Third Party Discovery of Foreign Bank Records Should First Proceed Under the Hague Convention

Where U.S. litigation discovery obligations were argued to be in conflict with foreign civil and criminal privacy statutes, many recent opinions found that discovery should proceed under the Federal Rules over the protest of the foreign data custodians. See, e.g., Gucci Amer., Inc. v. Curveal Fashion, No. 09 Civ. 8458, 2010 WL 808639 (S.D.N.Y. Mar. 8, 2010) (compelling the third-party U.S. parent of a foreign bank to produce documents located at its subsidiary despite claims that such production was illegal under Malaysian law) discussed further in prior blog posts here and here. However, in SEC v. Stanford International Bank Ltd, the court departed from this pattern in finding that discovery should first proceed under the Hague convention “in the interest of comity.” Civil Action No. 3:09–CV–0298–N, 2011 WL 1378470 at *14 (N.D.Tex. April 6, 2011).

In this case, the court previously determined that R. Allen Stanford, his associates, and various entities under Stanford's control (collectively “Stanford”) operated “a massive Ponzi scheme that stole approximately $8 billion from an estimated 50,000 investors scattered over more than 100 countries,” and accordingly, the Court appointed a Receiver to identify and take control of Stanford’s assets. Id. at *1. As third-party Société Générale Private Banking (Suisse) S.A. (“SocGen”) was believed to hold accounts belonging to Stanford, the Receiver sought to discover account records under the Federal Rules of Civil Procedure (“FRCP”). Id. at *2. SocGen, opposing discovery under the FRCP, argued that as the sought-after documents were located in Switzerland, compliance with the FRCP discovery request would “subject it and its employees to criminal, civil, and administrative penalties under Swiss law.” Id. Instead, SocGen argued that the Receiver should first utilize the discovery procedures of the Hague Convention, of which Switzerland is a signatory.

To determine under which mechanism discovery should proceed, the court applied the balancing of factors set out in Société Nationale Industrielle Aérospatiale v. U.S. District Court, 482 U.S. 522, 538, 107 S.Ct. 2542, 96 L.Ed.2d 461 (1987) (“Aérospatiale”) and Minpeco, S.A. v. Conticommodity Serv., Inc., 116 F.R.D. 517, 523 (S.D.N.Y. 1987). These factors include: (1) the importance to the litigation of the documents or other information requested; (2) the degree of specificity of the request; (3) whether the information originated in the United States; (4) the availability of alternative means of securing the information, (5) the competing interests of the nations whose laws are in conflict; (6) the hardship of compliance on the party or witnesses from whom discovery is sought; and (7) the good faith of the party resisting discovery under the Federal Rules. See id. at *4.

The court’s application of these factors was initially fairly typical. Factors 1, 2, and 4 were found to favor the Receiver, as the documents were “vital” to the receivership proceedings and not available anywhere else. In particular, the court noted that as it considered the Receiver to essentially be SocGen’s customer, the discovery request “constitutes no more than a bank customer asking for a copy of its own records.” Id. at *5-6, 8, and 11. Counseling the opposite conclusion, factors 3, 6, and 7 were found to favor SocGen, as the documents were only located in Switzerland; this defense was not raised in bad faith; and “comity counsels deference” to SocGen’s “potentially well-founded fear” that compliance with the discovery request under the Federal Rules could lead to prosecution. Id. at *7-8, and 12-13.

Where the Court’s analysis deviates significantly from other opinions is its consideration of the fifth factor, which in this case involves the competing interests of the U.S. and Switzerland. Whereas other courts found that U.S. discovery interests trumped foreign privacy concerns, the Stanford court found this factor to be neutral, after noting that any such balancing of interests would be “political” and “especially inapposite in this case, where the legislative authorities of both nations essentially have spoken by adopting the Convention.” Id. at *9. Compare id. (“the Convention inherently, and adequately, balances the competing sovereign interests here because its use will benefit U.S. interests by providing the needed evidence, and protect Swiss interests by avoiding intrusions upon Swiss sovereignty.”) with Gucci, 2010 WL at *7 (“[T]he Court concludes that the United States interest in fully and fairly adjudicating matters before its courts . . . outweighs Malaysia’s interest in protecting the confidentiality of its banking customers’ records.”).

On balance, the Stanford court found that the comity factors weighed in SocGen’s favor “at least in the first instance.” Id. at *13. Accordingly, the Receiver was to proceed with discovery under the Hague Convention, but was not precluded from renewing its request for discovery under the FRCP should its efforts be unsuccessful. Id. at *13-14. In so holding, the court acknowledged that others relied on the discretion provided by the Supreme Court in Aérospatiale as a “green light to generally ‘discard[ ] the treaty as an unnecessary hassle.’” Id. at *3 (citing In re Automotive Refinishing, 358 F.3d 288, 306 (3rd Cir. 2004)). However, this approach “ignores Aérospatiale's admonition to ‘exercise special vigilance’ in international discovery disputes . . . and exemplifies courts' intrinsic ‘proforum bias’ warned against by . . . the Aérospatiale minority.” Id.

While it is unclear the extent to which this approach will be followed by other courts in the future, this opinion illustrates that it is possible for litigants and third parties to successfully navigate cross border discovery conflicts even where privacy interests are at stake.

Stanford Investors Complaint Against BDO

BDO Complaint May 26 2011

Allen Stanford Investors Sue His Accounting Firm

Nearly two years after Texas financier Allen Stanford was indicted in an alleged massive Ponzi scheme, investors have just filed a $10 billion proposed class action suit against his auditor—the giant accounting firm BDO.

The suit—filed Thursday in federal court in Dallas—says BDO did not only aid and abet the $7 billion dollar fraud...it was a "co-conspirator."

“BDO’s cozy relationship with the Stanford Financial Group was steeped in conflicts of interest and required ongoing deceptive and duplicitous manipulation of the facts to allow the Ponzi scheme’s exponential growth for over a decade,” the complaint says. “The result of this deception is the loss of thousands of investors’ life savings.”

BDO not only audited Stanford's U.S. operations, it also did critical work in Antigua, where the alleged fraud was based.

Before his indictment in 2009, Stanford told CNBC about a task force he put together—including a "major accounting firm" to rewrite Antigua's banking laws.

“Back in the early '90s, I was asked by the then-government if I would put together a civilian team of professionals, which I got,” Stanford said. “Ex-FBI, ex-DEA, an ex-U.S. Attorney…a major accounting firm and others to come up with a strong, if not the strongest platform for international banking.”

Authorities and investors say that platform paved the way for the fraud. Stanford has denied wrongdoing. He faces a trial currently scheduled for September 12 on 14 criminal counts.

BDO has not had a chance to respond to the suit, but for months it has been fighting a civil subpoena for documents filed by the court-appointed receiver in the SEC’s lawsuit against Stanford.

In a court filing in April, BDO attorneys said the firm "has no clue as to what it may have done wrong." The filing called the subpoena “a fishing expedition.”

Stanford's 30-thousand investors have so far recovered just pennies on the dollar.

Stanford Investors Sue Former Auditor BDO US for $10.7 Billion Over Fraud

BDO USA LLP and its parent, the ex- auditors of indicted financier R. Allen Stanford’s former company, were sued for $10.7 billion by investors claiming BDO ignored signs of potential fraud.


“Despite the pervasive fraud that infected Stanford Financial Group’s operations, BDO repeatedly issued unqualified audit opinions on its Stanford client’s annual financial statements,” Edward Snyder, a lawyer for Stanford investors, said in a complaint filed yesterday in federal court in Dallas.

Stanford’s companies “needed BDO’s unqualified audit opinions to satisfy securities regulators and to continue recommending” sales of the allegedly bogus certificates of deposit at Stanford International Bank Ltd. in Antigua, the investors said in the complaint.

U.S. Securities and Exchange Commission regulators seized Stanford’s operations in February 2009 on allegations they were involved in a “massive Ponzi scheme” that defrauded investors of more than $7 billion.

“We have yet to be served with the complaint and therefore are unable to comment at this time,” Jerry Walsh, a spokesman for BDO, said in an e-mail. “However, the fact that this complaint was not filed until now -- years after the Stanford fraud came to light and after many other investor complaints were filed -- reflects a transparent understanding that the allegations lack merit.”


