmaker for not just white-collar attorneys but the entire civil practice," he said.

Barasch's e-mail to the SEC seeking permission to represent Stanford echoes that: "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines."

Barasch also showed interest in representing another well-known investor, Mark Cuban, in the SEC's suit against the Dallas billionaire.

On Nov. 17, 2008, regulators charged the Dallas Mavericks owner with insider trading. Cuban immediately announced that he'd hired Paul Coggins, a well-known lawyer and former U.S. attorney.

In an e-mail to a person he thought could persuade Cuban to hire him, Barasch wrote that Coggins was a "blow hard [who] doesn't know anything about securities, and has no name appeal or clout with the SEC."

Barasch also suggested he could influence the SEC attorneys involved with the complaint against Cuban.

"I am friends with and helped promote two of the guys who signed the Complaint against Mark," Barasch wrote, according to a copy of the e-mail obtained by The Dallas Morning News. "Someone should tell Mark to look at my profile on my firm website, my SEC press releases, and advise Mark to add me to his defense team."

The SEC's case was dismissed by a federal judge in July 2009. Coggins declined to comment on Barasch's e-mail.

Andrews Kurth reiterated its support for Barasch this week, saying he "will remain a valued member of the Andrews Kurth team where he provides our clients with the highest possible quality of advice and counsel."

Meanwhile, Stanford is in jail in Houston, awaiting trial on criminal charges filed by the Department of Justice in June.

Barasch is not part of his legal team.

TIMELINE: SEC WAITS YEARS TO LAUNCH INVESTIGATION OF R. ALLEN STANFORD

1997: SEC Fort Worth examiners audit Stanford Financial Group and conclude it may be a Ponzi scheme.


1998: SEC enforcement, led by Spencer Barasch, quickly closes initial inquiry into Stanford, saying the plan lacked U.S. investors.


2002: SEC examiners again refer Stanford to enforcement. Enforcement ignores the research and says it will send a letter of complaint to the Texas State Securities Board, which never received the letter.


2003: SEC receives two complaints that Stanford is operating a Ponzi scheme, but it does nothing.


2004: SEC examiners again prepare a case against Stanford.


2005: Barasch Barsach and office head Harold Degenhardt tell examiners they will not take action against Stanford.


April 2005: Barasch leaves SEC for Andrews Kurth; SEC staff immediately refers Stanford case to enforcement staff.


2006: SEC officially opens investigation into Stanford.


2009: SEC sues Stanford in February; Justice Department adds criminal charges in June.


SOURCES: SEC inspector general, Dallas Morning News research

SEC staff investigating financial crimes 'surfed porn websites while economy crashed'

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SEC Lawyer Refused to Investigate Allen Stanford Ponzi Scheme…then Represented Stanford

Spencer Barasch could have done something years ago about the Allen Stanford Ponzi scheme, but didn’t. Four times red flags went up in the Securities and Exchange Commission’s Fort Worth, Texas, office about Stanford, who has been accused of crafting a $7 billion fraud, but Barasch—the SEC’s local chief of enforcement—declined to investigate or closed down probes begun by others.

Barasch ended his 17-year career with the SEC in 2005 and went to work for the law firm
Andrews Kurth. And who does he represent among his clients? Stanford.

According to the Andrews Kurth website, Barasch “has extensive experience defending regulatory and government investigations and civil and criminal litigation initiated by the Securities and Exchange Commission…”

While Barasch insists he’s done nothing wrong, the SEC’s inspector general believes otherwise and has asked the bars of Washington and Texas to determine if Barasch violated conflict of interest rules.

SEC Enforcement Lawyer Who Quashed Stanford Probes Later Did Legal Work For Stanford

The new inspector general report on the SEC's handling of the Allen Stanford alleged Ponzi scheme case paints a devastating picture of the agency's repeated failures to pursue the billionaire banker, despite a widespread belief within the SEC's Fort Worth office that he was a fraud.

At the center of the story is Spencer Barasch, the chief of enforcement at the SEC's Fort Worth office, who declined to pursue Stanford multiple times, only to later jump ship to become a partner at a big private law firm where he proceeded to represent none other than 'Sir' Allen Stanford.

The inspector general has referred Barasch to the bars of Washington and Texas, where he is licensed, for potential violation of conflict of interest rules.

Stanford is now in jail facing charges over an alleged $7 billion Ponzi scheme.

In March 2005, Barasch announced he was leaving the SEC after 17 years, with seven of those as the head of the Fort Worth enforcement division, for the international law firm Andrews Kurth. He joined the firm's securities enforcement team.

"I am excited to become a part of this premier law firm, and look forward to using my regulatory background and experience to provide an expanded level of service to the firm's clients," Barasch said in a Andrews Kurth press release.

A couple months later, Stanford Financial Group executives were looking for representation to help them handle a burgeoning SEC inquiry into the company. They got wind of Barasch's new gig and word made its way up to Stanford himself, who said in an email to an underling, "This guy looks good and probably knows everyone at the Fort Worth office. Good job."

A few days later, Barasch emailed an SEC ethics counsel to get the green light to work for Stanford. "I am not aware of any conflicts and I do not remember any matters pending on Stanford while I was at the [C]ommission," he wrote.

In fact, the IG found, Barasch was involved in deciding at least four times to close investigations of Stanford Financial or to not pursue findings by SEC investigators that the firm was a fraud.

The first of those came in August 1998 when Barasch, recently promoted to head of enforcement at the Fort Worth office, made the decision to kill a three-month old inquiry into Stanford's business.

Even though his staff had not "determined there was no fraud," Barasch said the matter was closed due to "some problems with the case," according to another SEC staffer's account quoted in the IG report. Those problems included the enforcement staff's belief that Stanford, though himself based in the U.S., did not have U.S. investors, along with the institutional "preference for 'quick hit' cases," according to the report.

But there was dissent in the SEC ranks over Barasch's decision.

In an interview with the IG, an SEC staffer who had reviewed Stanford's financial statements described her reaction as "shock and disbelief and this incredible feeling of failure and great disappointment".

In early 2001, Barasch received a complaint which began: "I am currently providing [redacted] services to an Antigua company and have become very concerned about the unusual activities of the Stanford Financial Group, a Texas based organisation, operating though subsidiaries on the Island." But nothing was ever done in response to the complaint, the IG found.

