SEC Seeks Sanctions Against Ex-Stanford Brokerage Execs

By Joshua Gallu (Bloomberg)

 The U.S. Securities and Exchange Commission accused four former executives of R. Allen Stanford’s Houston-based brokerage of facilitating the sale of bogus investments that fueled a $7 billion Ponzi scheme.
Top officials at the Stanford Financial Group Co. unit willfully aided and abetted the fraud, which unraveled in February 2009, the SEC said today in an administrative order. The agency named Jay Comeaux, the brokerage’s president from 1996 to 2005, his successor Daniel Bogar, private client group head Jason Green and Bernerd Young, a former regulator who became chief compliance officer.

Comeaux settled the claims without admitting or denying the allegations and agreed to be barred from associating with a broker or investment adviser. An administrative law judge will determine any financial penalties. Bogar, Green and Young are fighting the SEC’s claims.
Stanford, 62, was found guilty in March of using the brokerage to sell fraudulent certificates of deposit issued by his Antigua-based bank over the course of 20 years. He is serving a 110-year prison sentence for the fraud, which drew on more than 20,000 investors worldwide. Stanford’s former accountants and other executives also face criminal and civil claims.
The SEC has been reviewing the brokerage’s role for more than two years amid criticism from investors and lawmakers who said regulators should’ve caught the fraud sooner. The SEC’s internal watchdog faulted the agency in a report, saying no meaningful probe of Stanford’s businesses was conducted until 2005, even though examiners suspected fraud eight years earlier.

Fighting Claims

J. Randall Henderson, an attorney for Young, said yesterday his client will fight the claims “with whatever possible in terms of resources and energy.”
John Kincade, an attorney for Green, said in an e-mail that his client had no knowledge of Stanford’s fraud. “We look forward to the opportunity to clear Mr. Green’s name, and we are confident we will succeed.”
Phone calls to attorneys for Comeaux and Bogar weren’t immediately returned.
Bogar, Young and Green took several trips to Antigua to investigate and perform due diligence on Stanford’s bank, and they knew that the bank refused to allow the brokerage to review and confirm its investment portfolio, including historical performance and claims that it was focused on highly liquid investments, the SEC said.

False Claims

They then armed brokers with offering documents making claims they knew to be false, including that depositors were protected by a comprehensive insurance program. In 2007 and 2008, the brokerage sold more than $2 billion of the CDs, the SEC said.

“They mischaracterized Stanford’s CD program as safe and secure when in fact it was a secret trading program known only to a select few individuals,” Kevin Edmundson, an assistant director of enforcement in the SEC’s regional office in Fort Worth, Texas, said in an interview. “U.S. investors deserved to know that the CD program was a black box.”

The brokerage, which derived more than half of its revenue from the CDs, also gave employees financial incentives to sell the fraudulent products, according to the order. Advisers got 1 percent upon the sale, a trailing commission of 1 percent for each year of the CD’s term and additional quarterly bonuses based on total volume of CDs sold. By February 2008, an outside consultant advised the executives that the compensation was above the market rate and resulted in a distorted focus on the sale of Stanford CDs, the SEC said.

Conflicts of Interest

Bogar and Young also knew or were reckless in not knowing that the brokerage failed to disclose certain conflicts of interest, according to the SEC. The conflicts included the brokerage earning revenue from Stanford’s bank by managing its private equity investments and producing research reports on its asset allocation at the same time it was selling the CDs, according to the order.

Young became the top compliance official at Stanford’s brokerage in 2006 after having worked for nearly two decades at the National Association of Securities Dealers, which became the Financial Industry Regulatory Authority in 2007. He headed NASD’s Dallas office from 1999 to 2003, the brokerage-industry self-regulator said in a 2009 report. Young now works at Magnolia, Texas-based MGL Consulting LLC.

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net