September 22, 2010 / 1:15 PM / 9 years ago

Timing of Goldman case "suspicious": SEC watchdog

WASHINGTON (Reuters) - The timing of the Securities and Exchange Commission’s case against Goldman Sachs Group Inc is “suspicious,” a federal watchdog said, suggesting that the SEC used it to divert attention from a report that sharply criticized its probe into accused Ponzi schemer Allen Stanford.

R. Allen Stanford arrives at federal court for a hearing before U.S. District Judge Nancy Atlas in Houston August 24, 2010. REUTERS/Richard Carson

The SEC filed civil fraud charges against Goldman in mid-April, the same day it released a watchdog report accusing the agency of mishandling an investigation into Stanford’s alleged $7 billion Ponzi scheme.

The report by SEC Inspector General David Kotz said the regulator suspected as early as 1997 that Stanford was running a Ponzi scheme but did nothing to stop it until late 2005.

The timing “strains credulity,” Kotz told a congressional hearing on Wednesday examining the SEC’s handling of the Stanford case.

Kotz’s report went largely unnoticed.

Stanford is in a Texas jail awaiting trial on 21 criminal charges related to his alleged Ponzi scheme involving the issuance by his Antiguan bank of certificates of deposit with improbably high interest rates. The SEC filed civil charges related to the matter in February 2009.

Some Republican lawmakers accused the SEC of suing Goldman to help Democrats pass the landmark Wall Street reform bill, which was winding its way through Congress in April.

Kotz is probing whether the SEC’s lawsuit against Goldman was politically motivated, a charge the SEC vehemently denies. He expects to complete his Goldman report by the end of next week.

At the Senate Banking Committee hearing, the top Republican, Richard Shelby, said the Stanford case represents a “major failure” by the SEC. He also suggested the timing was suspect and seemed intended to draw lowered scrutiny.

The SEC, still recovering from missing Bernard Madoff’s $65 billion Ponzi scheme, is under pressure to root out fraud after the U.S. housing collapse and Wall Street’s ensuing meltdown.


The SEC’s enforcement director, Robert Khuzami, and other SEC officials apologized at the hearing and said they had deep regrets that the regulator failed to act more quickly to limit losses suffered by Stanford investors.

But apologies did little to assuage Stanford victims, who traveled to Washington to attend the hearing and snickered as the regulators testified.

“I feel that the SEC did a good job of covering their own tails. I think they were part of the problem in this whole thing,” said Richard Muzyka, 67, of Fort Myers Beach, Florida.

Muzyka is a retiree who initially invested with Stanford because of the company’s seeming stable returns, which he saw as attractive for someone living on a fixed retirement income.

Kotz’s report found the SEC’s Fort Worth, Texas, office examined 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.”

In 2005, the enforcement arm of the SEC finally agreed to seek a formal order from the commission to investigate Stanford. But Kotz said it failed to conduct due diligence on his investment portfolio, a missed opportunity.

Kotz said he was talking to criminal authorities about the former head of enforcement in Fort Worth, Spencer Barasch, who “played a significant role” in quashing investigations of Stanford and sought to represent him on three occasions after he left the SEC.

According the report, Barasch briefly represented Stanford in 2006 before being informed by the SEC ethics office that it was improper to do so.

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.

Republican Senator Jim Bunning said he “almost fell off his chair” when he read that and asked Kotz whether that looked like criminal negligence.

Kotz only said he was talking to criminal authorities and would not elaborate further.

Barasch is a partner at the law firm Andrews Kurth LLP.

In a statement, the firm’s managing partner, Bob Jewell, called Kotz’s testimony “disappointing,” and said Barasch “acted properly during his contacts with the Stanford Financial Group and the Securities and Exchange Commission. He did not violate conflicts of interest.”


The SEC has said that most of Kotz’s seven recommendations have been implemented and that it would carefully analyze the report and implement any additional reforms as necessary for effective investor protection.

Kotz’s report says that even after SEC examiners identified multiple violations of securities laws by Stanford in 2002, the enforcement division did not open an investigation.

He also said senior Fort Worth office officials perceived they were judged by the number of cases they brought.

“Novel or complex cases were disfavored,” he concluded. “As a result, cases like Stanford, which were not considered ‘quick-hit’ or ‘slam-dunk’ cases, were not encouraged.”

Reporting by Joe Rauch and Rachelle Younglai; Additional reporting by Jonathan Stempel in New York; Editing by Gerald E. McCormick, Andre Grenon and Steve Orlofsky

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