In 2002, the Fort Worth office's examination staff again looked at Stanford Financial and grew suspicious that "the international bank was a Ponzi scheme," one staffer told the IG. They discussed the matter with the enforcement staff and forwarded a report on Stanford to Barasch. But Barasch told the IG that he couldn't recall seeing it, and the IG found "no indication" that he ever read the report.

At a March 2005 conference in which an attorney with the Forth Worth office's examination division gave a talk on the Stanford case, Barasch looked "annoyed" and "summarily told [her] ... it was not something they were interested in" immediately after the presentation, according to IG interviews with SEC staffers. He told the IG he couldn't remember the presentation or the conversation.

The examination staff then deliberately waited until Barasch left the SEC in April 2005 -- to become a partner at Andrews Kurth on the firm's securities enforcement team -- to refer the matter yet again to the office's enforcement division, according to the IG.

The SEC ethics counsel denied Barasch's request to work for Stanford, made soon after he left the SEC. (In an email to an underling, Stanford reacted angrily: "This is bs and I want to know why the SEC would /could conflict him out.")

But Barasch was undeterred. "Approximately one year after the SEC's Ethics Office determined that Barasch's conflicts ... prevented him from representing Stanford in connection with the SEC investigation, Stanford retained Barasch to do just that," the IG report says.

He belatedly sought -- and was denied -- permission to represent Stanford Financial Group, but only after billing for 12 hours of work.

The IG has referred the matter to the bars in Washington, D.C., and Texas, where Barasch holds membership, as potentially violating professional ethics.

Barasch did not immediately respond to a request for comment. But in a statement provided by his firm, Andrews Kurth Managing Partner Bob Jewell said Barasch "served the SEC with honor, integrity and distinction" and did not violate conflicts of interest.

When the SEC finally sued Stanford for fraud in February 2009, Barasch was on the scene again, eager to represent Stanford, only to be denied permission. He described his thinking in an interview with IG investigators:

"In 2009 the whole thing blows up. Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines. And I was contacted right and left by people [to] represent them."

Message from Peter Morganstern

Dear Clients:

As most of you know, last Friday, the United States Securities and Exchange Commission released a Report of Investigation by its Office of the Inspector General concerning the SEC’s failures in the Stanford matter. The Report’s conclusions are truly shocking. As detailed in the report, the SEC knew for many years that Allen Stanford was almost certainly operating a Ponzi scheme, but did nothing to stop it. Between the time that the SEC first reached its conclusion that Stanford’s operation was a fraud, and the time that it started an enforcement action against Stanford in 2009, investors poured billions of dollars into Stanford International Bank.

There is no doubt that the SEC failed to carry out its responsibilities to regulate Stanford, and many of you have asked if and when we are going to sue the SEC for your losses. You should know that we are continuing to investigate every possible avenue for recovery on your behalf, including a suit against the SEC. Significantly, the United States government generally has the benefit of “sovereign immunity,” which poses significant obstacles to successfully prosecuting an action against it on behalf of victims of financial fraud. The sovereign immunity defense makes it very difficult to bring any case against the government for failing to stop a crime – including a financial fraud. There are also procedural hurdles that would need to be overcome, including the requirement that every person who sues the SEC must first file an administrative claim with the agency in his or her own name, and not by means of a class action. While these hurdles are significant, we are continuing to analyze the viability of such a lawsuit, and will continue to explore ways to use the new Report from the Office of the Inspector General to our advantage.

Please know that we are continuing to pursue every possible avenue of recovery for our clients, and that we will aggressively fight to recover every dollar we can on your behalf.

A full copy of the SEC Report is available on our website.

Our Web Page

The website is: http://mbstanford.typepad.com/clientinformation/

The SEC's Impeccable Timing

The Securities and Exchange Commission fraud case against Goldman Sachs may be settled before it ever sees a courtroom. Yet intentionally or not, the SEC has already secured at least one victory in the court of media opinion.

Last Friday, the same day that the government unexpectedly announced its Goldman lawsuit, the SEC's inspector general released his exhaustive, 151-page report on the agency's failure to investigate alleged fraudster R. Allen Stanford. Mr. Stanford was indicted last June for operating a Ponzi scheme that bilked investors out of $8 billion. He has pleaded not guilty.

Guess which of these two stories was pushed to the back pages? The SEC did its part by publishing the Stanford report so deep in its Web site that more than a few of our readers had trouble finding it. Yesterday, the SEC management's response to the report was available on the agency's homepage, yet it provided no links to the report itself.

Little wonder. The report is damning for an SEC that wants the public to believe it has turned the corner after the Bernie Madoff disaster. The commission has made young Fabrice Tourre of Goldman Sachs a household name for his debatable disclosures to institutional investors. But many individual investors will be more interested in learning the story of Spencer Barasch. He's the SEC enforcement official who sat on various referrals to investigate Allen Stanford and then, after leaving the SEC, performed legal work for . . . Allen Stanford.

In its own way, the Stanford calamity is arguably worse than the SEC's Madoff bungle. In the Madoff case, passionate outsider Harry Markopolos could find no one at the SEC who took the time to understand the scam, cared enough and had enough authority to shut down the fraud. In the Stanford case, we see numerous SEC insiders over many years urging -- at times begging -- the enforcement staff to take action, to no avail.

The examination staff at the SEC's district office in Fort Worth, Texas reviewed the Stanford Group's operations in 1997, concluded that its sale of certificates of deposit likely constituted a Ponzi scheme, and referred the matter to SEC enforcement staff. Mr. Stanford kept on selling his seemingly too-good-to-be-true CDs, so SEC examiners investigated again in 1998, 2002 and 2004. Each time, they concluded that the Stanford operation was a probable Ponzi scheme and urged SEC action. Each time, the enforcement staff failed to act.

Along the way, SEC enforcers also ignored warnings from the daughter of an elderly investor in the Stanford scheme, the Texas State Securities Board, an anonymous insider in the Stanford operation, and U.S. Customs, which suspected that the Stanford organization was laundering money. The SEC at times would open preliminary investigations. When the Stanford Group declined to provide information, the inquiry would end.

Particularly tragic is that almost all of the $8 billion that Mr. Stanford collected from investors was gathered after the SEC's first round of inquiries, so if SEC enforcers had acted on the first referral from their colleagues, this alleged fraud would be measured in millions of dollars, not billions. Later, some investors increased their investments with Stanford Group after they learned that the SEC had investigated in 2005 and took no action. They viewed it as a clean bill of health.

