La. Stanford victims' negligence claims moving forward

March 20, 2012
By Leslie Turk

On Monday the 5th U.S. Circuit Court of Appeals in New Orleans reversed a 2011 lower-court ruling, clearing the way for state court class actions against financial advisers, lawyers and other third parties accused of aiding convicted financial Allen Stanford's $7 billion Ponzi scheme.

U.S. District Judge David Godbey in Dallas had ruled in 2011 that the federal Securities Litigation Uniform Standards Act, or SLUSA, barred the state cases in Louisiana and Texas because they were related to securities fraud.

But the federal three-judge appeals court panel said that law was only "tangentially related" to the fraud alleged by the plaintiffs, the sale of bogus CDs issued by Stanford's Antigua-based Stanford International Bank Ltd.

Defendants include Stanford financial advisers, SEI Investments Co, which was accused of inducing investors to move retirement funds into the CDs, and the insurance brokerage Willis Group Holdings.

Phillip Preis, a lawyer for plaintiffs who has estimated total losses of $1 billion among some 1,000 Louisiana investors, said the ruling was the most significant for investors since Stanford's fraud was uncovered in February 2009.

"It will allow us to assert negligence claims," Preis told the Chicago Tribune. "It's a big deal." The plaintiffs in the Preis lawsuits affected by the appeals court's decision claim that SEI Investments Co. and Stanford's financial advisers, among them Tiffany Angelle and Hank Mills, both of whom worked out of the former Lafayette office in River Ranch, either knew or should have known that Stanford was stealing their money.

Preis also told Baton Rouge's Daily Report that the ruling is significant because state law only requires that plaintiffs prove negligence, not outright fraud, on the part of those entities. Preis said the appeals court's decision makes it more likely that those people will be made whole:

Preis filed the original class action suit in Baton Rouge's 19th Judicial District against the Stanford Trust, trust administrator SEI, a major international firm, and the Louisiana Office of Financial Institutions. Defendants were able to move the suit to federal court, but the Fifth Circuit (Monday) remanded the suit back to Baton Rouge. Preis expects to meet with Judge R. Michael Caldwell during the next six weeks to set a new schedule for the suit. "All those big companies like SEI that supported Stanford," Preis says, "we have a very viable claim against them."

A Houston federal jury found Stanford guilty March 6 on 13 criminal counts, including fraud, conspiracy and obstructing the SEC's investigation. The 61-year-old could face more than 200 years in prison at his June 14 sentencing, or a maximum of about 20 years if he is sentenced to concurrent terms, the Tribune reported.

Appeals from the United States District Court for the Northern District of Texas

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Vitter Testifies at House Hearing, Continues to call for SIPC to Compensate Stanford Victims

March 7, 2012
For Immediate Release

(Washington, D.C.) - U.S. Sen. David Vitter today was invited to testify at the U.S. House Committee on Financial Services, Subcommittee on Capital Markets about some of the ongoing problems at the Securities Investor Protection Corporation (SIPC). Vitter testified about SIPC's refusal thus far to compensate the victims of the Allen Stanford Ponzi scheme.

Since early 2009, Vitter has been the leading Congressional advocate for Stanford victims, many of whom live in Louisiana.

The text of Vitter's testimony as prepared for delivery is below.

Thank you, Chairman Garrett and Ranking Member Waters and members of the Capital Markets and Government Sponsored Enterprises Subcommittee, for inviting me to testify here today. Congress has given the Securities Investor Protection Corporation (SIPC) incredible responsibility for protecting investors, and for that reason, it's vitally important and appropriate that we point the spotlight at SIPC to understand the ways that it is and is not working.

If there is one common cause between Stanford and Madoff investors, it's the way SIPC fought investors every step of the way and has absolutely refused to protect the victims of fraud. For three years the Stanford victims have been fighting just to have their day in court - and unfortunately, it's SIPC that they have to fight.

I fear we are in a situation where, if SIPC were a true financial regulator, we would call it regulatory capture. The actions of SIPC are dictated by the member companies rather than by the law. SIPC is functioning more like a trade association and advocate than a quasi-regulator.