Criminal Charges

Stanford, 61, has been incarcerated since June 2009 as a flight risk after he was indicted on parallel criminal fraud charges. He denies the charges and is scheduled for trial in federal court in Houston in September.

In addition to claims that auditors intentionally concealed fraudulent activity, the investors also contend four BDO executives played key roles in a Stanford-sponsored task force that assisted the Antiguan banking authorities in overhauling their banking regulations in the late 1990s, allegedly weakening them in ways that aided Stanford.

The Stanford task force rewrote Antigua’s money-laundering act “to ensure that ‘fraud’ and ‘false accounting’ did not fall under the Act’s prescribed list of violations,” the investors said. After the laws were rewritten in April 1999, the U.S. Treasury Department issued an advisory warning banks to give Antiguan financial transactions “enhanced scrutiny” because of money-laundering concerns, according to the complaint.


‘Speculative Investments’

The investors also accuse BDO auditors of ignoring signs Stanford’s company was operating as an unregistered hedge fund “illegally disguising itself as a bank.” They claim investors were sold hedge fund shares “disguised as CDs,” and that clients’ cash was pooled by Stanford’s company to make “illiquid, speculative investments” instead of the safe, liquid portfolio promised to clients.

“BDO’s cozy relationship with the Stanford Financial Group was steeped in conflicts of interest and required ongoing deception and duplicitous manipulation of the facts to enable the Ponzi scheme to grow exponentially for over a decade,” investors said in the complaint. “The result is the loss of thousands of investors’ life savings.”

The complaint, which seeks to represent all Stanford investors, was filed on behalf of three Texans who lost more than $3.2 million on certificates of deposit issued by Stanford’s Antiguan bank. They seek $10.7 billion in damages from BDO, which is what they calculate Stanford investors worldwide collectively lost on the Antiguan CDs.


The case is Wilkinson v. BDO USA LLP, 3:11-cv-1115, U.S. District Court, Northern District of Texas (Dallas).

SIB Gets New Joint Liquidators

Antigua St John's - The Stanford Investment Bank (SIB) has new liquidators, as decided by Justice Mario Michel of the Eastern Caribbean Court of Appeal earlier this month.

The new liquidators, Marcus A Wide of the British Virgin Islands and Hugh Dickson of the Cayman Islands, replace Nigel Hamilton-Smith and Peter Wastell.

Alexander Fundora is the Stanford International Bank Ltd creditor who led the action to appoint new liquidators.

In a recent statement, Hamilton-Smith said his team is now focused on ensuring a smooth handover, including all in-progress claims, to the new appointees.

He said, “The new liquidators will be able to continue the good work in recovering assets for investors – including land assets in Antigua, funds in Switzerland, funds in the UK, and other asset tracing claims that may arise in the future.”

The former joint liquidators had reportedly been able to agree 12,083 investor claims, totalling more than US$4 billion.

“Our primary aim now is to ensure that this progress is continued,” Hamilton-Smith said.

He advised that SIB investors should contact the new joint liquidators at stanford.enquiries@uk.gt.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it for information about their claims.

The outgoing liquidators had previously provided an investor update on April 18, in which they outlined progress to date.

Wide and Dickson bring more than 60 years' combined experience in insolvency, and now specialize in offshore entities and complex and contentious cases. Wide in particular has liquidated over 30 failed banks in the Caribbean.

Stanford’s relationship with Congress

If the government’s assertions are true, Allen Stanford presided over a Ponzi scheme second only to Bernard Madoff’s in U.S. history. Stanford also sought to cultivate influence in Washington. Most of his campaign contributions occurred in two periods when his interests in legislation peaked: 2001-2002 and 2005-2008.

State may have missed Stanford clue

R. Allen Stanford used to tell prospective investors in the U.S. that he could pay higher interest rates because his Caribbean bank was free of expensive U.S. banking regulations.

Investors outside the U.S. got a different pitch: Put your money with us and enjoy all the protections of a U.S. financial institution.

Neither, of course, was true.

Federal authorities now claim that the interest rates were a sham, part of a massive $7 billion Ponzi scheme. Stanford, who has denied wrongdoing and is awaiting trial this fall, didn't have any U.S. financial institutions, either, but he did have a unique state-chartered trust company in Texas that could have given regulators insight into Stanford's activities had anyone bothered to look.

Members of Congress recently held hearings into the regulatory failures that allowed Stanford's alleged scheme to flourish for so long. But the scrutiny of federal regulators has overlooked questions of how Texas regulators also missed signs that something was amiss with Stanford.

Some of the earliest red flags about Stanford came from the Texas Department of Banking. In 1991, the department moved to shut down the Houston and El Paso offices of Stanford's Guardian International Bank. In a letter to Stanford's father, James, who was Guardian's chairman, the department threatened to file charges for violating the state's banking code because Guardian's Texas offices kept operating even after authorities in the British territory of Montserrat, where Guardian was based, revoked the bank's charter.

After Guardian was shut down, Stanford regrouped on another Caribbean island, Antigua, where he founded Stanford International Bank.

In 2000, Stanford approached the banking commission again, this time to set up a state-chartered trust company.

In granting approval, the commission also established a unique agreement by which Texas and Antiguan regulators would share information about Stanford's operations.

"Our goal is coordinated, comprehensive supervision," then-banking commissioner Randall James said in a news release at the time.

A year earlier, the U.S. Treasury Department had issued an advisory to U.S. banks urging them to scrutinize any transactions involving Antigua because the island nation had become a money-laundering haven.

Questions on cooperation
Indeed, by then the FBI and Great Britain's Scotland Yard had begun investigating Stanford's Caribbean activities, according to British newspaper reports.

That same year, Texas securities regulators forwarded concerns about possible money laundering by Stanford International to the FBI and the Securities and Exchange Commission, former Texas Securities Commissioner Denise Voigt-Crawford later testified. No action was ever taken.

Stanford had a similar trust operation in Miami, but it lacked the information-sharing agreement that the Texas charter had.

As the Stanford case has unfolded during the past two years, investigators have complained about a lack of cooperation from Antiguan authorities. The court-appointed receiver in Dallas even squared off in court with his Antiguan counterpart over who has the authority to recover funds for investors.

It's not clear if Texas banking regulators ever actually received information from Antigua.

A lawyer for the commission confirmed the agreement, but asked that I file a public records request for any details on what may have been exchanged.

I'll let you know what I get back in a later column.

Accuracy at issue
Another lawyer involved in the case told me that even if information was shared, it may not have been accurate.

Little of the financial information Stanford disclosed ever was, and Stanford allegedly managed to bamboozle regulators in the U.S. and Antigua for years.

The trust arrangement, though, was designed to prevent exactly that sort of deception.

It was supposed to allow Texas regulators to see inside Stanford's Caribbean operations. Instead, it was just another safeguard that failed to protect investors.

A Washington Tale: As Feds Closed In, Stanford Boosted Efforts To Buy Influence

As the federal government closed in on Allen Stanford in 2008, he began desperately pulling out all the stops in a bid to stay one step ahead. The Texas banker launched his own in-house lobbying shop, run by a former top aide to a powerful congressman. And he hired a former Clinton administration PR specialist to aggressively deflect reporters looking into his financial empire.

The Stanford story, of course, is primarily about how a high-living tycoon used a Caribbean tax shelter to allegedly orchestrate a multi-billion dollar Ponzi scheme. But it's also an object lesson in how Washington works: How wealthy and powerful people can buy a level of influence and access that allows them to play by a different set of rules. In Stanford's case, that only worked for so long. But it's not hard to see how he could have thought playing the Beltway influence game might be his salvation.

For at least a decade, Stanford had understood that in order to keep his operation running, he needed some juice in the capital. Starting in 2000, he spent millions on high-priced lobbyists, and used hefty campaign donations and lavish trips to the Caribbean to curry favor with lawmakers -- a subject now reportedly being investigated by the Justice Department.

But he seems to have felt that wasn't enough. In 2008, the FBI and SEC probes that would eventually lead to his downfall appeared to be heating up. That year, Stanford opened his own in-house Washington lobbying operation, headquartered on New York Avenue.