In the wake of its Goldman lawsuit, the SEC is being hailed for returning to a "tough" enforcement line, but this is deceiving. The contrast between the SEC inspector general's report on Stanford and the zeal of the SEC's pursuit of Goldman Sachs is far more revealing about why the agency fails to stop genuine fraudsters.

While taking testimony and conducting interviews with dozens of agency staffers on Stanford, SEC IG David Kotz asked the enforcement staff how it could possibly have failed to prosecute someone who was believed by so many others to be running a fraud. The staff told him that senior SEC management did not favor the pursuit of Ponzi schemes and other frauds that were difficult to investigate and time-consuming to prosecute. He was also told that management favored "quick hits" and "Wall Street" cases.

This makes perfect sense when you think about the political incentives. Why do the painstaking work of tracking down actual criminals when you can score favorable headlines with a drive-by lawsuit against a large public company that will have a strong incentive to settle quickly?

In other words, the SEC is a dreadful failure in fulfilling its core mission of protecting individual investors, as the Stanford and Madoff cases show. But the SEC is very good at nailing politically correct targets like Goldman years after the fact on charges that have little or nothing to do with the investing public. On the Goldman case, by the way, the news broke yesterday that the SEC commissioners split 3-2 on whether to bring the lawsuit -- a rare partisan split on such a prominent case and further evidence of its thin legal basis.

In the cases of Stanford and Madoff, thousands of small investors lost their life savings. In the case of Goldman, some masters of the financial universe lost money on what they knew was a calculated gamble. Which did more societal harm?

From the Executive Summary of the SEC Inspector General’s Report of Investigation on the Allen Stanford debacle

Finally, the OIG investigation revealed that the former head of Enforcement in Fort Worth, who played a significant role in numerous decisions by the Fort Worth office to deny investigations of Stanford, sought to represent Stanford on three separate occasions after he left the SEC, and represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so.

This former head of Enforcement in Fort Worth was responsible for: (1) in 1998, deciding to close a MUI opened regarding Stanford after the 1997 broker-dealer examination; (2) in 2002, deciding to forward the [redacted] complaint letter to the TSSB and deciding not respond to the [redacted] complaint or investigate the issues it raised; (3) in 2002, deciding not to act on the Examination staff’s referral of Stanford for investigation after its investment adviser examination; (4) in 2003, participation in a decision not to investigate Stanford after receiving [Confidential Source]’s complaint letter comparing Stanford’s operations to the [redacted] fraud; (5) in 2003, participating in a decision not to investigate Stanford after receiving the complaint letter from an anonymous insider alleging that Stanford was engaged in a “massive Ponzi scheme;” and (6) in 2005, informing senior Examination staff after a presentation was made on Stanford at a quarterly summit meeting that Stanford was not a matter they planned to investigate.

Yet, in June 2005, a mere two months after leaving the SEC, this former head of the Enforcement in Fort Worth e-mailed the SEC Ethics Office that he had been “approached about representing [Stanford] . . . in connection with (what appears to be) a preliminary inquiry by the Fort Worth office.” He further stated, “I am not aware of any conflicts and I do not remember any matters pending on Stanford while I was at the commission.”

After the SEC Ethics Office denied his request in June 2005, in September 2006, Stanford retained this former head of Enforcement in Fort Worth to assist with inquiries Stanford was receiving from regulatory authorities, including the SEC. He met with Stanford Financial Group’s General Counsel in Stanford’s Miami office and billed Stanford for his time. Following the meeting, he billed 6.5 hours to Stanford on October 4, 2006, for, inter alia, “review[ing] documentation received from company about SEC and NASD inquiries.” On October 12, 2006, he billed Stanford 0.7 hours for a “[t]elephone conference with [Stanford Financial Group’s General Counsel] regarding status of SEC and NASD matters.” In late November 2006, he called his former subordinate, the Assistant Director who was working on the Stanford matter in Fort Worth, who asked him during the conversation, “[C]an you work on this?” and who in fact told him, “I’m not sure you’re able to work on this.” Near the time of this call, he belatedly sought permission from the SEC’s Ethics Office to represent Stanford. The SEC Ethics office replied that he could not represent Stanford for the same reasons given a year earlier and he discontinued his representation.

In February 2009, immediately after the SEC sued Stanford, this same former head of Enforcement in Fort Worth contacted the SEC Ethics Office a third time about representing Stanford in connection with the SEC matter – this time to defend Stanford against the lawsuit filed by the SEC. An SEC Ethics official testified that he could not recall another occasion in which a former SEC employee contacted his office on three separate occasions trying to represent a client in the same matter. After the SEC Ethics Office informed him for a third time that he could not represent Stanford, the former head of Enforcement in Fort Worth became upset with the decision, arguing that the matter pending in 2009 “was new and was different and unrelated to the matter that had occurred before he left.” When asked why he was so insistent on representing Stanford, he replied, “Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.”

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.

Update from Peter Morganstern to Stanford Victims

While it may not always be publicly apparent, please know that we are working very hard to advance the cause of maximizing recoveries for Stanford investors, and I personally spend the great majority of my own professional time on this matter. Second, I believe that there is a misperception that the victims from outside the United States are not being fairy represented. That is not true. The considerable majority of our clients (which exceeds 1000 in total) reside outside the United States and all of my efforts are on behalf of the entire group, without reference to where they are located. Our cases against the banks and Antigua are proceeding as expeditiously as possible (the banks are due to answer the complaint next month), and we are investigating other potentially lucrative claims all the time. We believe that other promising cases will be filed shortly. The legal process is slow, but we are aggressively pursuing all avenues for recovery. The process is particularly burdensome in large complex cases like this, and the involvement of a foreign government makes things even more complicated, as we need to formally serve Antigua under a foreign treaty, which takes several months even when the other side is cooperative, which they are not. We are doing everything we can under international law, to pursue the claims we filed against Antigua, the Eastern Caribbean Central Bank, and the other defendants. Please note that our economic interests are absolutely aligned with the victims that we represent, as our compensation depends on the success of our efforts.
We also strongly believe that the victims of this terrible fraud deserve to be compensated under the applicable laws that we cite in our complaints. As you know, we sought to move the main cases from the receivership to bankruptcy court. After the court expressed skepticism about the wisdom of removing the receiver and his team after a year of work, and the potential for increased expense and delay, we devised a compromise that will empower investors through an official committee.
This was not our first choice. Under the order we submitted to the court, we are still able to seek to move the case to bankruptcy in the future, if we are dissatisfied with this arrangement. The committee will be formed as soon as the court enters the order, as we expect it will. I assure you that the committee will represent the interests of all victims and we have been responding to people who have expressed interest in serving on the committee. I apologize for the fact that I am not always able to respond to personal emails as quickly as some people would like. We are trying to balance the legitimate desire of our clients for responses and updates with our efforts to work toward the quickest possible successful resolution of the cases. Please feel free to share this as you consider appropriate, and let's keep in touch.
Regards, PDM

SEC aware of Stanford Ponzi scheme since 1997

The Robert Allen Stanford alleged Ponzi scheme and its impact on middle class investors still isn’t getting the media attention it deserves. Last week, a blistering report on the incompetence of the Securities and Exchange Commission was buried by the Goldman Sachs fraud charges; both were released Friday.