I first became involved in the Stanford case because it has affected thousands of victims in the United States, and many of them live in Louisiana. Allen Stanford was adept at preying upon the savings of retired oil and gas workers in Louisiana in particular. Many of the victims have told me their entire savings has been lost because of the Stanford fraud, and that they have been forced to sell their home and re-enter the work force.

I want to be absolutely clear. I don't believe there is any need to change to the Securities Investor Protection Act in order to provide coverage for the Stanford victims. These victims are entitled to coverage under the law as it is currently written.

In the actual criminal case against Allen Stanford, he is accused of stealing customer funds. Instead of purchasing Stanford International Bank (SIB) "certificates of deposit" (CDs), the Stanford Group Company (SGC) which was a SIPC member, acquired control of its customers' funds and the funds were stolen by Allen Stanford. The Securities Exchange Commission (SEC) and courts have taken the position in litigation related to the receivership of Stanford's estate, that the Stanford companies operated as a Ponzi scheme and, "a Ponzi scheme is, as a matter of law insolvent from its inception." And, just yesterday, a jury convicted Allen Stanford on 13 of 14 counts related to this case.

In Old Naples Securities, Inc. the U.S. Court of Appeals for the 11th Circuit held that customers of an introducing broker-dealer who thought they were purchasing bonds through the broker- dealer were "customers" of an introducing broker-dealer within the meaning of SIPA and entitled to coverage under the statute. The court held whether a claimant deposited cash with the debtor "does not... depend simply on to whom the claimant handed her cash or made her check payable, or even where the funds were initially deposited." Rather, the issue was one of "actual receipt, acquisition or possession of the property of a claimant by the brokerage firm under liquidation."

Previously, the SEC has argued that "a customer's legitimate expectations" ought to be protected "regardless of the fact that the securities were fictitious." It is impossible for an insolvent entity issue legitimate securities. In re New Times Securities Services, Inc., the owner sold fictitious mutual funds, as well as bona fide mutual funds to investors via a register broker dealer that was a SIPC member and a non-broker-dealer entity.

Forensic accounting, which was done by the court appointed receiver, shows that the SIB CDs were not purchased by SGC for its customers, and therefore they are not worthless securities with zero value as argued by SIPC. Instead, these CDs are fictitious. The SGC customer funds were never transferred to the Antiguan bank and there was never any money standing behind the CDs.

On June 5, 2011, the SEC Commission voted on a determination that SIPC should provide coverage for the Stanford victims. In the analysis of the case provided by the SEC to SIPC, the SEC explains that on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualified for protected "customer" status under SIPA.

In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford "were operated in a highly interconnected fashion, with a core objective of selling" the CDs. Among other things, the receiver also noted that "[c]orporate separateness was not respected within the Stanford empire... Money was transferred from entity to entity as needed, irrespective of legitimate business need. Ultimately, all of the fund transfers supported the Ponzi scheme in one way or another, or benefited Allen Stanford personally."

A SIPA liquidation proceeding would allow investors with accounts at the SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have "customer" claims that are protected by the statute, and an investor who disagreed with the trustee's determination could seek court review.

However, the ultimate roadblock to the victim's day in court is SIPC.

During the eight months since the SEC made its determination instructing to provide protection to the Stanford victims, SIPC has tried every conceivable idea to drag out making a final determination.

After the SEC's determination, SIPC ran up $200,000 of charges in June and July of last summer in reviewing the court appointed receiver's documents - a cost that will be ultimately be paid for with the money set aside for the victims. When asked about these charges, SIPC claimed that it was in order to do research into a settlement offer to the victims. However, an official settlement offer never materialized.

During the time between the SEC's determination and the SEC ultimately filing an application with the DC Circuit Court to compel a SIPA liquidation, I had many calls and meetings with Orlan Johnson, then Chairman of SIPC and his staff, including Stephen Harbeck. Concerns were raised by both Mr. Johnson and his staff on a reoccurring basis, as far back as our first meeting on this issue, about the cost to the SIPC fund of covering Stanford victims and how SIPC member companies would react to the need for SIPC to increase its assessments. I stressed in our discussions that I believe the only focus should be on providing the victims with swift resolution under the law in a manner that takes into account the complex nature of the fraud and uses the forensic accounting that had already been undertaken.