To run it, he hired two men with ideal backgrounds for pressing his agenda: James Conzelman, a former chief of staff to Michael Oxley, the Republican congressman who had chaired the House Ways and Means committee, which oversees our tax laws; and Lionel Johnson, a former top Treasury Department official during the Clinton administration, specializing in international development. Conzelman was even given the title of Senior Vice President of Stanford Financial. That year, Stanford spent $2.2 million on lobbying on "general tax" issues, records show -- far more than he had spent in previous years.

According to Jack Blum, a former congressional investigator and an expert on money laundering, it's not surprising that Stanford stepped up his lobbying operation when he did. "There were a lot of people closing in on him," Blum told TPMmuckraker. "So his natural response was: 'I'm gonna reach out and get all the people I can to cover me.'"

Referring to Stanford's work with Florida regulators in the late 1990s, Blum added: "He had spent a lot of time and money in the past to buy his way out of scrutiny."

The lobbying effort was all in vain though, of course. "He threw away a potful of money," said Blum. "He was a target, he stayed a target. No good came of it."

Blum also was a colleague of Conzelman at Baker Hostetler, the powerhouse law and lobbying firm that Conzelman joined after leaving Capitol Hill. He described Conzelman as "a nice guy, a smart guy," but said he was "really disappointed" when he learned that Conzelman had gone to work for Stanford. "I thought, Oh my God, this guy has no clue about what he's walked into."

Conzelman, now the president of the Ripon Society, an organization of moderate Republicans, told TPMmuckraker he did not immediately have time to talk. Johnson, who's now at the PR firm Fleishman Hillard, did not respond to a request for comment.

A stepped-up lobbying presence wasn't the end of it though. We told you that for much of the decade, Stanford used his "chief of staff," Yolanda Suarez, to play hardball with investigative journalists who were digging into his operation. But Suarez left his company in 2008, and that year Stanford hired Lula Rodriguez as Managing Director of Global Communications and Corporate Affairs. Rodriguez was a top State Department communications official during the Clinton administration, according to her online bio, and later was a managing director at Citigroup, focusing on Latin America and the Caribbean.

She appears to have been tenacious in fighting off journalists who were on Stanford's trail. "This was a very very professional and aggressive PR operation," one reporter who engaged with her that year told TPMmuckraker. Rodriguez, said the reporter, was "utterly relentless" in arguing that Stanford was a legitimate businessman, even sending the reporter a link to the CNBC interview in which Stanford admits that it's fun to be a billionaire.

"She was bragging about all her connections," the reporter added. [She was saying:] I wouldn't possibly be involved with someone who's a total crook."

Rodriguez also bragged about her access to Stanford, said the reporter. "She implied that she was his best pal. That she could pick up the phone, and he would be on the phone." But when the reporter followed up and tried to set up a meeting with Stanford, Rodriguez never got back to him.

Efforts to reach Rodriguez were not successful.

Of course, Stanford's high-powered lobbying and PR help couldn't keep the Feds off his trail forever. It says something about the way Washington operates, though, that Stanford even thought he could try.

Statement from FRP Advisory LLP regarding Stanford International Bank (SIB) – in liquidation

16 May 2011


Following a claim made to the Eastern Caribbean Court of Appeal, Nigel Hamilton-Smith and Peter Wastell have been removed as Joint Liquidators to Stanford International Bank – in liquidation.


Nigel Hamilton-Smith said: "Our focus is now on ensuring an effective and speedy handover to the new Joint Liquidators, so that investors suffer no more delays. The new liquidators will be able to continue the good work in recovering assets for investors - including land assets in Antigua, funds in Switzerland, funds in the UK and other asset tracing claims that may arise in the future. We were able to agree 12,083 investor claims, totalling more than US$4 billion and our primary aim now is to ensure this progress is continued. All in-progress claims will be passed to the newly appointed Joint Liquidators, Marcus Wide and Hugh Dickson at Grant Thornton BVI. SIB Investors should contact stanford.enquiries@uk.gt.com for all investor enquiries going forward.


The previous Joint Liquidators provided an update for investors, published on 18 April 2011, outlining progress to date and this can be viewed in full at http://www.frpadvisory.com/stanford/update-from-the-joint-liquidators-of-stanford-international-bank-20110418.html

Lawmakers rebuff pleas to return funds from alleged Ponzi schemer

While Allen Stanford was flying high, he and his colleagues spent more than $10 million on campaign contributions and lobbying payments to curry favor in Washington. But all that money was diverted from investors in what authorities have called an elaborate Ponzi scheme, second only to Bernard Madoff’s in U.S. history, according to court documents.

Since Stanford’s arrest in 2009, a court-appointed receiver for the Houston-based Stanford Financial Group has been struggling to reclaim investor funds paid out to in-house and contract lobbyists, financial advisers and others whose services may have helped enable the scheme.

The receiver, Dallas lawyer Ralph S. Janvey, has been able to recover only about 5 percent of the political contributions he has targeted. Four of the principal national Republican and Democratic fundraising committees took in $1.6 million in Stanford donations, but they are vigorously fighting demands that they return it

At least 50 members of the House and Senate have either ignored restitution demands or donated some of Stanford’s campaign contributions to charity instead, according to the receiver and a survey by The Washington Post. Included are House Majority Leader Eric Cantor (R-Va.); Senate Rules Committee Chairman Charles E. Schumer (D-N.Y.); Sen. Bill Nelson (D-Fla.), who chairs a Finance Committee subcommittee; and Sen. John Cornyn (R-Tex.), a member of the Judiciary Committee.

After questioning by The Post, a few of the lawmakers say they are having second thoughts. “We’re prepared to send the money back if they’re prepared to send us a release,” a spokesman for Cantor’s fundraising committee said.

“A check will be cut shortly,” Nelson’s spokesman said, explaining that the senator earlier donated matching funds to charity in keeping with his practice for “individuals who run afoul of the law.”

Kevin M. Sadler, an Austin-based lawyer who speaks for Janvey, said no one in Washington has argued that Stanford, who is in federal custody while awaiting trial, is innocent. Instead, they have challenged the receiver’s legal standing or argued that he waited too long to litigate. “Such indifference to the victims of a massive fraud scheme is difficult to understand,” Sadler said.

Thus far, Janvey has filed 45 lawsuits as part of his global scramble to recover a fraction of the more than $7 billion that prosecutors allege Stanford stole from investors in 114 countries. His authority has been upheld twice in federal civil court, where an appellate panel affirmed last December that there was considerable evidence that “the Stanford enterprise operated as a Ponzi scheme.” It cited in particular the August 2009 guilty plea of Stanford aide James Davis, who said the firm had routinely reported false returns and used new income to pay client debts.

Noting this confession, Janvey forged a legal strategy that includes pursuing payments to lobbyists and advisers, arguing that the money represented fraudulent transfers and therefore is eligible for seizure.

The Stanford Ponzi Scheme: The Whistleblower’s View

"In August 1997, I assigned an experienced and highly skilled examiner to go to Houston to analyze Stanford’s revenue stream, its methods of product distribution, and its sales practices. In only a week the examiner was able to collect enough evidence to suggest that Stanford was engaged in a fraudulent scheme – most likely a Ponzi scheme. Our conclusion was based on a significant capital infusion of funds into the broker-dealer, the source of which appeared to be investor funds. We also noted apparent misrepresentations regarding the safety and security of the investments. It was highly unlikely that the high returns being paid to investors from the CDs along with the high recurring referral fees being paid to Stanford’s broker-dealer could be generated without engaging in significant risk."

Julie Preuitt

by Julie Preuitt, Fort Worth Regional Office
U.S. Securities and Exchange Commission

Before the Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House of Representatives

May 13, 2011

Introduction

Thank you for the opportunity to testify before this subcommittee with respect to my work for the Securities & Exchange Commission (SEC or Commission) as it relates to R. Allen Stanford and his affiliated companies as well as my experience as a whistleblower within the Commission. Since 1992 I have been employed by the Commission in its Fort Worth office. In my testimony I am stating my personal views which do not necessarily reflect the views of Commission staff, the Commission, or its Commissioners.