The Inspector General for the SEC issued a detailed 159-page report, dated March 31, concluding that the agency’s Fort Worth office knew the Texas businessman was operating a Ponzi scheme in 1997. The Stanford Victims Coalition, a group that represents former Stanford investors, was quick to accuse the agency of trying to “minimize the revelation of the truth” by releasing the IG’s report on the same day it announced fraud charges against investment bank Goldman Sachs.

The IG’s report was requested by Republican U.S. Sen. David Vitter.

Among the most damning findings was the warning issued by a retiring assistant district administrator for the Fort Worth examination program in 1997 to the branch chief: “Keep an eye on these people [Stanford] because it looks like a Ponzi scheme to me, and some day it’s going to blow up.”

It was not the examiners, but rather the enforcement division, that dropped the ball. Fort Worth examiners repeatedly conducted examinations of Stanford in 1997, 1998, 2002 and 2004, concluding each time that Stanford’s CDs were likely a Ponzi scheme. “The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion,” according to the report. However, “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 report also noted that the former head of the SEC’s enforcement office in Fort Worth impeded investigations into Stanford’s operations for years. Spencer Barasch repeatedly decided “to quash the matter,” the report reads. Later, when the SEC began investigating, “Barasch repeatedly attempted to represent Stanford in connection with the investigation he had blocked for seven years.” Barasch is now a partner at the law firm Andrews Kurth LLP. Andrews Kurth managing partner Bob Jewell said Barasch did not violate any ethics laws and will remain with the firm, Dow Jones reported. However, because Barasch’s representation of Stanford appears to have violated state bar rules that prohibit a former government employee from working on matters in which he participated as a government employee, Inspector General H. David Kotz referred the findings of his investigation to the SEC’s ethics counsel for referral to the bar counsel offices in the two states Barasch is admitted to practice law.

Additionally, the IG noted that SEC enforcement officials also ignored a number of warnings from insiders at Stanford’s operations. The report notes that a letter was forwarded to the SEC in October 2003 by the National Association of Securities Dealers warning that Stanford’s businesses “WILL DESTROY THE LIFE SAVINGS OF MANY.”

After the initial red flags, it would be another eight years, 2005, before a serious effort to expose the alleged fraud was launched. And another several years before the SEC stopped it. In February 2009 the SEC shut down Stanford’s operations.

It is estimated that about $1 billion was invested in the CDs in Louisiana. The flamboyant Texas billionaire remains in jail facing charges of operating a $7 billion Ponzi scheme.

In the conclusion of the report, the IG noted:

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’s findings during this investigation raise significant concerns about how decisions were made within the SEC’s Division of Enforcement with regard to the Stanford matter. We are providing this Report of Investigation (“ROI”) to the Chairman of the SEC with the recommendation that the Chairman carefully review its findings and share with Enforcement management the portions of this ROI that relate to the performance failures by those employees who still work at the SEC, so that appropriate action (which may include performance-based action, if applicable) is taken, on an employee-by-employee basis, to ensure that future decisions about when to open an investigation and when to recommend that the Commission take action are made in a more appropriate manner.

Sun Printing and Publishing folds

The last vestige of what was once the R Allen Stanford empire crumbled Friday afternoon, with the closure of Sun Printing and Publishing Company Limited for an indeterminable period.

The 46 members of the Antigua staff and four in St Kitts received letters that read, in part, “owing to circumstances beyond our control, the company will be unable to sustain operations in the immediate future.”

Interestingly, a check on the St Kitts office, by an OBSERVER reporter, just after 3:30 pm yesterday as the staff in Antigua was receiving the news, revealed that up to that point, they were unaware of the development.

The letter noted that the directors, Stanford’s fiancée Andrea Stoelker and Barbara Streete, are working with legal counsel “to explore possible options for a solution to our short and long term difficulties.”

It was just last month that the paper was not printed for a week because of financial constraints that rendered management unable to clear a shipment of paper from the port.
Additionally, Antigua-based staffers said they walked away from the posh offices at the gateway to VC Bird International Airport being owned salaries for the last two pay periods.

The letter, which was signed by General Manager Patrick Henry, noted that there should be news on the way forward in the middle of next week. Incidentally, Stoelker was not at yesterday’s meeting and the news was delivered by Henry, who employees said spoke with his head hung. Only about half of the staff was present.

Sources said the directors are in discussions with the principals of the Barbados Advocate, who expressed an interest in the company.

Informed that rather than a sale, a lease option is being discussed, members of staff crafted a proposal, to which they had no reply at the time of going to press, to ask Stoelker and Streete to consider using 25 per cent of the severance owed to a group of them to lease the operations.

Sun employees had received severance letters at the end of July 2009, although they did not receive the monies to which they were entitled at the time. Those sums are, however, accruing interest until such a time that they can be paid.

There was mixed emotions from employees with whom this newspaper spoke yesterday afternoon. Some said they saw this coming and had prepared as best they could. Others said they were hopeful that issues would be resolved and they would be back at work with the company in some form or other, and a few were clearly dejected at the prospects of having commitments and being unemployed.

Of further concern to another set was issues not addressed yesterday, such as late notice of the lay off, outstanding salaries and vacation pay.

The Sun, which began operations in 1998, in the past 12 months doggedly withstood the loss of its benefactor, who is in a Texas jail waiting to defend himself against charges that he orchestrated a massive ponzi scheme.

With diminished capacity, statute and skeleton staff, Stanford Development Company (SDC) struggles on.

Several other Stanford companies, namely The Pavilion, Stanford Trust, Antigua Athletic Club, Sticky Wicket Restaurant, Stanford Cricket Ground, SDC Warehouse at Powells Estate and the Parking Lot were forced out of operation earlier this year for outstanding utilities owed to Antigua Public Utilities Authority (APUA).

