September 28, 2010
By Phil Trupp
By Phil Trupp
In the style of "Mad" magazine, it's the season of con vs.
con at the Securities and Exchange Commission -- only no one's
laughing.
Word on the inside is that the Commission covered up -- or at least ignored -- an investigation of billionaire R. Allen Stanford, who is awaiting trial in a Texas jail on 21 criminal charges that his Antiguan bank allegedly sold questionable certificates of deposit with "improbably high" interest rates and was running a Ponzi scheme at the same time.
"They didn't call him 'Agile Allen' for nothing," according to a source familiar with the case.
The SEC apparently wasn't nearly so agile.
A report by SEC Inspector General H. David Kotz claims the SEC was aware Stanford was running a $7 billion Ponzi scheme as far back as 1997, but waited until late 2005 to step in. The Commission filed civil charges in the case in February 2009.
Kotz noted that the Commission filed civil fraud charges against Goldman Sachs last April, on the same day it released his report critical of the Stanford investigation. The timing of the Goldman filing is "suspicious," said Kotz, who went on to suggest that the Goldman charges diverted attention from the report of the botched Stanford probe.
The inspector general said the timing of the two actions in April "strains credulity." Kotz made his suspicions public at a September 22 congressional hearing on the Stanford investigation before Senate Banking Committee.
Republican sources in Washington claimed the SEC made Goldman the poster boy for greed as a cover for the Stanford investigative foul up. These sources also suspect Goldman was sued to help boost support for the new regulatory reforms governing Wall Street's occasionally bad behavior.
Though SEC denies the Goldman announcement was a cover-up of the Stanford probe, Kotz wondered out loud if in fact the timing might have been politically motivated.
Republican speculation aside, Mr. Kotz told the committee that top officials at the SEC's Fort Worth office were "being judged on the numbers of cases they brought, so-called 'stats'," the obvious and easy cases. "Complex cases were disfavored," Mr. Kotz explained, because they were not "slam dunks." Mr. Allen's case is a rat's nest of allegations including, but hardly limited to, the purchase of a Caribbean island. In other words, it didn't add up as a "stat" or "quick hit" case.
Robert Khuzami, director of SEC's Enforcement Division, and Carlo di Florio, director of the Office of Compliance Inspections and Examinations, said they are moving to implement the reforms demanded by Mr. Kotz.
Mr. Khuzami said he was alerting what he called "rank and file" SEC inspectors that quick hits do not drive enforcement. He said the divisions are now coordinating their efforts and stepping up the pace.
So what does it take to make the SEC do the right thing? Among the suggestions by Mr. Khuzami and Mr. di Florio is to expand training programs and modernize the management structure. In addition, they added, it's time to place "seasoned investigative attorneys back on the front lines and improve examiners' risk management techniques." No one on the Senate panel bothered to ask where these "seasoned attorneys" have been hiding.
The Kotz report landed on SEC Commissioner Mary Schapiro's desk in March. The Senate hearing gave the lawmakers a chance to vent their dissatisfaction with the Commission, but it's anyone's guess if substance will come out of the Senate probe. Last year, for example, the House Financial Services Committee held hearings on the $336 billion auction rate securities scandal, but no legislation or regulations followed. When Rep. Barney Frank (D-MA) was asked about this failure, he replied, "The ('08) meltdown got in the way." It now remains to be seen if the Senate Committee can find a clear path to financial reform of the SEC's enforcement process.
The hearing produced notable contradictions. Sen. Richard Shelby (R-Ala), the committee's ranking republican, said the Bernard Madoff $65 billion Ponzi scheme had caught the SEC flatfooted though at least one part of the Commission had been aware of the Stanford case for years. Sen. Shelby was obviously unaware that there had been warnings about Madoff as far back as the late 1990s.
"I believe this should mark the beginning of our review of this troublesome episode," Sen. Shelby said, referring to Mr. Stanford. "We need to know exactly why evidence of this fraud was not more thoroughly pursued."
He added that Mr. Khuzami had brought to light "a colossal failure of the SEC."
Observers wondered why Sen. Shelby was so outraged. "Is he living on another planet?" asked one source. "Is this the first time it crossed his mind that the SEC is maybe a little slow off the mark?"
Another open question: Why was no one fired because of the incompetent handling of the Stanford affair? It seemed a rhetorical question, given that no one was fired in the wake of the Madoff scandal, which was a much larger fraud. Lawmakers also expressed concern that the head of the Fort Worth division later offered to defend Mr. Stanford before the Senate committee.
"It takes time for a culture to change," Mr. Kotz said. "It takes time to trickle down the line."