In these meetings and on these calls, it seemed to me, that SIPC was more interested in the cost of the resolution and protecting its Wall Street member companies than it was in doing their duty, doing the right thing, and immediately initiating a formal liquidation proceeding in the Stanford matter as ordered by the SEC. In fact, I was told that SIPC felt they would be sued no matter what they ultimately decided to do. SIPC was certain they would either be sued by the SEC or sued by their member companies.

During the course of these meetings and phone calls it also became obvious that SIPC hired lawyers to defend itself from the SEC while still negotiating a settlement offer, and SIPC has shown every indication it will continue to litigate this matter in court.

Currently, SIPC is fighting the SEC in court trying to avoid being compelled to file a protective order which would ultimately allow individual victims to get a judicial review of the merits of their claims against SIPC. While this judicial review is certainly part of the SIPA process, it was intended to be more of a summary proceeding, and I think everyone would be surprised at some of SIPC's tactics they are willing to use in order to avoid compensating the victims.

In a filing on February 16th, despite the fact that SIPC has run up a charge of $200,000 dollars with the court-appointed receiver, SIPC asked the judge to allow a discovery of documents related to who the customers were, the certificates of deposit and the corporate structure of the Stanford Companies. In addition, on Monday of this week, SIPC asked the judge for approval to review all of emails and documents of the SEC's legislative affairs team in a fishing expedition in an attempt to find a past instance where a staffer at the SEC might have said something that disagreed with what the SEC ultimately voted on months or years later.

The SIPA statute is 41 years old, and SIPC has never challenged the authority of the SEC in court the way it is now. SIPC has decided to test the SEC's authority to compel SIPC to protect investors. If SIPC persists on this pat, SIPC will undermine the faith investors have in markets and in SIPC coverage itself. Although I hope SIPC will see the error of their logic, I realize that ship has already sailed. I will continue to work on behalf of Stanford victims and all of Louisiana victims of securities fraud.

Chairman Garrett, I want to close by once again commending you on this timely hearing. I hope that my testimony shows that though no additional legislative action is needed to provide SIPC coverage for the Stanford victims, they are facing what amounts to regulatory capture and are in a desperate search for ways to hold SIPC accountable. Hearings like this one are a very important step in that process. I encourage you to bring them back before this committee on a regular basis to answer for their actions.

I hope at some point to hear Mr. Harbeck and Ms. Bowen tell the victims why they feel comfortable running up a $200,000 tab at the expense who have lost everything.

Thank you again Chairman Garrett, Ranking Member Waters and Members of the Subcommittee for the opportunity to speak on behalf of the victims.

Congressman Bill Cassidy questions CEO of SIPC Stephen Harbeck

Related article:

STIPULATED FACTS for SGC Customers

The Securities and Exchange Commission ("SEC") and the Securities Investor Protection Corp. ("SIPC") have reached the stipulated facts that are attached hereto. In addition, the SEC is still attempting to confirm and the parties are attempting to reach a stipulation to the following effect: "SIBL did not provide its investors with U.S. tax Form 1099 for the income purportedly earned on the SIBL CD investments. SGC did not include SIBL CD ‘interest income' on the Forms 1099 it provided to investors."

The Securities and Exchange Commission ("SEC") and the Securities Investor Protection Corp. ("SIPC") hereby stipulate and agree to the following facts only for purposes of the abovereferenced matter:
At the specified times or at all relevant times:

1. Stanford Group Company ("SGC") was a Houston-based broker-dealer that was registered with the Commission and a member of SIPC.

2. Stanford International Bank, Ltd. ("SIBL") was a bank organized under the laws of Antigua.

3. SIBL offered certificates of deposit ("CDs") to investors. In order to purchase a SIBL CD, an investor had to open an account with SIBL. CD investors wrote checks that were deposited into SIBL accounts and/or filled out or authorized wire transfer requests asking that money be wired to SIBL for the purpose of opening their accounts at SIBL and purchasing CDs.