REPORT OF SEC INVESTIGATION

REPORT OF INVESTIGATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
OFFICE OF INSPECTOR GENERAL
Case No. OIG-526

http://www.sec.gov/news/studies/2010/oig-526.pdf

SEC suspected Stanford scheme for years

U.S. securities regulators suspected as early as 1997 that alleged swindler Allen Stanford was running a Ponzi scheme, but did nothing to stop it until late 2005, a government watchdog found.

Even then, it was not until February of 2009 that the Securities and Exchange Commission filed civil charges accusing Stanford and three of his companies with selling billions of dollars of fraudulent certificates of deposit (CDs).

SEC Inspector General David Kotz said on Friday that the Fort Worth, Texas office of the SEC conducted examinations of 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."

"The only significant difference in the Examination group's findings over the years was that the potential fraud grew exponentially from $250 million to $1.5 billion," Kotz found.

In 2005, the enforcement arm of the SEC finally agreed to seek a formal order from the commission to investigate Stanford. But even so, Kotz said, an opportunity was missed to bring action against Stanford Group Co for its admitted failure to conduct due diligence on Stanford's investment portfolio.

The report is another black eye for the agency from Kotz, who last year reported that the SEC bungled five probes of Bernard Madoff's Ponzi scheme that investigators have estimated at $65 billion. Madoff pleaded guilty and is serving a 150-year prison sentence.

A Ponzi scheme is one in which early investors are paid with the money from new clients.

SEC Chairman Mary Schapiro, who took office in January of 2009, has tried to reinvigorate the agency's enforcement division.

Earlier on Friday, the SEC sued Goldman Sachs Group Inc for fraud in marketing a debt product tied to subprime mortgages.

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.

Responding to Kotz's report, Schapiro said on Friday that since 2005, "much has changed and continues to change regarding the agency's leadership, its internal procedures and its culture of collaboration."

"The report makes seven recommendations, most of which have been implemented since 2005," she said. "We will carefully analyze the report and implement any additional reforms as necessary for effective investor protection."

Kotz's investigation was triggered by former investors who blamed the SEC and the Financial Industry Regulatory Authority, a broker-dealer regulator, for not stopping the Texas financier sooner.

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 said.

He said that senior officials in the Fort Worth office perceived they were being judged by the number of cases they brought, conveying 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," Kotz concluded.

Kotz also found that the former head of enforcement in Fort Worth, Spencer Barasch, "played a significant role" in quashing investigations of Stanford and sought to represent him on three occasions after he left the SEC. In 2006, he did briefly represent Stanford before being informed by the SEC ethics office that it was improper to do so.

When asked why he was so insistent on representing Stanford, Barasch replied, "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines," according to Kotz's report.

In an earlier report in July, Kotz concluded the SEC did nothing wrong when it "stood down" on investigating Stanford at the request of federal prosecutors

SEC Missed Chances to Snare Stanford, IG Says

The Securities & Exchange Commission missed numerous opportunities over nearly a decade to crack down on Texas financier R. Allen Stanford's alleged Ponzi scheme, with investigators aware of the problem as early as 1997 according to a new report.

The SEC Inspector General said in a report released Friday that it was referring the former head of the SEC's enforcement office in Fort Worth, Texas, to the Texas and Washington D.C. bar associations. The report found the employee, "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.

The report lays out a series of missteps by the SEC ignoring red flags being raised by the examiners in its Fort Worth office, who were "aware since 1997 that [Stanford] was likely operating a Ponzi scheme." In four separate instances in 1997, 1998, 2002 and 2004, examiners concluded that Stanford's businesses were either a Ponzi scheme "or a similar fraudulent scheme."

"The only significant difference in the Examination group's findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion," the report said.

SEC Chairman Mary Schapiro, in a statement released by the agency, said that the SEC has made a number of changes since the events recounted in the report.

"Since that time, much changed and continues to change regarding the agency's leadership, it's internal procedures and its culture of collaboration," she said.

The report suggests the SEC's mistakes in the Stanford case were in part the result of a culture that favored cases that could be quickly resolved over more complicated matters. Cases like the alleged Stanford fraud weren't considered "quick-hit" and "slam-dunk," and were thus discouraged, the inspector general's office said.

SEC examiners raised alarms about Stanford's businesses early on, targeting his operations in 1997, just two years after they registered with the agency.

The examinations raised enough alarms that the former administration for the Fort Worth examination program told her branch chief in 1997, "keep your eye on these people [referring to Stanford] because this looks like a Ponzi scheme to me and some day it's going to blow up."

SEC enforcement officials also appear to have ignored warnings from insiders at Stanford's operations. The report said a letter was forwarded to the SEC in October 2003 by the National Association of Securities Dealers that warned, in part, that Stanford's businesses "WILL DESTROY THE LIFE SAVINGS OF MANY."

The inspector general's office found that enforcement staff "minimally reviewed" the letter, but decided not to investigate or open an inquiry into the matter. The enforcement chief who made the decision told investigators that the decision was made in part to "wait and see if something else would come up."