My Role with the Commission

I would like to begin my testimony by explaining my role at the Commission. Starting as a staff accountant my duties were to conduct examinations of registered broker-dealers and transfer agents. The examinations were designed to determine the registrants’ compliance with the Securities Act of 1933 and the Securities Exchange Act of 1934, with particular emphasis on the anti-fraud provisions. I became a first line supervisor (branch chief) in 1997, where I became deeply involved in making many of the decisions regarding the direction of the Fort Worth broker-dealer examination program. In 2003 I was promoted to an assistant director position where I became responsible for running the broker-dealer program. In that role two first line supervisors as well as nine examination staff and one support person reported to me.

The Stanford Examinations

First, I would like to note that I am just a representative of the many highly experienced and skilled examiners who have done their best to protect all investors including those defrauded by Stanford. I know this may not provide comfort and certainly doesn’t lessen the Stanford victims’ losses in any way, but I and the examination staff truly care about being an advocate for the investor. Behind the public, impersonal face of a large institution like the SEC are many individuals that truly mourn your loss.



The intertwining of my career with Stanford started simply enough. In August 1997, I had just been promoted to the position of first line supervisor. One of my responsibilities was to select broker-dealers in the Fort Worth Region for examination. In an effort to familiarize myself with the registrants and to target high risk firms for examination, I began by reviewing the annual filings required by all registered broker-dealers. Stanford’s filings immediately stood out in the review process because the firm was generating millions of dollars in revenue although it had only been in existence for two years. Furthermore, the firm had generated all of the revenue by engaging in a business model which typically offered very little revenue – selling certificates of deposit (CDs). In a more typical situation at the time, a broker-dealer would receive perhaps $50 to $100 for the sale or referral of a CD.



In August 1997, I assigned an experienced and highly skilled examiner to go to Houston to analyze Stanford’s revenue stream, its methods of product distribution, and its sales practices. In only a week the examiner was able to collect enough evidence to suggest that Stanford was engaged in a fraudulent scheme – most likely a Ponzi scheme. Our conclusion was based on a significant capital infusion of funds into the broker-dealer, the source of which appeared to be investor funds. We also noted apparent misrepresentations regarding the safety and security of the investments. It was highly unlikely that the high returns being paid to investors from the CDs along with the high recurring referral fees being paid to Stanford’s broker-dealer could be generated without engaging in significant risk.



Before the end of September 1997, we reported our findings to enforcement in the Fort Worth office. Although the examiner, the associate regional director and I were anxious to get enforcement to act on our concerns, we were met with little enthusiasm. By January of 1998, when the associate regional director retired, we had yet to persuade enforcement to open an investigation. However, before the associate regional director left the Commission, she repeatedly reiterated her concerns to both the examination and enforcement staff. She also encouraged me to keep fighting for the Stanford investors.



In May 1998, after receiving an inquiry from another agency regarding Stanford’s activities, enforcement decided to open a preliminary investigation. Then, in June of that same year, Fort Worth’s investment advisory examination group started an examination of Stanford to, in part, follow up on the broker-dealer examination findings. By the beginning of July the investment advisory group also had substantial concerns regarding Stanford’s business model.



In July of 1998, I was summoned to the office of the associate director for enforcement for a meeting. I recall that he discussed some of the reasons why a decision had been made to close the investigation, but I don’t recall what any of those reasons were. Unfortunately, my clearest memory of that meeting is leaving his office feeling absolutely heartsick.



In November of 2002, the investment advisory examination group again conducted an examination of Stanford. The group found significant problems at the firm including failing to meet its fiduciary duty to clients. As I had in 1998, I was involved in multiple discussions with the investment advisory lead examiner about how obvious the fraudulent scheme seemed to be, but how difficult it seemed to get action from enforcement regarding this particular set of circumstances. In fact, rather than opening an investigation, enforcement advised the investment advisory examination group that it would be referring their findings to the Texas State Securities Board. I was disappointed in enforcement’s decision. It made no sense to me that enforcement would refer such a complicated scheme to an agency which had a far more limited jurisdictional reach.



In approximately September of 2004, the associate director for examinations asked me to make Stanford an examination priority. This was the same associate director for examinations who was in place at the time of the 2002 examination program and he was gravely concerned about Stanford’s activities. I considered this assignment to be a tremendous challenge. I had no doubt that we would find numerous indicia of fraud, but I was extremely concerned about how I could convince the same associate director of enforcement, who had declined to investigate Stanford three times earlier, that there was any reason to pursue an investigation this time? However, we both concluded that my concerns were trivial compared to our mission to protect the investing public.



In October 2004, two examiners who I considered to be some of the best in the Commission went to Houston and began another examination. Meanwhile, an attorney advisor assigned to the examination staff and I began to develop alternate strategies to pursuing the investigation so that we could overcome any previous objections raised by enforcement staff. Since we could not gain access to financial records held in a foreign country, we worked with examiners to develop objective analytical methods to demonstrate what we believed to be the impossibility of Stanford’s purported returns.



In March of 2005, as we were nearing completion of the examination, a summary of our findings and conclusions were presented at a regional regulators’ meeting. The immediate reaction from both the Fort Worth regional director and the associate director for enforcement was decidedly negative.



Around the time of this fourth unofficial declination to pursue an enforcement investigation, the associate director for enforcement announced his imminent departure from the Commission. I decided that the best course of action was to wait until he departed the Commission to officially refer our findings.

Opening the Stanford Investigation

Within two or three weeks of the just mentioned meeting, when the associate director for enforcement departed, I referred the examination to an assistant director in enforcement who I believed would be more likely to tackle an investigation into Stanford. The assistant director immediately responded to the referral; however, he too, was also soon departing the Commission so it was referred to another assistant director in enforcement. The new assistant director initially reacted with great enthusiasm and even considered filing an emergency court action which would halt the apparent fraud immediately. However, he soon took on a much more negative view of the facts and circumstances. Eventually, enforcement asked us to refer the case to the self-regulatory organization FINRA. Although we complied with the request, we remained undaunted in our determination to move Stanford forward into an SEC investigation. Just as in the case of the referral to the Texas State Securities Board, it seemed difficult to imagine that an agency with a smaller jurisdictional net could be as well-equipped as the SEC to tackle such a significant investigation. We continued to work on developing legal theories and case strategies. Despite our efforts, in approximately October of 2005, the assistant director announced his decision to close what had been up to now only an informal, or preliminary, investigation.



I did not accept his decision. I implored the new acting regional director of the Fort Worth office as well as the new head of enforcement to keep the investigation open and moving forward. It was agreed that I and the assistant director of enforcement would each prepare a memo explaining our opposing viewpoints and discuss them at a meeting. I’d like to believe that I wrote a very compelling memo and that is why it was ultimately decided to keep the case open, but the truth is that where there are that many indications of fraud, it is easy to be persuasive.



It should be noted that despite the decision to move forward with the investigation, it took another eleven months with little activity occurring on the investigation before a formal investigation was finally opened.

Institutional Influences Affecting the Stanford Investigation

Before I discuss my views on the causes for the long delay of the Stanford investigation I want to take a moment to express my personal admiration for the enforcement staff members who were able to overcome significant obstacles and obtain the critical evidence necessary to bring an action against R. Allen Stanford and his companies. Their hard work has continued in both the current litigation and in efforts to build cases against others involved in the Stanford fraud. It would be difficult to imagine a more talented or dedicated group of professionals. I believe that the public is well-served by having such individuals devote their life’s work to investor protection.



Much has been made of the former SEC-wide institutional influence that created an institutional bias against matters that were resource intensive and whose outcome was less than certain. Stanford was such a matter. There is no question that during the early Stanford timeframe, the Fort Worth office’s management firmly believed that the office’s success was measured strictly by the number of cases filed each year. Additionally, In Fort Worth, “beating” other offices by filing a greater number of cases was the highest goal. That is not to say that the Fort Worth staff did not bring meaningful cases; they did, and they should be credited for doing so. A prime example is the office’s 2002 case against a Houston energy company, Dynegy Inc., for accounting improprieties involving special-purpose entities and “round-trip” or “wash” trades. Another example is the office’s 2004 enforcement action against foreign-based oil companies Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, p.l.c., in connection with their overstatement of 4.47 billion barrels of hydrocarbon reserves. The companies paid a $120 million penalty.



The good news is that things are changing. In that regard, I want to commend Mr. Khuzami’s recognition that the evaluation of an office’s performance should include factors such as the quality, difficulty and programmatic significance of cases; the consideration of “quantity” has been placed in proper perspective. This can only encourage management decisions to be aligned with the public good.