In the meantime, the investing public will just have to wait on trickle-down ethics to kick in before trust is restored.
Word on the inside is that the Commission covered up -- or at least ignored -- an investigation of billionaire R. Allen Stanford, who is awaiting trial in a Texas jail on 21 criminal charges that his Antiguan bank allegedly sold questionable certificates of deposit with "improbably high" interest rates and was running a Ponzi scheme at the same time.
"They didn't call him 'Agile Allen' for nothing," according to a source familiar with the case.
The SEC apparently wasn't nearly so agile.
A report by SEC Inspector General H. David Kotz claims the SEC was aware Stanford was running a $7 billion Ponzi scheme as far back as 1997, but waited until late 2005 to step in. The Commission filed civil charges in the case in February 2009.
Kotz noted that the Commission filed civil fraud charges against Goldman Sachs last April, on the same day it released his report critical of the Stanford investigation. The timing of the Goldman filing is "suspicious," said Kotz, who went on to suggest that the Goldman charges diverted attention from the report of the botched Stanford probe.
The inspector general said the timing of the two actions in April "strains credulity." Kotz made his suspicions public at a September 22 congressional hearing on the Stanford investigation before Senate Banking Committee.
Republican sources in Washington claimed the SEC made Goldman the poster boy for greed as a cover for the Stanford investigative foul up. These sources also suspect Goldman was sued to help boost support for the new regulatory reforms governing Wall Street's occasionally bad behavior.
Though SEC denies the Goldman announcement was a cover-up of the Stanford probe, Kotz wondered out loud if in fact the timing might have been politically motivated.
Republican speculation aside, Mr. Kotz told the committee that top officials at the SEC's Fort Worth office were "being judged on the numbers of cases they brought, so-called 'stats'," the obvious and easy cases. "Complex cases were disfavored," Mr. Kotz explained, because they were not "slam dunks." Mr. Allen's case is a rat's nest of allegations including, but hardly limited to, the purchase of a Caribbean island. In other words, it didn't add up as a "stat" or "quick hit" case.
Robert Khuzami, director of SEC's Enforcement Division, and Carlo di Florio, director of the Office of Compliance Inspections and Examinations, said they are moving to implement the reforms demanded by Mr. Kotz.
Mr. Khuzami said he was alerting what he called "rank and file" SEC inspectors that quick hits do not drive enforcement. He said the divisions are now coordinating their efforts and stepping up the pace.
So what does it take to make the SEC do the right thing? Among the suggestions by Mr. Khuzami and Mr. di Florio is to expand training programs and modernize the management structure. In addition, they added, it's time to place "seasoned investigative attorneys back on the front lines and improve examiners' risk management techniques." No one on the Senate panel bothered to ask where these "seasoned attorneys" have been hiding.
The Kotz report landed on SEC Commissioner Mary Schapiro's desk in March. The Senate hearing gave the lawmakers a chance to vent their dissatisfaction with the Commission, but it's anyone's guess if substance will come out of the Senate probe. Last year, for example, the House Financial Services Committee held hearings on the $336 billion auction rate securities scandal, but no legislation or regulations followed. When Rep. Barney Frank (D-MA) was asked about this failure, he replied, "The ('08) meltdown got in the way." It now remains to be seen if the Senate Committee can find a clear path to financial reform of the SEC's enforcement process.
The hearing produced notable contradictions. Sen. Richard Shelby (R-Ala), the committee's ranking republican, said the Bernard Madoff $65 billion Ponzi scheme had caught the SEC flatfooted though at least one part of the Commission had been aware of the Stanford case for years. Sen. Shelby was obviously unaware that there had been warnings about Madoff as far back as the late 1990s.
"I believe this should mark the beginning of our review of this troublesome episode," Sen. Shelby said, referring to Mr. Stanford. "We need to know exactly why evidence of this fraud was not more thoroughly pursued."
He added that Mr. Khuzami had brought to light "a colossal failure of the SEC."
Observers wondered why Sen. Shelby was so outraged. "Is he living on another planet?" asked one source. "Is this the first time it crossed his mind that the SEC is maybe a little slow off the mark?"
Another open question: Why was no one fired because of the incompetent handling of the Stanford affair? It seemed a rhetorical question, given that no one was fired in the wake of the Madoff scandal, which was a much larger fraud. Lawmakers also expressed concern that the head of the Fort Worth division later offered to defend Mr. Stanford before the Senate committee.
"It takes time for a culture to change," Mr. Kotz said. "It takes time to trickle down the line."
In the meantime, the investing public will just have to wait on trickle-down ethics to kick in before trust is restored.
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