Frauds put forensic accountants in the spotlight

Allen Stanford may still be grabbing headlines as he awaits trial on charges of fraud worth $8.5bn but it is forensic accountants who will play a prominent role in readying the case for both sides and testifying as expert witnesses.
Forensic accountants’ involvement in American criminal and civil litigation has become more visible because of the sensational nature of recent financial scandals, according to 30-year industry veteran Ronald L. Durkin, senior managing director of specialist accounting firm Durkin Forensic.
The biggest challenge is gathering records. “There are bound to be millions of computer files and electronic documents that must be forensically preserved and duplicated,” writes Robert Harris, vice chair of the American Institute of Certified Public Accountants (AICPA).
In an October case hearing, the prosecution said it had established a searchable computer database with 4.1 million records and that it expects to add at least another 1.5 million documents.
Stanford and his co-defendants are charged with defrauding investors who purchased around $7bn in certificates of deposit administered by Stanford International Bank. The company allegedly misappropriated most of those assets, including more than $1.6bn for personal loans to Stanford himself, according to the government indictment.
An important strategy for forensic accountants is finding a benchmark period where assets and liabilities were fairly stated. Financial statements are then rolled forward on an account by account basis to see which assets dropped off the balance sheet and what debt was added, said Durkin.
Insurance policies, depreciation schedules, tax returns and loan applications are used to identify missing assets. Gathering these records is especially challenging in an international case like Stanford’s, with the company’s headquarters in Antigua, investors in more than 100 countries and branch offices in the US and abroad.
“It’s a ripple effect. When the funds are moved from country to country, it becomes quite a challenge to find the scent and follow the trail,” said Durkin, who tracked the assets of Saudi billionaire arms dealer Adnan Khashoggi in the late 1980s and 1990s.
“My guess is that there will be a considerable amount of records missing and therefore forensic accountants will need to reconstruct the financial and accounting transactions,” Durkin speculated. Once the story of the assets has been reconstructed, forensic acc-ountants need to tell that story.
“Communication skills are important when appearing before a jury or a judge,” Durkin, who honed his testimonial skills as a special agent for the FBI, added. “You have to be able to take complicated, complex issues and put them in simple terms that are easy to understand.”
Certification for forensic accountants isn’t required, though there are a number
of certifications offered by various professional associations.
The biggest drawback for clients is cost. Upon suspicion of fraud, a company retains a law firm and the firm hires a third party to conduct the forensic accounting, so that the forensic accounting work will be protected by attorney-client privilege.
“What most people don’t realise is that, once we find the fraud, like the $50bn in the Madoff case, then the costs grow significantly due to the tremendous expense of the lawyers and forensic accountants,” said Larry Crumbley, professor of accounting at Louisiana State University.
Allen Stanford’s defence attorneys have said it may take a year to prepare his defence.
“A year is a lot of man hours and a lot of money,” Crumbley said.

SEC watchdog to fault Stanford probe: sources

A federal watchdog is expected to soon release a report criticizing how the U.S. Securities and Exchange Commission handled a probe of alleged swindler Allen Stanford, people familiar with the matter said on Tuesday.
The report by SEC Inspector General David Kotz is expected to be highly critical of the agency, unlike a narrowly focused report he released last July.
It comes as the agency has been trying to rebuild its reputation after missing Bernard Madoff's fraud.
Stanford is in a Texas jail awaiting trial on 21 criminal charges related to an alleged $7 billion scheme involving the issuance by his Antiguan bank of certificates of deposit (CDs) with improbably high interest rates.
Authorities accuse Stanford of running a Ponzi scheme, in which early investors are paid with the money from new clients.
Some of his former investors are blaming the SEC and the Financial Industry Regulatory Authority, a broker-dealer regulator, for not stopping the Texas financier sooner.
In his July report, Kotz concluded that the SEC did nothing wrong when it "stood down" on investigating Stanford at the request of federal prosecutors.
But the new report, which looks further back at the agency's dealings with Stanford, suggests the SEC dragged its feet in getting its own probe under way, the sources familiar with the report said.
The sources requested anonymity because Kotz's latest report is not yet public.
A spokesman for the SEC had no comment. Kotz's report is being reviewed by the agency's Freedom of Information Act office.
In February 2009, the SEC filed civil charges accusing Stanford and three of his companies with fraudulently selling billions of dollars of the fraudulent CDs.
The SEC's charges were announced two months after Madoff was arrested for orchestrating a massive Ponzi scheme, which investigators have estimated at up to $65 billion.
The SEC has said it began investigating Stanford in 2005, and had been aware of complaints about his CDs even earlier.
But it has said it faced jurisdictional hurdles in pursuing an investigation against an offshore bank, in part because of a U.S. Supreme court ruling that limited its ability to regulate traditional bank products such as CDs.
In September, Kotz issued a report in which he found the SEC had bungled five probes that should have uncovered Madoff's fraud. Madoff pleaded guilty and is serving a 150-year sentence in a North Carolina federal prison.

Stanford properties are on the auction block

After months of inactivity, the former Fairpark offices of the Stanford Financial Group are seeing the light of day again.

The building, at the corner of East Main and South Commerce streets in Tupelo, is on the auction block, along with other SFG properties across the country. The sale does not include Fairpark Salon, which is privately owned.

The auction does include property formerly owned by James Davis, Stanford’s chief financial officer and a native of Baldwyn. Davis’ property up for auction includes the ForeFront Golf facility in Baldwyn and seven properties in downtown Baldwyn, including the building that housed The Status Thimble and Davis Holdings.

The auction is being held by Ralph Janvey, the court-appointed receiver who took possession of Stanford’s assets after company’s top executives were charged in $7.2 billion Ponzi scheme.

Proceeds from the auction are aimed at returning as much money as possible to investors who held Stanford International CDs that proved worthless when the financial empire collapsed in 2009.

The Fairpark office, which used to house offices for Davis and Stanford Chief Investment Officer Laura Pendergest-Holt, has been vacant since the SEC shut it down Feb. 17, 2009.

The papers and computers are long gone, but the interior of the building points to some of the opulence of its former owners.

The main lobby of Stanford’s offices in Fairpark is tiled with green marble. The walls have wood paneling and there are wood accents throughout the building.

Stone is used as a wall accent behind the former receptionist’s desk, which still has the Stanford name mounted to the wall above it. An ornamental railing with brass accents graces the staircase to the second floor.

Ten offices and multiple conference and break rooms are spread throughout the two floors.

The rooms were emptied of their furniture, fixtures, decorative accessories and electronic equipment late last year by Office Liquidators of Colorado, which won the bid from the receiver.

Along with the Stanford Group offices, the 20,000-square-foot building at 110 East Main St. has about 10,000 square feet of unfinished space. It also houses the financial company Edward Jones on the first floor, in addition to Fairpark Salon.

Kim Miller and Sharon McDaniel own the salon, which is not included in the sale.

Keith Henley, one of the real estate agents for the property, said the space leased by Edward Jones is part of the sale, but he expects a lease understanding to be written into the sale that will allow the business to stay.

The buildings are up for sale in a stalking horse auction, which is being coordinated locally by Henley and Tommy Morgan of Coldwell Banker Tommy Morgan Realtors.

“It’s not like standing on the street corner with auction cards,” Henley said.

The “stalking horse” phase of the auction currently is open. For this phase – which does not have a minimum bid – parties submit written bids for the building, the bids are verified and then the winner – the stalking horse – is selected, Henley said.

The stalking horse’s bid sets the threshold for the public auction. For example, if the stalking horse bids $1 million on the Fairpark property, a bidder in the public auction will have to submit a higher figure.

If the public auction gets a bid that beats the stalking horse, the receiver will give the stalking horse 3 percent of his or her bid as compensation.