4. Most SGC investors either received the physical CD certificates or had them held by an authorized designee, including Stanford Trust Company. To the extent that some SIBL CD investors did not receive the physical certificates, the SEC is not relying on that fact to support its claims in this proceeding.

5. SIBL CD investors received periodic statements from SIBL reflecting the balances in their SIBL accounts, including their CD balances. (An example of such a periodic statement is attached as Exhibit A.)

6. In the United States, disclosure statements for SIBL's CDs stated that "SIBL's products are not subject to the reporting requirements of any jurisdiction, nor are they covered by the investor protection or securities insurance laws of any jurisdiction such as the U.S. Securities Investor Protection Insurance Corporation." (An example of such a disclosure document is attached as Exhibit B.) A version of the marketing brochures for SIBL's CDs stated that SIBL CDs "are not subject to the reporting requirements of any jurisdiction outside of Antigua and Barbuda, nor are they covered by the investor protection or securities insurance laws of any jurisdiction such as the U.S. Securities Investor Protection Insurance Corporation or the bonding requirements thereunder.
There is no guarantee investors will receive interest distributions or the return of their principal." (An example of such a marketing document is attached as Exhibit C.)

7. SIBL and Stanford Trust Company are not and never have been members of SIPC.

8. For purposes of its Application in this proceeding, the SEC is relying on investors' deposit of funds for the purchase of SIBL CDs; it is not relying on transactions involving any other securities (or funds for other securities).

Source and Exhibits.

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Insight: How Allen Stanford kept the SEC at bay