I also want to express my appreciation to Mr. Khuzami for publicly acknowledging that the Commission could have taken a more imaginative approach to investigating Stanford. I urge Mr. Khuzami to carry that sentiment forward in the Commission’s approach to investigating other novel situations. A culture that has greater appreciation for thinking “outside the box” will well serve the interests of investors.

Raising Concerns about a “Quick-Hit” Mentality in Examinations

Unfortunately, the mentality that motivated managers in Fort Worth to sometimes ignore the best interests of the public in favor of a race for numbers has not been limited to the enforcement program.



In Mid-2006, after nearly nine years of on-again off-again battling with enforcement regarding Stanford, a new Associate Director for Examinations was hired. In short order it became clear that the new Associate Director wanted to create a culture within the examination program that mirrored enforcement’s emphasis on generating numbers. I feared the consequences of shifting from focusing on high risk examinations such as Stanford, to competing with other regional offices for statistical superiority. I expressed my concerns regarding this new approach, but my concerns were dismissed.



In the fall of 2007, the associate director for examinations announced her plan to have us conduct a new type of broker-dealer examination which would consist of interviewing a few senior personnel at brokerage firms over the course of a half day while reviewing limited, if any documentation. I found that plan to be nothing short of a subversion of the core mission of the examination program.



I had always focused Fort Worth’s regional broker-dealer examination program on the primary goal of protecting investors by rooting out fraud and other serious issues. This approach was based on the same tried and true core principles espoused by Director di Florio, recommended by the SEC’s Inspector General in the wake of the Madoff Ponzi scheme, and exemplified by the Fort Worth examination program’s work on Stanford. For example, during my tenure in management in Fort Worth: Examinations were selected based on high risk brokerage practices;



■Examinations were staffed by capable, well-qualified examiners;

■There was meaningful interaction and coordination with the investment advisory examination group;

■There was regular and consistent communication with enforcement staff;

■There was frequent coordination with other regulatory agencies; and

■Examinations were completed in a timely, efficient, and well-documented manner.

These practices quickly identified concerns about Stanford and they were key in developing other significant cases. For example, in 2006, the broker-dealer and investment advisory examination teams along with input from FINRA’s enforcement division devoted significant resources to the review of the sales practices and the investment products being sold to military members. We were successful in helping to bring not only an enforcement action against one of the largest brokerage firms selling to military members, but also our findings were instrumental in Congress’s 2006 decision to enact the Military Personnel Financial Services Protection Act which prohibited future sales of periodic payment plans.



I, and one of the first line supervisors who worked at my direction, Joel Sauer, explained why these mini-examinations would offer no discernable value to the broker-dealer program. We already had extensive information on each firm through past examinations, through quarterly filings, and through the information provided by FINRA which conducted routine examinations on a regular, frequent schedule. Furthermore, such examinations would be at the expense of meaningful program priorities. The Associate Director stated that she wanted a significant increase in numbers and this is how we would do it. The Regional Director concurred with the Associate Director.



Since local management refused to even discuss our concerns, I contacted headquarters, about the Associate Director’s examination proposal. Despite protracted resistance from the Associate Director, OCIE ultimately quashed the mini broker-dealer examinations for some of the same reasons that Mr. Sauer and I had initially expressed.



I paid a heavy price for complaining. First I received a Letter of Reprimand for not being supportive of the Associate Director’s “program initiatives” and for contacting OCIE regarding the Associate Director’s failure to follow OCIE guidelines. Two months later, in June 2008, I was transferred to a new position.



Mr. Sauer complained to the then Chairman, Executive Director and the Director for OCIE for the mistreatment I received. In response he received a Letter of Counseling, daily monitoring, and a Letter of Reprimand for complaining about the Regional Director and the Associate Director. The associate director and regional director made the situation so antagonistic that Mr. Sauer was eventually left the Commission. Only the year before Mr. Sauer had received an award for examination excellence, submitted by these same individuals.



I believe my new position was truly an attempt to drive me out of the Commission. I was assigned to report to the Regional Director (who retired last month) who would at times go weeks or even months intentionally avoiding any contact with me. At times I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level. My responsibilities and duties have generally been undefined and those that have been assigned are generally not commensurate with my pay grade and salary. I have been excluded from training and participation in management meetings or decisions.



Despite these limitations, I have done my best to be productive and effective as well as taking every advantage to learn and grow. I have become more involved in the enforcement investigative process. I have developed relationships with the public affairs office and become more extensively involved in investor education. I have organized training sessions for local staff and other regulators in the region on oil and gas fraud. I took advantage of the opportunity to lead or be involved in four examinations, two of which were with examiners in other regional offices. I’m proud to say that all four resulted in enforcement referrals and the respondents are in the process of settling charges with the Commission or are being actively investigated. There is no doubt in my mind, though, that my situation has diminished my ability to serve the investing public.



The Inspector General released a report in September, 2009 which recommended potential discipline for the associate Director and the regional director (who has since retired), for retaliating against Mr. Sauer and myself. The Commission has failed to discipline any one, at least not visibly, nor has there been any effort made to restore me to a position with similar duties and responsibilities to the one held before.



My situation should not be viewed in isolation. It is part of a cultural problem which continues to impact the Commission’s effectiveness. As Mr. di Florio pointed out in his testimony before the Senate’s Committee on Banking, Housing and Urban Affairs in September of 2010, in a self-assessment of OCIE it was concluded there was a need to create an environment for the staff to have open, candid communication and personal accountability for quality. I urge you to seek the trust of the staff by acting on those situations, such as the one in Fort Worth, where management has not fostered the desired environment.



I believe I have been very successful in serving the investing public. I have spearheaded many examinations that resulted in significant findings of fraud and monies recovered for investors. The types of cases I’ve worked on have varied from misconduct on the part of municipal officials, market manipulation, late trading in mutual funds, churning variable annuities, theft, selling inappropriate mutual fund share classes, issuer fraud in private securities, Ponzi schemes and misrepresentations and omissions in the sale of securities to name just a few. I’m proud to say that I have worked on cases where I helped stop fraud against the elderly, military members, municipalities and public institutions, affinity groups and hard-working blue-collar and professional individuals.



Many have asked me why I haven’t left the Commission over the course of the last several years. My answer has always been the same. I believe passionately in the mission of the SEC. I am proud to have devoted most of my professional life to the service of the investing public. I have tried to serve with honor and integrity. I am grateful for the many strong relationships I have developed with managers and staff throughout the Commission, which have kept me going through this difficult period. I am proud of the many accomplishments of the examiners and managers with whom I have worked all of these years. I hope I am fortunate enough to spend the remaining part of my career in the service of the Commission.

Source: Securities And Exchange Commission

Preuitt says she paid ‘heavy price’ for protesting SEC handling of Stanford probe

An SEC employee who fought for years to get the agency to stop an alleged massive Ponzi scheme told a House panel that she “paid a heavy price” for protesting her boss’s weak approach to exposing such scams.

In prepared testimony on Friday, Julie Preuitt, a longtime employee in the Securities and Exchange Commission’s Fort Worth office, said she was given a letter of reprimand and in 2008 was reassigned to report to a regional director “who would at times go weeks or even months intentionally avoiding any contact with me.”

She said she interpreted her transfer as an effort to drive her out of the agency, and she argued that the move was “part of a cultural problem” that continues to undermine the SEC’s effectiveness.

Preuitt was called to testify before the oversight panel of the House Financial Services Committee on the SEC’s failure to stop Robert Allen Stanford’s alleged $7.2 billion Ponzi scheme. The SEC’s bungling of the Stanford case and the alleged retaliation against Preuitt were the subject of news stories and SEC inspector general reports almost a year ago. House Republicans revisited the subject Friday against the backdrop of a largely partisan battle over how much funding the agency should receive.

Democrats have generally argued that the agency needs a substantial budget increase to prevent more big financial frauds and crises like the 2008 meltdown that left the nation’s economy reeling.

Some Republicans have countered that the agency’s past failures render it undeserving of such a funding boost. They have invoked such embarrassments as the SEC’s failure to stop Bernard Madoff’s Ponzi scheme and a scandal in which agency employees were viewing pornography at work.