“We have a couple of interested prospects circling,” Henley said. “We anticipate some offers in the next week or so.”

Henley said there aren’t specific dates for deadlines. He expects the entire auction process, from marketing to negotiating the closing details, to take about 90 days.

He also expects an investor – not the end used – to buy the Fairpark property.

Henley, a former Downtown Tupelo Main Street board member, said he hopes the buyer can see the potential for the building. If it were his building, Henley said he would keep the Stanford offices as professional space and add a retailer or a restaurant to the first floor.

He would transform the vacant space on the second floor into luxury lofts and condos.

Stepping out onto one of the balconies, he pointed around downtown and cited the views that would be perfect for parade-watching. He also cited its location in the Fairpark District.

The downtown location is one of the perks that got Miller’s attention when she was looking to relocate from the Crosstown area. Now, the Fairpark Salon has been in the building for four years.

“We love the location,” she said. “It’s easily accessible. We’ve really enjoyed being down here and being a part of it. It’s been a positive move for us.”

But as nice as the building is, the auction comes down to finding a buyer with the available capital.

The economy has whittled down the field of candidates, Henley said.

“In this economy, we’ve told our contact that if we receive three or more bids, we’d be very fortunate,” he said. “I think that it stands to reason that a bidder that is selected as a stalking house has a very good chance of being the person that ends up with the property.”

Vantis hit by $6bn 'hole' in Allen Stanford assets

The thousands who invested $7 billion (£4.5 billion) in Allen Stanford's alleged Ponzi scheme are unlikely to get more than 10% of their money back.

The receiver investigating Stanford International Bank today warned he had discovered a $6 billion (£3.9 billion) "hole".

Stanford, who arrived at Lord's cricket ground in 2008 to sign up the England team for a $1 million tournament in the West Indies, lured more than 27,000 investors into his scheme.

But Nigel Hamilton Smith, head of corporate restructuring at the listed accountancy firm Vantis, said Standford “siphoned away” $6 billion.

The receiver, who was appointed by the Antiguan government, told Insolvency News: “There is meant to be funds from deposits worth £7.3 billion.

"However, the only assets existing are worth $500 million to $700 million, creating this $6 billion hole. All the money invested was siphoned away and spent on creating this huge financial empire. While it would be naïve to think Stanford didn't stash away something, it certainly wasn't billions.”

The news led to shares in Vantis falling 3% to 22.8p. The firm recently told shareholders that it had not collected any fees for the advisory work carried out on the liquidation of Stanford International Bank, because the assets had been frozen.

Its auditors Ernst & Young warned that “material uncertainties associated with receipts from the Stanford insolvency ... may cast significant doubt on the company's ability to continue as a going concern”.

Dershowitz will try to get Stanford bail

Harvard Law School professor Alan Dershowitz will be a consultant on a third effort to get incarcerated businessman R. Allen Stanford freed before his January trial.

Deemed a flight risk because of his connections to Antigua and denied bail, Stanford, 60, has been behind bars since June 2009 and in solitary confinement some of that time. His prior teams of lawyers have twice argued that he cannot adequately prepare for his defense and must be let out, under house arrest and possibly with guards.

Though lawyers argued Stanford must be able to use a computer and review boxes of documents, which are not allowed in federal detention, their two prior efforts have failed at both the trial and appellate court level.

The law professor says he thinks he can combine arguments about violations of Stanford's Fifth Amendment right against double jeopardy, Sixth Amendment right to defend himself and Eighth Amendment right to pre-trial freedom to get this case all the way to the U.S. Supreme Court.

“My philosophy is: Never give up,” said Dershowitz, who visited Stanford in Houston this week. “Just because something was turned down doesn't mean you shouldn't try again.”

Dershowitz said he will be a consultant to Stanford's new Houston-based attorneys, Mike Essmyer and Robert S. Bennett. The law professor, known for his defense work nationwide, said he's talked to Stanford's previous lawyers over time as well.

Dershowitz said Thursday he does not believe that when Congress passed the bail reform act that allowed for Stanford's detention that they had in mind a man who could be in prison for two years before the end of his trial.

“It's so unfair to simply lock somebody up and not let them prepare for their defense,” said Dershowitz.

Stanford is accused of 21 counts of conspiracy, fraud, bribery and obstruction of justice. He and others are accused of cheating investors who bought certificates of deposit issued by Stanford International Bank on the Caribbean island of Antigua, and sold through companies affiliated with Houston-based Stanford Financial Group.

Stanford has denied he committed any crimes.

Stanford's co-defendants were not imprisoned. Laura Holt had all her funds frozen in February 2009 when the Securities and Exchange Commission filed a civil lawsuit that froze all company assets as well and put the firm under a receiver through a Dallas judge.

Essmyer said they want Dershowitz on the team because they believe if a Supreme Court justice saw how difficult it is under Bureau of Prison rules to get paperwork to Stanford so he can aid in his own defense, this wouldn't be happening.

“I cannot effectively defend the man if he can't read over the paperwork. Prison rules don't match what's necessary in a big paper case,” Essmyer said.

Essmyer said they hope Lloyd's of London insurance will pay for Dershowitz.

Prosecutors generally do not comment for stories like this, and federal prosecutor Paul Pelletier had no comment Thursday.

In previous court cases and in briefs responding to these same arguments made by Stanford's previous lawyers, prosecutors have said Stanford's dual citizenship, international contacts and possible access to hidden or donated funds make him a flight risk.

Judge gets frustrated with Stanford/New lawyers appointed

R. Allen Stanford arrives at the Federal Courthouse on Tuesday seeking his ‘Sixth Amendment right' to choose new attorneys.

businessman R. Allen Stanford got two new lawyers Tuesday, but not before a federal judge became frustrated questioning the shackled defendant.

Mike Essmyer, a longtime Houston criminal defense lawyer, told Senior U.S. District Judge David Hittner that Stanford wants new counsel because of a conflict with his last set of lawyers.

Hittner himself questioned Stanford, noting that he's now asked for 11 different lawyers. The judge told Stanford to sit down when the defendant would not give the judge the yes or no answers he was looking for. Essmyer, Stanford's new lead counsel, finished the questioning.

Kent Schaffer, Stanford's last lawyer, said he and George “Mac” Secrest are happy to be leaving the case. He said the trouble the judge had with the obstinate Stanford that morning was a tiny taste of the difficulty he had in the months he represented Stanford.