	January 26, 2012 By Murray Waas For twenty years, R. Allen Stanford allegedly had run a $7 billion Ponzi scheme from his offshore bank on the Caribbean island of Antigua. U.S. authorities had been nosing around Stanford's empire for longer than a decade but hesitated to open a full-blown probe. As Stanford's trial began this week, one question left unanswered was: How did he keep authorities at bay for so long?
Texas billionaire Allen Stanford is interviewed in Houston in April 20, 2009
A Reuters examination of his case finds that the answer lay in part in the legal advice he obtained from former SEC officials and other ex-regulators and law-enforcement officials. Among those Stanford sought help from was famed securities lawyer Thomas Sjoblom. Then a partner at the international law firm of Proskauer Rose and chair of its securities practice, Sjoblom also was a former 20-year veteran of the U.S. Securities and Exchange Commission's enforcement division. What Sjoblom allegedly did next for Stanford has drawn the scrutiny of federal prosecutors. The Justice Department has been investigating Sjoblom for possible obstruction of justice, witness tampering, and conspiracy related to his efforts to persuade the SEC to stand down from its investigation of Stanford, according to people familiar with the probe. Sjoblom is one of the most senior attorneys ever to be investigated for allegedly crossing the line from legal advocacy on behalf of a client to violating the law. He hasn't been charged, however, and it is possible he never will be. Stanford went on trial on Monday in federal court in Houston on charges that he defrauded more than 30,000 investors from more than 113 countries, and also obstructed the SEC's investigation of him. Only Bernard Madoff is alleged to have stolen more. Stanford has pleaded not guilty. Prosecutors are likely, in making the obstruction portion of their case against Stanford, to detail Sjoblom's alleged role in assisting Stanford in that effort. Attorneys began their opening arguments on Tuesday. IMMUNITY SOUGHT, AND REJECTED People with first-hand knowledge of the matter say that Sjoblom had offered the Justice Department his testimony against Stanford in exchange for a grant of immunity from prosecution for himself - an offer rejected by the Justice Department. Prosecutors demanded a formal acknowledgment by Sjoblom of his own alleged criminal participation in an attempt by Stanford to derail investigations by the SEC, according to people involved in the discussions. Sjoblom declined to answer questions when reached by telephone as well as inquiries submitted to him by email. Ordinarily, attorneys are precluded from being witnesses against former clients because of the attorney-client privilege. But under a legal doctrine known as the crime-fraud exception, an attorney can tell what he knows if his client has sought advice that would abet the commission of that fraud or some other criminal act - or in rare instances, if the attorney himself aided a crime. The crime or fraud disclosed or discussed must also then occur for the attorney to be able to testify. If Sjoblom had testified against Stanford, he would have been one of the most prominent attorneys to turn against such a client. THE STANFORD EIGHT The trials could cast light on the broader mystery of how the alleged Stanford fraud could have gone on so long even though federal regulators were examining the Texas financier for years. The case has put the SEC and other federal agencies in an embarrassing light, creating fresh fodder for critics of the revolving door between government and the private sector. Stanford, Reuters has found, paid at least eight former senior U.S. and foreign regulators and law-enforcement officials for legal advice or investigative services. Among the former government figures who worked for Stanford is Spencer C. Barasch, who headed the enforcement division of the SEC's office in Ft. Worth, Texas. Barasch agreed this month to pay a $50,000 fine for allegedly violating federal ethics laws by representing Stanford after overseeing regulation of Stanford's U.S. brokerage businesses. It is illegal for many former federal regulators, including those at the SEC, to represent private clients if they have "personally and substantially" participated in any matters related to those clients during the course of their government employment. Examiners at the SEC had suspected as early as 1997 that Stanford was engaged in a Ponzi scheme and felt the SEC should investigate. But year after year, until 2005, their warnings and calls for investigation were ignored by higher-ups. A FRIEND IN FT. WORTH In January 2009, the SEC was seeking the sworn testimony of both Stanford and James Davis, the chief financial officer for Stanford International Bank. Davis, Stanford's top deputy, has since pled guilty to securities-fraud and mail-fraud charges and has become a government witness against Stanford and others. Stanford sought to delay and wear down regulators and investigators, Davis and other witnesses told the government, according to a 2009 plea agreement between Davis and federal prosecutors filed in federal court in Houston. In 1997, 1998, 2002, 2004, and 2005, according to internal agency records seen by Reuters, examiners for the SEC recommended that the agency investigate Stanford. In three of those instances, Barasch, at the time an SEC official in Ft. Worth, personally overruled the examiners' recommendations, according to those records. Those decisions helped the Ponzi scheme to continue unabated for several additional years, costing investors additional billions of dollars, according to a report by the SEC's Inspector General. Barasch told the SEC Inspector General that he made those decisions because he was not sure the SEC had the statutory authority or jurisdiction to investigate. He blamed his superiors and a broader culture within the SEC for pressuring the staff not to pursue complex and difficult cases, according to the Inspector General report. In his final days at the SEC in 2005, Barasch overruled examiners one last time on a request to investigate Stanford, according to the Inspector General report and interviews with SEC officials. The SEC's formal investigation of Stanford began exactly one day after Barasch left the agency. Barasch referred questions to his lawyer; his attorney didn't respond to requests for comment. REVOLVING DOOR "This misconduct highlights the dangers of a 'revolving door' environment between the SEC and the private securities law bar," outgoing SEC Inspector General H. David Kotz said in statement about the Barasch case. The Justice Department's agreement with Barasch was reported by Reuters earlier this month. The SEC, which has the authority to bar professionals from practicing before the agency, has not announced any disciplinary action. The SEC is also preparing a separate civil case against another former regulator, Bernerd Young, who worked as a compliance officer for Stanford's