On Friday, Republicans pressed SEC officials on such sore points as the revolving door between the agency and the industry it oversees and a wasteful SEC office lease.

The SEC didn’t need a bigger budget or more regulations to stop Stanford’s alleged scam, Rep. Randy Neugebauer (R-Tex.), chairman of the oversight and investigations subcommittee, said. The problem was that “people just didn’t do their job,” he said.

The Stanford case was in a sense more egregious than the Madoff fraud because SEC employees recognized for years that Stanford might be running a Ponzi scheme, Neugebauer said.

Preuitt reviewed the Stanford Group in 1997 and concluded that Stanford’s stated financial returns were “absolutely ludicrous,” SEC inspector general H. David Kotz said in testimony Friday. The SEC then flagged Stanford Group as a “possible Ponzi scheme,” Kotz said.

In the years that followed, SEC examiners repeatedly pressed the agency to investigate, but the SEC enforcement staff made little if any meaningful effort to do so, Kotz said. Senior officials in Fort Worth thought they were being judged on the number of cases they brought, and they discouraged work on cases that were not quick hits or or slam dunks, Kotz said.

In fall 2007, one of Preuitt’s superiors announced a new type of brokerage examination, “which would consist of interviewing a few senior personnel at brokerage firms over the course of a half day while reviewing limited, if any documentation,” Preuitt said in written testimony. Preuitt said the plan was “nothing short of a subversion of the core mission.”

Her superior, Preuitt said, called the plan part of the emphasis on “numbers.”

When Preuitt was reprimanded, another SEC official who complained about the way Preuitt had been treated was also reprimanded, Preuitt said.

The plan for mini-examinations was ultimately quashed, and the inspector general recommended potential disciplinary action against officials for retaliating against Preuitt and her colleague, she said.

But Preuitt said she is unaware of any disciplinary action, and she has not been restored to her former position.

The SEC took enforcement action against Stanford in 2009, after the Madoff fraud heightened awareness about Ponzi schemes.

Committee member Rep. Bill Posey (R-Fla.) asked SEC officials: “Have we canonized Julie Preuitt yet? ... She should probably be running the agency.”

Carlo di Florio, who heads the SEC examination program, said Preuitt showed the kind of determination the agency encourages, and said that the agency is working to give her new responsibilities.

SEC officials said new management at the agency has addressed the problems that the Stanford matter illustrated.

Rep. Michael Capuano (D-Mass.) objected to any implication that the Stanford story is an argument for loosening regulation.

The attitude that the markets will police themselves and “that somehow regulation is not necessary ... is just wrong,” Capuano said.

2nd US House Panel Presses SEC Over Stanford Fraud

WASHINGTON -(Dow Jones)- A former Securities and Exchange Commission official who was faulted for blocking attempts to investigate jailed money manager R. Allen Stanford may be the target of federal criminal inquiry, SEC officials told lawmakers Friday.
Former Fort Worth Regional Office Enforcement Chief Spencer Barasch, after leaving the SEC, sought three times to represent Stanford as he fought the agency's case, and he briefly represented Stanford in 2006. The SEC made referrals to the Texas state bar and the Washington, D.C., bar as well as to criminal authorities to investigate the matter, SEC Enforcement Chief Robert Khuzami said in testimony before the U.S. House Financial Services Oversight Panel.
SEC Inspector General David Kotz told senators in a hearing last fall that he had spoken with the U.S. Justice Department about opening a probe into Barasch.
During the hearing, Rep. Randy Neugebauer (R., Texas) asked Khuzami if he knew Barasch had represented a client before the commission last Friday. "I was not aware of that," Khuzami said.
Neugebauer said that he doesn't believe the Texas state bar has received a referral regarding Barasch.
Lawmakers at the hearing, many of whom said they represent investors in $7 billion of bogus certificates of deposit issued by Stanford International Bank Ltd., expressed dismay that the SEC hadn't disciplined Barasch and other senior enforcement managers who allegedly stifled attempts to investigate the scheme.
"I don't think the agency is going to change much because I don't see anything where people are being held accountable and responsible," Rep. Steve Pearce (R., N.M.) said.
Khuzami and SEC Examination Chief Carlo di Florio testified the SEC couldn't punish people who have left the agency. Barasch left the SEC in 2005. He now leads the corporate governance and securities enforcement team at Dallas law firm Andrews Kurth LLP.
Khuzami noted that SEC ethics rules bar former employees from ever representing clients before the commission on matters in which they had been heavily involved when they worked there.
SEC spokesman John Nester said the SEC can't move to bar a lawyer from appearing before the commission in the absence of a finding in an SEC administrative hearing that the person acted improperly or unethically or if another court enters into a judgment against the person after being sued by the SEC. Lawyers who have been criminally convicted or disbarred also cannot appear before the commission.
Neugebauer asked whether the ethics rules prohibited former employees from advising clients on SEC matters even if they don't serve as the client's agent before the commission. Khuzami said he believed former employees could advise clients on their dealings with the SEC in some situations.
Neugebauer said the rules should be tightened.
Senior enforcement staff in the SEC's Fort Worth office failed for years to open an investigation into the Stanford bank's certificate of deposits despite numerous red flags, including the conclusions of SEC examiners stretching back to 1997 that they were bogus, the SEC's internal watchdog concluded in a March 2010 report.
Stanford has pleaded not guilty to criminal charges, detailed in a 14-count indictment, that he operated the fraud. He is now awaiting trial, set for September, in a federal medical facility in North Carolina where he is receiving psychiatric treatment.
The SEC will soon determine whether victims of the Ponzi scheme should be covered by federal insurance meant to compensate people missing securities held by brokerages, SEC Deputy Solicitor Michael Conley told lawmakers at the hearing.
The SEC will determine "in the next few weeks" whether the Securities Investor Protection Corp. is wrongly refusing coverage to victims of the fraud, he said. Victims of the fraud have argued for years they deserve compensation from SIPC for the amounts they invested, but SIPC found they aren't covered by federal insurance for failed brokerages because the certificates of deposit were being held at a bank.
Julie Preuitt, an employee of the Fort Worth office who used to manage examination staff, testified as part of a second panel of witnesses that she was still being retaliated against for raising concerns a few years ago about a new "quick-hit" approach to broker-dealer examinations being pushed by her superiors. Preuitt tried to bring the alleged Stanford fraud to the attention of investigators in her office several times, beginning in 1997. Her supervisory duties were removed after she confronted her superiors about the broker examinations.
Preuitt told lawmakers she still has little work and no supervisory duties and that her superiors continue to isolate her.
Di Florio praised Preuitt for doing a "terrific job" attempting to uncover Stanford's fraud. He said, "We are working closely with Ms. Preuitt right now to structure a portfolio of responsibilities that we think demonstrate her talents to the fullest potential," including exams "of national significance."

The SEC Doesn't Care About Your Ponzi Schemes

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

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

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

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

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

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

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

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

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

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

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

“The Stanford Ponzi Scheme: Lessons for Protecting Investors from the Next Securities Fraud"

Friday, May 13, 2011 10:00 AM in 2128 Rayburn HOB
Oversight and Investigations


Click here for the Archived Webcast of this hearing.

WITNESS LIST

Panel I

Mr. H. David Kotz, Inspector General, Office of the Inspector General, U.S. Securities and Exchange Commission

Mr. Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission

Mr. Carlo di Florio, Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission

Mr. Richard Ketchum, Chief Executive Officer, Financial Industry Regulatory Authority


Panel II

Ms. Julie Preuitt, Assistant Regional Director, U.S. Securities and Exchange Commission Fort Worth Regional Office

Mr. Charles Rawl, former employee Stanford Group Company

Mr. Stanford Kauffman, victim of the Stanford fraud

***********

Submit a Question for YourWitness

UPDATE 1-FBI probing ex-SEC official on Stanford matter

* FBI, U.S. attorney probing ex-SEC official Barasch

* Barasch gave legal advice to Stanford after leaving SEC

* Republicans critical of SEC's failures on Stanford (Rewrites throughout; adds comments from SEC, lawmaker)

Federal criminal authorities are investigating whether a former U.S. securities regulator inappropriately represented alleged fraudster Allen Stanford after he left the agency in 2005.