“I feel great, just like I did after my first divorce,” Schaffer said. “We're lawyers who don't do what our clients necessarily want. We do what our experience tells us is best for their case.”

High turnover
Stanford's lawyers in his criminal case have included ones from Washington and Houston, and he defended the high turnover in Tuesday's hearing.

“I think I have a Sixth Amendment right to pick counsel of my choice,” Stanford told the judge.

“Over and over again?” Hittner replied. The judge said he will grant no more lawyer substitutions and the trial will go forward as planned in January.

Essmyer told reporters he thinks a lot of the musical chairs occurred over problems involving legal fees. Ess- myer will now handle the case with Houston-based consumer lawyer Robert S. Bennett, who also does some criminal cases.

He said he's ready to go forward with the case and will now explore asking that the case be moved because of pre-trial publicity.

Essmyer handles everything from traffic tickets to white-collar crime, he said. He said his fee in this case is likely to be $700 an hour.

Stanford, 60, founder and chairman of Stanford Financial Group, faces 21 federal criminal charges in connection with what the government calls a $7 billion Ponzi scheme. Stanford has pleaded not guilty to all charges. He has been detained without bail as a flight risk since his indictment.

Pay for Stanford's lawyers has been an issue since the Securities and Exchange Commission first froze assets of Stanford and the company in February 2009.

Lloyd's of London, which insured Stanford company directors and officers, has been ordered by courts to pay until recently but is fighting that ruling. The company says that under its contract, it doesn't have to pay criminal lawyers because the company's chief financial officer pleaded guilty to charges and described what Lloyd's contends was money laundering at the firm.

Security tight
Hittner asked Essmyer and Bennett to promise to stay on the case as appointed lawyers if the insurance money runs out. The judge also told Stanford that he will not automatically let more lawyers join the team.

Security was unusually tight in the courtroom. U.S. marshals at first moved spectators away from the side of the courtroom with unobstructed views and later asked for bar identification from most of those allowed to sit in the front row behind Stanford.

Stanford Receiver Seeks to Sell Horse Magazines, Boutique Bank

The court-appointed receiver for R. Allen Stanford’s businesses asked permission to sell the indicted financier’s stakes in a Houston television station, a pair of glossy horse-industry magazines, a boutique bank in the U.S. Virgin Islands and a publicly traded precious-metals firm.

Ralph Janvey’s private-equity advisers have found three buyers willing to pay a total of $6.1 million for Stanford’s holdings in the separate companies, all of which are experiencing financial difficulty, according to Janvey.

The Park Hill Group, which is marketing Stanford’s private- equity portfolio for Janvey, “concluded that these offers represent the highest dollar value available for the receivership estate,” Kevin Sadler, Janvey’s lawyer, said in court papers filed yesterday in federal court in Dallas.

Sadler said prospective investors have refused to inject direly needed capital into the businesses as long as Stanford remains an investor.

Stanford, who denies any wrongdoing, has protested Janvey’s sale of his assets and investments before he has the chance to defend himself at trial. The financier is scheduled to be tried in January on 21 criminal counts that he led a $7 billion investment fraud involving certificates of deposit sold by Antigua-based Stanford International Bank Ltd.

Parallel Allegations

He also faces parallel civil fraud allegations from the U.S. Securities and Exchange Commission. Stanford’s personal and corporate assets were placed under Janvey’s control when the SEC sued him and several associates in February 2009.

“I think it is odd the government is collecting millions of dollars for these assets, when they say he was running a Ponzi scheme,” Christina Sarchio, Stanford’s civil-defense lawyer, said yesterday in a phone interview. “If it’s a Ponzi scheme, there’s supposed to be nothing there.”

Sarchio has filed multiple motions seeking to block Janvey’s sales of Stanford’s assets, without success to date.

“It’s remarkable that the government continues to sell off assets in a case where there’s been no finding of fraud by Mr. Stanford,” Sarchio said. “What happens at the end of the day, if Mr. Stanford is found not guilty and not liable? Allen Stanford himself is suffering, but it’s the investors’ money, so they’re getting short-changed as well.”

Janvey asked the judge overseeing Stanford’s SEC case for permission to sell Stanford’s Houston-based USFR Media Group to a unit of the Goodman Group, which is the largest equity shareholder in the Western-lifestyle media group. Goodman has agreed to pay $2 million cash to the receivership and invest $2 million in working capital into the media properties.

UHF Station

USFR’s largest holding is a full-power independent UHF television station in Houston, known as Channel 55, which Stanford bought for $31.5 million in late 2006. The company also owns two glossy magazines for horse enthusiasts -- “Cowboys & Indians” and “Western & English Today” -- and a video production division formed last year to make TV ads, infomercials and promotional videos.

During 2008 and the first nine months of 2009, the media group’s operating losses exceeded $14 million, Janvey said. At yearend 2009, it had about $1.1 million in overdue payables and risked insolvency without an immediate cash infusion, Janvey said.

Janvey has also located a buyer for Stanford’s 8 percent share of Merchants Commercial Bank, a one-branch bank in St. Thomas, U.S. Virgin Islands, that he co-founded with a $1.1 million investment in 2006. An unidentified existing investor in the bank has agreed to pay $536,250 for the stake in MCB, whose portfolio consists primarily of local real estate loans.

Property Values

Sadler said property values in the U.S. Virgin Islands have plunged, causing a 700 percent increase in the number of non- performing loans on the bank’s books. As of yearend 2009, 6.6 percent of MCB’s total loans, or $4.6 million, were considered non-performing. That sum is “materially higher than the comparable ratio range of 1 percent to 3 percent found at large and regional banks in the United States,” Sadler said.

DGSE Cos., a precious-metals and jewelry company based in Dallas, agreed to pay Janvey $3.6 million for Stanford’s stake in the firm and its subsidiary. Sadler said Stanford holds about 30 percent of DGSE’s shares, which are listed on the American Stock Exchange, as well as $10.5 million in secured and unsecured debt by DGSE’s rare coin unit, Superior Galleries of Woodland Hills, California.

Superior Unit

The Superior unit has lost almost $20 million in the past eight years, according to court papers, and DGSE had threatened to liquidate the business unless Janvey approved the sale.

“Stanford’s investment is likely to be rendered worthless in the event of liquidation,” Sadler said in the filing.

Kristie Blumenschein, Janvey’s law partner and spokeswoman, didn’t immediately return a call for comment on the proposed sales.