bank, said a person familiar with the matter. Before he worked for Stanford, from 1999 to 2003, Young was a district director of the Dallas office of the National Association of Securities Dealers, which was then the brokerage industry's self-regulator. Regulation of the industry has since been taken on by a successor agency, the Financial Industry Regulatory Authority. Young was notified by the SEC staff last June that they were preparing a civil complaint against him for securities-law and other violations and seeking a lifetime ban on his employment in the securities industry, according to a person who reviewed the SEC's notification to Young. Young hasn't been charged with any wrongdoing. In November 2007, the Financial Industry Regulatory Authority charged that Stanford had used "misleading, unfair and unbalanced information" and fined him $10,000, but with no admission of guilt. Young was central to decisions by the NASD not to take tougher action against Stanford, according to government officials involved in the matter. Randle Henderson, an attorney for Young, said Young had "done absolutely nothing wrong" and that he and Young had been cooperating with SEC investigators. If an enforcement action was brought, Henderson said, he and his client would engaged in a "full and complete and aggressive defense" of the allegations. THE AIRCRAFT HANGAR SESSION Sjoblom began work for Stanford as early as 2005, as the SEC began a formal investigation. Barasch began representing Stanford in September 2006. Barasch's successor at the SEC had reversed course and given a green light for the SEC to investigate. Stanford believed that hiring former SEC officials was the best course to thwart the agency, according to emails written by Stanford to subordinates and later cited by the SEC's Inspector General. Barasch worked on the case until December 2006, dropping out after SEC ethics officers warned him that any further involvement would violate a federal law. On January 21, 2009, Stanford, his deputy Davis and other senior executives of the Stanford International Bank met Sjoblom in an aircraft hangar in Miami, Florida, to devise a strategy for fending off the SEC, according to the Davis plea agreement entered in Houston federal court. Stanford, a bulky man with a thick mustache, paced nervously in the aircraft hangar, according to an account one of the attendees gave to federal investigators. In contrast, Sjoblom appeared calm and collected as they discussed their next move, the attendee told federal investigators. The group allegedly agreed on a strategy: Sjoblom would go to the SEC and tell officials that both Stanford and Davis knew very little about the business they ran. Instead, he would tell them, two other, lower-ranking executives of the Stanford International Bank understood much better how the bank invested customers' money. He would then propose that they testify in place of Stanford and Davis, according to the plea filed in federal court in Houston. SJOBLOM'S STRATEGY Sjoblom knew that these assertions were false, and was also by then aware that Stanford had engaged in a massive financial fraud, according to the Davis plea. Still, Sjoblom moved forward with the effort to obstruct the SEC investigation, the Justice Department alleged in the Davis plea. Early the next morning, on Jan 22, 2009, Sjoblom met in Houston with attorneys for the SEC, according to the Davis plea. There, Sjoblom told the SEC staff that Stanford and Davis did not "micro-manage" clients' portfolios. Taking Sjoblom's word, the SEC agreed to delay the testimony of Stanford and Davis, according to the plea filed in Houston federal court. The Justice Department has since alleged that Sjoblom's actions constituted an obstruction of their investigation. Based in part on information given them by Davis, federal prosecutors alleged that Sjoblom continued trying to prevent the SEC from learning the truth even after Sjoblom learned about Stanford's massive fraud. After convincing the SEC to forego Stanford's and Davis's testimony, Sjoblom allegedly helped prepare Laura Pendergest-Holt, Stanford International's chief investment officer, to testify in their absence, according to the Davis plea and an indictment against Pendergest-Holt in federal court in Houston. Prosecutors allege that in reality, Stanford and Davis were the only two Stanford executives intimately familiar with the finances of the company. Pendergest-Holt only learned the full extent of the fraud around the same time that Sjoblom did, when the two were preparing her to testify before the SEC, federal prosecutors assert. Pendergest-Holt and Sjoblom learned then that the firm was insolvent and most of its financial claims fictional, prosecutors allege in the Pendergest-Holt indictment and the Davis plea. On February 5, Stanford admitted to Davis and Sjoblom that his bank's "assets and financial health had been misrepresented to investors, and were overstated," according to Davis's plea agreement with prosecutors. $4 MILLION MORE? Instead of dropping Stanford as a client and setting the record straight with the SEC, Sjoblom went back to Davis and Stanford with an offer, Davis told the FBI, according to a person familiar with the case. Sjoblom told the pair that they both faced serious criminal jeopardy and asked each to pay him a retainer of $2 million to represent them personally, for a total of $4 million, this person said. That money would have been in addition to what Stanford's firm had already paid Sjoblom's firm. It is not clear whether the additional money was paid. On February 10, Pendergest-Holt gave testimony to SEC officials. That morning, Davis admitted in his guilty plea, he phoned Pendergest-Holt and encouraged her to lie to "continue to obstruct the SEC investigation," according to the Davis plea agreement. During her testimony, Pendergest-Holt said she knew little about the assets the SEC wanted to know about. All during her testimony, Sjoblom sat at her side, as five attorneys from the SEC's enforcement division fired away questions. A federal grand jury later indicted her on obstruction of justice and conspiracy charges related to her allegedly false testimony. She is currently awaiting trial. Her lawyer declined to comment. The indictment of Pendergest-Holt also implicated Sjoblom. "Holt, Attorney A and others would make false and misleading statements to the SEC staff attorneys in order to persuade them to delay" Stanford's testimony while Pendergest-Holt would "provide false testimony," the indictment alleged. Days after Pendergest-Holt's testimony, on February 14, Sjoblom resigned as a lawyer for Stanford and wrote to the SEC: "I disaffirm all prior oral and written representations made by me and my associates to the SEC staff." Federal prosecutors are looking to Pendergest-Holt to see if she corroborates Davis' testimony regarding Sjoblom, and will then decide whether to charge Sjoblom, according to sources close to the case. (editing by Martin Howell and Michael Williams)