Spencer Barasch, former head of enforcement for the U.S. Securities and Exchange Commission in Fort Worth, Texas, is being probed by the U.S. Attorney's Office and Federal Bureau of Investigation, SEC enforcement director Robert Khuzami and SEC Inspector General David Kotz told lawmakers on Friday.

The criminal probe follows SEC internal findings that Barasch made numerous requests after he left the SEC to represent Stanford and was turned down each time.

Barasch persisted in his requests even though he directly dealt with Stanford matters while at the SEC and was partly responsible for ignoring repeated red flags SEC examiners raised about Stanford as early as 1997, Kotz found in a 2010 report. He later eventually did provide some legal counsel to Stanford in 2006, the report found.

"The rules clearly prohibited [Barasch] from ... in my view, representing Mr. Stanford," Khuzami told a House Financial Services oversight subcommittee on Friday. "We made a referral to criminal authorities."

In addition, Kotz and Khuzami said they had also referred the matter for investigation to the Texas and Washington, D.C. bars.

Republican lawmakers called the hearing to investigate why it took the SEC so long to probe Stanford, a Texas financier, despite repeated attempts by SEC examiners to bring the matter to the enforcement division's attention.

The agency finally filed civil charges against Stanford in February 2009. Stanford was arrested in June 2009 and criminally charged with fraud in connection with a $7 billion scheme linked to certificates of deposit issued by his Antigua-based banking company. Stanford has denied any wrongdoing.

REVOLVING DOOR

After leaving the SEC, Barasch became a partner at law firm Andrews Kurth. In response to an inquiry from Reuters earlier this week, Andrews Kurth Managing Partner Bob Jewell said Barasch had not done anything wrong.

"We disagree with the characterization of Mr. Barasch's involvement put forth by the Inspector General in his report last year," he said. "We believe he acted properly during his contacts with the Stanford Financial Group and the Securities and Exchange Commission. He did not violate conflicts of interest."

The testimony about Barasch came on the same day the Project on Government Oversight, a government watchdog group, issued a report about the "revolving door" at the SEC. It found that 219 former officials at the SEC have left since 2006 to help clients with business before the agency. [ID:nN12129379].

Federal laws place certain restrictions on many SEC and other government employees once they return to the private sector. In addition to a one-year cooling off period, they are generally prohibited from representing a client before a government agency on any matter in which they were personally and substantially involved.

Some lawmakers say stricter policies are needed.

Republican Randy Neugebauer, the chairman of the panel, claimed Barasch represented a client before the SEC in a legal matter as recently as last Friday.

"One of the things that hopefully comes out of this is there are some tighter rules," he said. "It is obviously very alarming." (Reporting by Sarah N. Lynch; editing by Tim Dobbyn and Andre Grenon)

Marcus Wide and Hugh Dickson of Grant Thornton Appointed New World-Wide Liquidators of Stanford International Bank Ltd.

SAINT JOHN'S, ANTIGUA -- the Honourable Mr Justice Mario Michel of the Eastern Caribbean High Court at Antigua appointed Marcus A. Wide of the BVI and Hugh Dickson of the Cayman Islands the new liquidators of Stanford International Bank Ltd., today.

In November 2009, a number of creditors of Stanford International Bank sought the removal of the original joint-liquidators of the failed bank, Nigel Hamilton-Smith and Peter Wastell, alleging that, they should be removed from office.

"Wide's and Dickson's appointment represents an important step in the recovery of money for the many victims of the alleged R. Allen Stanford multi billion dollar Ponzi scheme," said Alexander Fundora, the Stanford International Bank Ltd. creditor who led the action to appoint new liquidators. Fundora, the founder of a Miami, Fla.-based home health care company, lost $2.5 million in the Stanford scheme. His application to appoint new liquidators was supported by depositors who hold more than $100 million of claims.

"With more than $7 billion in alleged losses suffered by approximately 27,000 depositors worldwide, a robust liquidation of the bank is vital," said Wide. "Hugh Dickson and I look forward to serving the creditors of the Stanford estate."

Dickson said he looks forward to working with the former joint liquidators of the bank to ensure, for the sake of the creditors, that control over the estate is transferred in an orderly fashion.

Wide and Dickson have more than 60 years combined experience in insolvency, and now specialise in offshore entities and complex and contentious cases. Wide in particular has liquidated over 30 failed banks in the Caribbean.

For at least a decade, R. Allen Stanford, James M. Davis, and Laura Pendergest-Holt, through companies they controlled, including Stanford International Bank Ltd., executed a massive Ponzi scheme, according to court filings by U.S. prosecutors. In carrying out the scheme, it is alleged that Stanford, Davis and Pendergest-Holt misapplied billions of dollars of depositor funds.

Soon after the United States Securities and Exchange Commission ("SEC") sued Stanford for fraud, in February 2009, the High Court of Antigua appointed Hamilton Smith and Wastell of Vantis Business Recovery Services of the UK as receiver-managers over the bank. Their initial brief was to take charge of the bank's affairs and to preserve assets. In Dallas, Texas, a U.S. District Court Judge appointed, at the request of the SEC, Ralph Janvey as Receiver over the bank's assets as well. This has led to an expensive fight for control over the worldwide assets of the bank between SEC Receiver Janvey and the former joint liquidators appointed by the Antiguan Court.

Mr. Fundora launched his application for the former joint liquidators' removal shortly after Judge Claude Auclair of the Superior Court of Quebec ruled against the Outgoing Officeholders in a highly critical opinion in September 2009. Since then, Vantis plc, a U.K.-based accounting, tax and recovery firm, has been placed into insolvent administration and the former joint liquidators joined FRP Advisory LLP.

Despite repeated calls for urgency in appointing the new liquidators, the estate has been in limbo since the June 8, 2010 decision.

Mr. Fundora has been represented by Martin Kenney of Martin Kenney & Co. Solicitors, of the British Virgin Islands and Miami based attorney Edward H. Davis, Jr. of Astigarraga Davis. Antiguan lawyers Nicolette Doherty and Craig Christopher serve as local counsel in Antigua.

Revolving door between SEC, law firms spins at dizzying speed

SEC Chairman Mary Schapiro testifies at Congressional hearing in 2010. Evan Vucci/The Associated Press

New database shows more than 200 ex-SEC staff appeared at agency on behalf of corporate clients

When the Securities and Exchange Commission accused Eric Sieracki of securities fraud in 2009, the former Countrywide Financial executive did what many others in trouble with Wall Street’s top cop have done: He hired a former SEC lawyer to defend him.

Between 2006 and 2010, at least 219 former SEC staff appeared before their former agency on behalf of private-sector clients in 800 different matters, according to a new database created by the Project on Government Oversight (POGO) and shared with iWatch News . POGO obtained copies of the ex-SEC employees’ disclosure forms through a Freedom of Information Act request.

Senior SEC officials – particularly those from the enforcement division – have long been able to count on finding a home at a private law firm with a hefty raise after a few years of government service. The new POGO data gives the clearest picture yet of just how much corporate America relies on former SEC staff to handle its legal work before the agency.

Sieracki’s lawyer, Nicolas Morgan at the law firm DLA Piper, has been one of the busiest.

From 1998 to 2005, Morgan held several jobs within the SEC’s enforcement division, including senior trial counsel. From 2006 to 2008, the disclosure forms show that he represented 17 clients in matters before his former employer.

Morgan didn’t respond to a request for comment. In 2010, Sieracki agreed to pay $130,000 to settle the SEC’s case.

The only former SEC lawyer to work on more cases involving the agency was Walter Ricciardi, a former deputy director of enforcement now at the firm Paul, Weiss, Rifkind, Wharton & Garrison. He filed 20 statements in 2009 and 2010, the two years after he left the SEC, according to the database.

In some cases, SEC staffers were barely out the door before telling the agency they would be back to represent private clients.

John Ivascu left his job as a staff attorney in the enforcement division on Jan. 2, 2006. Three days later, he petitioned to represent a client before the agency in a matter involving a financial restatement, the database showed.

Who was that client? As in the overwhelming majority of disclosure forms, the SEC redacted the client’s name.

Some ex-employees failed to file disclosures

The disclosure forms are required by the SEC for all former employees who appear before the agency in the first two years after leaving. They are meant to guard against a former employee from taking a case related to one he or she worked on while at the agency.

