WASHINGTON U.S. securities regulators suspected as early as 1997 that alleged swindler Allen Stanford was running a Ponzi scheme, but did nothing to stop it until late 2005, a government watchdog found.
Even then, it was not until February of 2009 that the Securities and Exchange Commission filed civil charges accusing Stanford and three of his companies with selling billions of dollars of fraudulent certificates of deposit (CDs).
SEC Inspector General David Kotz said on Friday that the Fort Worth, Texas office of the SEC conducted examinations of Stanford in 1997, 1998, 2002 and 2004, "concluding in each case that Stanford's CDs were likely a Ponzi scheme or a similar fraudulent scheme."
"The only significant difference in the Examination group's findings over the years was that the potential fraud grew exponentially from $250 million to $1.5 billion," Kotz found.
In 2005, the enforcement arm of the SEC finally agreed to seek a formal order from the commission to investigate Stanford. But even so, Kotz said, an opportunity was missed to bring action against Stanford Group Co for its admitted failure to conduct due diligence on Stanford's investment portfolio.
The report is another black eye for the agency from Kotz, who last year reported that the SEC bungled five probes of Bernard Madoff's Ponzi scheme that investigators have estimated at $65 billion. Madoff pleaded guilty and is serving a 150-year prison sentence.
A Ponzi scheme is one in which early investors are paid with the money from new clients.
SEC Chairman Mary Schapiro, who took office in January of 2009, has tried to reinvigorate the agency's enforcement division.
Earlier on Friday, the SEC sued Goldman Sachs Group Inc for fraud in marketing a debt product tied to subprime mortgages.
Stanford is in a Texas jail awaiting trial on 21 criminal charges related to what is now alleged to have been a $7 billion scheme involving the issuance of CDs with improbably high interest rates by his Antiguan bank.
Responding to Kotz's report, Schapiro said on Friday that since 2005, "much has changed and continues to change regarding the agency's leadership, its internal procedures and its culture of collaboration."
"The report makes seven recommendations, most of which have been implemented since 2005," she said. "We will carefully analyze the report and implement any additional reforms as necessary for effective investor protection."
Kotz's investigation was triggered by former investors who blamed the SEC and the Financial Industry Regulatory Authority, a broker-dealer regulator, for not stopping the Texas financier sooner.
Even after SEC examiners identified multiple violations of securities laws by Stanford in 2002, the SEC's enforcement division did not open an investigation, Kotz said.
He said that senior officials in the Fort Worth office perceived they were being judged by the number of cases they brought, conveying to the enforcement staff "that novel or complex cases were disfavored. As a result, cases like Stanford, which were not considered 'quick-hit' or 'slam-dunk' cases, were not encouraged," Kotz concluded.
Kotz also found that the former head of enforcement in Fort Worth, Spencer Barasch, "played a significant role" in quashing investigations of Stanford and sought to represent him on three occasions after he left the SEC. In 2006, he did briefly represent Stanford before being informed by the SEC ethics office that it was improper to do so.
When asked why he was so insistent on representing Stanford, Barasch replied, "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines," according to Kotz's report.
Barasch could not be reached for comment. But Bob Jewell, managing partner of the law firm he now works for, Andrews Kurth in Houston, said Kotz's report was "disappointing."
"Spencer Barasch served the SEC with honor, integrity and distinction," Jewell 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."
(Reporting by Dan Margolies and Rachelle Younglai; Editing by Tim Dobbyn)