Source.

Related article: Stanford Investors Accuse Lawyer, Law Firm of Aiding Fraud

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Ketchum on monitoring Stanford: Finra could have done better

	May 13, 2011 By Dan Jamieson Financial Industry Regulatory Authority Inc. chief executive Richard Ketchum issued a mea culpa today for Finra's failure to uncover R. Allen Stanford's alleged $8 billion Ponzi scheme. "Finra clearly could have done better and we deeply regret we did not," Mr. Ketchum said today in prepared testimony to the House Financial Services Committee's Subcommittee on Oversight and Investigations. Mr. Ketchum recapped the findings of a September 2009 Finra review of its missteps in the case.
Finra boss, Richard Ketchum (Bloomberg News)
That internal review found that in 2005, Finra's Dallas office curtailed an investigation of Stanford, which had been prompted by an SEC referral letter. Finra enforcement staff weren't sure whether they had jurisdiction over Stanford's offshore CDs, Mr. Ketchum said. The Securities and Exchange Commission, though, is perhaps more to blame for missing the alleged Stanford fraud. A separate March 2010 report from the SEC's inspector general found that the SEC’s Fort Worth branch was aware since 1997 that Mr. Stanford was possibly operating a Ponzi scheme. Despite numerous exams of the Stanford firm that raised a number of red flags, SEC enforcement staff in Fort Worth refused to investigate. SEC enforcement staff believed that "novel or complex cases were disfavored" by the agency's management, said David Kotz, the SEC inspector general, in testimony today. Stanford, 61, was indicted in June 2009 on 21 criminal charges claiming he misled clients about the safety and oversight of certificates of deposit issued by his Antiguabased Bank. Investors, lawmakers and the SEC's inspector general have accused the agency and the Finra of ignoring warnings about Stanford years before he was arrested. "It's a tragedy that the investors have to pay the price of the SEC and Finra's failures," Representative Francisco Canseco, a Texas Republican, said at the hearing. Julie Preuitt, an SEC employee who worked on an examination of Stanford's business in 1997, said she had been rebuffed by supervisors after flagging possible fraud and pushing for a more thorough investigation. Ms. Preuitt, now an assistant regional director in the SEC's regional office in Fort Worth, Texas, told the panel she was also reprimanded by management after complaining about changes to the examination program in 2007. "I paid a heavy price for complaining," Ms. Preuitt said. "I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level." Stanford, who has denied the allegations against him, has been in federal custody since 2009 while awaiting trial. He is being held in a hospital at the Butner Federal Correctional Complex in North Carolina, where he is receiving treatment for a prescription drug dependency developed while in prison. Stephen Harbeck, the president of the Securities Investor Protection Corp., said in an August 2009 letter that Stanford investors weren't eligible for insurance payments because the government-sponsored regulator doesn't protect people who are sold worthless securities. SIPC, which was chartered to guard investors against broker theft or brokerage failure, is overseen by the SEC. "We're being told our money was stolen the wrong way," Stanford Kauffman, who invested in the alleged fraud, said in testimony at the hearing. "Stanford stole our savings, but the SEC and Finra held the door wide open."