But POGO identified several instances where former employees appeared before the agency within the two-year time frame without filing a disclosure.

The most notable was Spencer Barasch, a former assistant director of enforcement in the SEC’s Fort Worth regional office until he left in April 2005 to join the law firm Andrews Kurth.

According to the SEC’s inspector general, while Barasch was still at the SEC, he played a big part in delaying and limiting the agency’s investigation of the $8 billion Ponzi scheme orchestrated by Allen Stanford. After leaving the SEC, Barasch repeatedly attempted to represent Stanford in connection with the regulator’s investigation, even though he was told by the agency’s ethics office that his previous involvement with the Stanford investigation prohibited him from doing so.

Nonetheless, the internal watchdog’s reported that in September 2006—well within two years of his departure—Stanford hired Barasch to “represent it in connection with the SEC’s investigation of Stanford.”

Barasch, who was not available for comment, never filed a disclosure form.

The SEC inspector general, David Kotz, criticized Barasch in written testimony prepared for a congressional hearing Friday about the Stanford fraud.

After the SEC’s ethics office told Barasch in 2009 a third time that he could not represent Stanford, Barasch became upset, Kotz said in his prepared testimony. “When asked during our [inspector general] investigation 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’.”

POGO also identified several former SEC staff who noted in their disclosure letters that they had some involvement with a related matter during their time at the agency. In those instances, the employees discussed the matter with an SEC ethics officer and were told they could carry on with the representation.

The job cycle that routinely has former SEC staff appearing in cases back before the regulator within days and weeks of leaving has attracted increased scrutiny from Congress and the SEC’s own inspector general.

Revolving door

One frequent critic of the SEC’s revolving door, Republican Sen. Charles Grassley of Iowa, said the new POGO database shows that restrictions on ex-government workers from other departments “must be made to apply to the financial regulatory agencies. “

“Along with the restrictions, there should be public disclosure of where these former financial regulators are working and what issues they are working on,” Grassley said in an emailed statement. “Transparency is a proven back-stop to enforce ethics rules.”

Last summer, Grassley, then the top Republican on the Senate Finance Committee, asked the SEC inspector general to review the departure of Elizabeth King, an associate director in the SEC’s markets division, who left for the high-frequency trading firm Getco LLC. The lawmaker said the probe was needed so Congress “can more accurately assess the integrity of the SEC’s operations.”

In a June 15, 2010 letter responding to Grassley’s request, Kotz revealed that he was already investigating the SEC’s revolving door policy. iWatch News previously reported that the Washington law firm WilmerHale, and its star, William McLucas, who chairs the securities group there, was a likely target.

McLucas left the agency long ago, and is not required to file disclosure forms. Indeed, it is very likely that POGO’s four-year database identifies just a small percentage of all former SEC staff who regularly appear before the agency.

The Government Accountability Office, the watchdog arm of Congress, is also looking at the revolving door issue at the SEC, with a report due in July.

The SEC did not respond to an iWatch News request for comment. But in testimony during her confirmation hearing in January 2009, Chairman Mary Schapiro indicated a willingness to address the revolving door issue.

Schapiro said then that the SEC must seek to avoid the conflicts created by these employees “walking out the door and going to a firm and leaving everybody to wonder whether they showed some favor to that firm during their time at the SEC.”

SEC to Release Findings on Stanford Investors SIPC Eligibility

The U.S. Securities and Exchange Commission, criticized for missing R. Allen Stanford's alleged $7 billion fraud, said it will decide "in the near future" whether victims should collect federal brokerage insurance.

The SEC has devoted "substantial time and effort" to determine whether the Securities Investor Protection Corp. erred in denying investors coverage, Robert Khuzami, the enforcement director, and Carlo di Florio, chief of inspections, said in prepared remarks for a hearing today of the House Financial Services Committee.

Investors, lawmakers and the SEC's inspector general have faulted the agency for ignoring warnings from its own examiners as far back as 1997. Stanford, 61, was indicted in June 2009 on 21 criminal charges as he was accused of misleading investors about the safety and oversight of certificates of deposit issued by his Antigua-based Stanford International Bank Ltd. Stanford denies the allegations.

Julie Preuitt, an SEC employee who worked on an examination of Stanford's business in 1997, said she was reprimanded after alerting supervisors to possible fraud and pushing for a more thorough investigation.

"I paid a heavy price for complaining," Preuitt said in prepared testimony. "At times I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level."

Inspector General H. David Kotz recommended in a report last year that the SEC consider taking disciplinary action against two managers in the Fort Worth, Texas, office who punished Preuitt.

According to Preuitt, that hasn't happened.

"The commission has failed to discipline anyone, at least not visibly, nor has there been any effort made to restore me to a position with similar duties and responsibilities to the one held before," Preuitt said.

House Republicans to dissect SEC's Stanford failure

SEC to say numerous improvements have been made

* Republicans expected to question SEC competence

* SEC near recommendation on SIPC coverage for victims

U.S. securities regulators will argue they have mended their ways at a congressional hearing Friday into the decade-long failure to investigate Texas financier Allen Stanford's alleged Ponzi scheme.

Republicans are expected to demand answers as to why it took the Securities and Exchange Commission so long to probe Stanford despite repeated attempts by SEC examiners to bring the matter to the enforcement division's attention.

The hearing before the House Financial Services oversight subcommittee could fuel Republican calls to take an ax to the SEC's 2012 budget request.

The SEC says it needs a 16 percent budget increase to boost enforcement efforts and to carry out its new responsibilities under the Dodd-Frank law.

The SEC filed civil charges against Stanford in February 2009. He was then arrested in June 2009 and criminally charged with fraud in connection with a $7 billion scheme linked to certificates of deposit issued by his Antigua-based banking company.

Stanford, who has denied any wrongdoing, is scheduled to go on trial in September.

His arrest came the same month as the sentencing of epic swindler Bernard Madoff, whose Ponzi scheme went undetected for years by the SEC despite tips and the suspicions of some agency staffers.

A Ponzi scheme is one in which money from new investors is used to pay out early investors.

Witnesses at Friday's hearing will include SEC Enforcement Director Robert Khuzami, examinations and inspections director Carlo di Florio, and an SEC employee who repeatedly warned about Stanford and was punished after she complained about watered-down examinations.

Also due to appear is SEC Inspector General David Kotz, who issued a report in 2010 faulting the SEC's enforcement staff for repeatedly failing to investigate Stanford.

He laid out numerous recommendations to improve SEC enforcement and examinations, all of which Kotz will tell lawmakers on Friday "have been implemented and closed to our satisfaction," according to prepared testimony posted on the House panel's website.

Khuzami and di Florio will express deep regret that the SEC failed to act more quickly. "More remains to be done, but...we have made great strides to put in place the people and structures to prevent another occurrence of Stanford-type problems."

Republicans are expected to ask why no one has been disciplined at the SEC over the Stanford matter, and why the victims of the alleged scheme are still fighting to get the Securities Investor Protection Corp to cover their claims.

Khuzami and di Florio's prepared testimony says the SEC is close to finalizing a recommendation to SIPC on whether the victims' claims should be covered.

Stanford Ponzi Scheme Trial Set for September 12

The long awaited trial of accused Ponzi schemer Allen Stanford has been set for September 12, according to a new scheduling order issued Tuesday by U.S. District Judge David Hittner in Houston.

Stanford's trial had been set for January, but was postponed indefinitely after he became addicted to prescription drugs while in prison, and Hittner ruled he was incompetent to stand trial.

Since February, Stanford has been undergoing drug treatment at a prison hospital in Butner, North Carolina. His court-appointed attorney, Ali Fazel, would not comment on Stanford's condition, citing a gag order in the case.

The setting of a new trial date is the latest in a fast-moving series of events in the case.

Last week, a federal grand jury in Houston returned a new indictment against Stanford, reducing the number of counts he faces to 14 from 21, and removing four co-defendants from the case. They are to be tried separately.

Following the new indictment, Fazel informed the court that his client could not be arraigned on the revised charges since Stanford had been ruled incompetent.

But Hittner set the new schedule anyway, noting that the new indictment has "no basic changes in the relevant counts."

Stanford investors have been critical of delays in the case. With the criminal charges unresolved, most of his assets are in foreign accounts, off limits to U.S. authorities.