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."