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Forensic accountant gives Stanford investors a little hope

By LOREN STEFFY
HOUSTON CHRONICLE
February 15, 2011

For two years, Stanford Financial Group's victims have struggled with the grim reality of their situation. Not only is their money gone, but every safety net has failed them. Now, they're hoping a new finding by a forensic accountant will give them a better chance at getting some of their money back.

Last week, investors circulated a declaration by FTI Consulting, an accounting firm hired by receiver Ralph Janvey to determine whether Stanford investors should be covered by the Securities Investor Protection Corp - SIPC.

The ruling found that money that was supposed to buy certificates of deposit at Stanford's Antiguan bank was diverted for other purposes.

The finding "100 percent supports the legal argument we've made" to get investors covered by SIPC, Angela Shaw, the head of the Stanford Victims Coalition, said in an e-mail sent to other investors.

After all, SIPC is covering some of the losses for Bernie Madoff's victims because he never bought the stocks he told clients he'd bought for them.

While the two cases may seem similar, they aren't. Nothing about the accountant's findings in the Stanford case changes SIPC's determination that investors aren't covered, said Stephen Harbeck, SIPC's chief executive. "We don't see a customer that we can protect," he said.

SIPC doesn't cover lost investment value, even if there may be fraud involved. Stanford investors' money may have been diverted, but the CDs did exist and the bank still had records of investors owning them, the accountant's report found. What was falsified, according to the Securities and Exchange Commission, was the assets that backed up those CDs.

Hoping SEC will step in

Stanford investors, though, hope the FTI report will encourage the SEC, which missed so many warnings about Stanford for so long, to ask SIPC to extend the coverage. So far, it hasn't. The SEC could even sue SIPC to compel it to cover Stanford's victims, but that's never happened.

"In this instance, both parties agree that there's no cause to initiate coverage," Harbeck said. "We were not designed to replace the initial purchase price when a security goes down in value."

That, of course, is not what Stanford victims want to hear. And who can blame them? After all, they weren't chasing exorbitant returns on risky investments. They thought they were buying a safe haven low-risk CDs - in a time of market turmoil. In many cases, they were following the advice of their trusted brokers.

Confusing to investors

SIPC is a narrowly defined insurance fund. The arcane details of its limitations have confused investors for years - at least the few who were even aware it existed.

In creating SIPC, Congress was careful to insure against broker misconduct, but not to shield investors from risk that, recent Wall Street bailouts aside, is supposed to be a part of investing.

The Stanford case, though, raises the question of whether that law needs amending. After all, the SEC claims Stanford brokers peddled the bogus CDs, collecting commissions for selling them to clients of the company's brokerage operation, which was a SIPC member.

In other words, SIPC coverage enhanced the veneer of credibility that Stanford used to sell itself to investors, and the FTI report describes a SIPC member firm that was diverting funds from customer purchases without the customers' knowledge. The fact that the alleged fraud wasn't quite as blatant as Madoff's - an obfuscation instead of an outright lie - is a hairline distinction with multibillion-dollar consequences.

Improvements ahead?

Given all the damage from Stanford's collapse, perhaps some good can yet come from the ashes. Perhaps Congress can review the law and build better protections for future investors.

SIPC touts itself as investors' first line of defense. For Stanford investors, it may be their last hope. The forensic accounting declaration makes it very clear that any funds that were intended to buy securities did not in fact reach its purpose; no securities were ever purchased and in fact it was only “fictitious securities.” Fictitious securities have been covered by SIPC in previous cases.

SIPC was denied until now with the excuse that investors got securities, but they are worthless because the Bank got broke and SIPC doesn’t insure worthless securities. But now with this declaration of Karyl Van Tassel, all the victims will get SIPC cover based on previous similar cases.

Nonmember affiliate company were also granted with SIPC cover

SIPC member
Old Naples Securities
First Interregional Equity Corporation
Churchill Securities
New Times Securities Services (New Times)

Nonmember affiliate(s)
Old Naples Financial Services
First Interregional Advisors Corporation
CD Investment Group Churchill Mortgage Investment Corporation
New Age Securities (New Age)

Source: http://sivg.org/article/SGC_Forensic_Accounting_Van_Tassel.html

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