Lawsuit against U.S. over Stanford Ponzi scheme can go ahead

Source:Joseph Ax (Reuters)

(Reuters) - A lawsuit claiming U.S. securities regulators were negligent in failing to respond earlier to Allen Stanford's $7 billion Ponzi scheme can go forward for now, a federal judge ruled in Florida on Friday.

U.S. District Judge Robert Scola rejected the U.S. government's motion to dismiss the case, according to court documents. The government claimed the court did not have jurisdiction over the U.S. Securities and Exchange Commission's handling of the Stanford case.

The purported class action complaint, filed by two investors who say they lost a combined $1.65 million when the scheme collapsed, claims the SEC knew as early as 1997 that Stanford was likely operating a Ponzi scheme but took no action against him until 2009. The SEC had a duty to notify the Securities Investor Protection Corp (SIPC) of Stanford's fraud, the lawsuit asserts.

The SIPC, funded by the brokerage industry, handles investors' claims when brokers fail and has overseen liquidation proceedings for Bernard Madoff's Ponzi scheme and the collapse of MF Global.

In his ruling, Scola found that the SEC was required to act if it concluded that Stanford was running a Ponzi scheme.

"When the Securities and Exchange Commission believes that a broker or dealer is in or approaching financial difficulty then it must report that broker/dealer to the Securities Investor Protection Corporation," he wrote.

Scola did, however, dismiss the lawsuit's second claim, which faulted the SEC for not considering whether to deny Stanford's company's annual registration as an investment advisor. The judge agreed with the government's argument that such decisions are entirely within the SEC's discretion.

The government's argument that the SEC did not know Stanford was running a Ponzi scheme will be addressed if and when it moves for summary judgment, the judge said.

A similar $18.7 million lawsuit against the U.S. was tossed by a Texas federal judge last year for lack of jurisdiction.

In a March 2010 report, the SEC's inspector general found the SEC was aware since 1997 that Stanford was likely running a Ponzi scheme and that numerous agencies, including the Federal Bureau of Investigation, the Justice Department and the Secret Service, all probed Stanford's operations at one time or another.

An SEC spokeswoman declined to comment on Friday's ruling.

"This is a historic ruling showing that the SEC can finally be held accountable for not notifying SIPC," said Gaytri Kachroo, a lawyer for the plaintiffs.

Stanford was sentenced in June to 110 years in prison for bilking investors with fraudulent CDs issued by Stanford International Bank, his bank in Antigua.

The plaintiffs are seeking unspecified damages and certification of the class action.

The case is Zelaya et al. v. United States, U.S. District Court for the Southern District of Florida, No. 11-62644.

(Reporting by Joseph Ax; editing by Carol Bishopric)

KLS complaint against the U.S. Government/SEC

Complaint Docket Stamped

SEC Eyed for Negligence in Enforcement Cases

A federal watchdog is investigating whether a senior Securities and Exchange Commission official bungled an examination associated with a "major" investment adviser enforcement case in 2009.

The senior official at one of the SEC's regional offices allegedly told staffers not to pursue certain red flags in an investment adviser examination, according to a report by SEC Inspector General David Kotz.

Kotz's semi-annual report to Congress, released on Monday, did not identify the senior official, the regional office or the major enforcement case.

The senior official was motivated to cover up his tracks because he was deeply involved in the prior examination that did not uncover the fraud, according to an internal complaint
received by Kotz.

The report from Kotz comes as the SEC continues to rebuild its reputation after the regulator was blasted for missing Bernard Madoff's epic fraud despite numerous tips and complaints.

The SEC declined comment. Kotz would not elaborate further.

According to the report, the complaint also alleged that a hostile work environment existed in the regional office because management failed to discipline the senior official after it was revealed that he had viewed porn on a SEC computer.

According to the report, Kotz is still eyeing allegations that the enforcement division was negligent in an investigation of an insider trading case. Among other things, Kotz is also probing allegations that SEC staff failed to properly investigate a prominent law firm for obstructing an ongoing case.

Stanford's "Non-US Victims" Demand that the SEC Take Responsibility

The non-US victims of the pyramidal fraud perpetrated by R. Allen Stanford, represented by the COALICION VICTIMAS DE STANFORD AMERICA LATINA, demand that the SEC (Securities and Exchange Commission) take responsibility for its ineptitude, negligence and complicity in the investigation of the "Stanford Case".

"For the majority of the non-US victims, that represent more than 84% of the total depositors that believed in America's ethical standards and the efficiency of its regulatory authorities, the Inspector General's Report of the SEC, published on April 16th, 2010, is shameful and devastating" according to Jaime R. Escalona, Leader of the COALICION VICTIMAS DE STANFORD AMERICA LATINA.

"Since 1997, the office of the SEC in Fort Worth knew that R. Allen Stanford was presumably running a pyramidal fraud. " Is it not inept and/or negligent to know a crime is being committed and not act? Did the pain the victims would inevitably suffer as a result of the economic devastation planned by Stanford not have any importance?" asks Escalona.

According to the Inspector General's investigation, the Examiners of the SEC in Fort Worth could never convince the SEC's Enforcement Division to open an investigation that could have stopped the sale of CDs in time and in consequence could have prevented this social catastrophe.

According to the SEC's Inspector General, then chief of enforcement in Fort Worth, Spencer Barasch, always refused to investigate Stanford and additionally closed the investigations that other officials had initiated.

Furthermore, after leaving the SEC in 2005, Barasch, now a partner of the law firm Andrews Kurth, tried on three (3) occasions to represent Stanford before the SEC and was able to represent him during three (3) months in 2006. Escalona asks, "How much did this complicity cost the victims? Why did the SEC not have the valor to stop the immoral behavior of this government official?"

According to the shocking Report from the Inspector General, the Stanford Case was a difficult one that required a long investigation. Directors of the Fort Worth office knew that they were evaluated on the number of investigated cases. For this reason, novel or complex cases were dropped, without any regard for the consequences. In this case, the SEC's staff knew of the growth of this fraud and did not investigate it.

But according to Escalona, "The saddest thing was to learn that the SEC did not give priority to the Stanford Case because in addition to being a complex case and difficult to investigate, the majority of the investors were foreigners".

The COALICION VICTIMAS DE STANFORD AMERICA LATINA asks: "Is this a case of negligence or discrimination?"

Contact:
Jaime R. Escalona
Leader Coalicion Victimas de Stanford
America Latina
E-mail: jaenrodes@gmail.com;
victimasdestanford@gmail.com
Phone: (512) 377 9255