February 18, 2009 / 3:37 PM / 11 years ago

Stanford had been on SEC's radar for some time

NEW YORK (Reuters) - The fraud case against Texas billionaire Allen Stanford may raise new questions about the aggressiveness of U.S. securities regulators, who according to an earlier lawsuit had begun examining the financier’s sales practices in 2007 or earlier.

A United States Marshal walks into a Stanford Financial Group office building in the upscale Galleria District of Houston February 17, 2009. REUTERS/Donna Carson

A complaint filed last year against Stanford’s firm by two former employees contended they were aware of a U.S. Securities and Exchange Commission inquiry into the firm’s sales practices while they worked there.

The employees, Mark Tidwell and Charles Rawl, said in their Texas state court lawsuit that they left rather than participate in unlawful business practices. They departed in late 2007.

They said the SEC was looking at the marketing of certificates of deposits and that the Stanford firm had purged files and destroyed documents “with knowledge of an ongoing SEC inquiry.”

These high-yielding CDs were at the heart of the SEC’s fraud case on Tuesday, when regulators accused Allen Stanford and three companies he runs of operating a worldwide fraud of “shocking magnitude” involving $8 billion in securities that were allegedly falsely marketed to customers.

The SEC is already under scrutiny for its handling of the Bernard Madoff fraud case — facing criticism that it failed to follow up tips and complaints about the accused swindler for years — and will also likely face questions about how aggressive it was in examining Stanford, legal experts said.

“The question is going to be raised, ‘Has the SEC been asleep at the switch?’” said Peter Henning, a professor at Wayne State University Law School in Michigan who focuses on white-collar crime and securities law.

But, he said, it may be too easy to blame the commission for possible inaction when many investors were only too happy to accept the higher-than-average returns that Stanford Financial Group was offering and did not lodge any complaints with authorities.

“If nobody was complaining, there may have been no indications of a fraud,” Henning said.

The SEC’s civil lawsuit, filed in federal court in Texas, was brought against Antiguan-based Stanford International Bank, the Stanford Group Company broker-dealer in Houston and investment adviser Stanford Capital Management, as well as several individual executives.

The SEC has not commented on the case beyond its court papers.

Investor lawyers say they want more answers about Stanford and how aggressively authorities had probed the firm.

Jacob Zamansky, an investor lawyer in New York, said he is conducting his own investigation on behalf of customers. He said the SEC “may be coming once again too late to prevent harm to investors” who are panicking and want their money back.

“They are going to have to answer why they didn’t do something sooner,” he said of the commission. “It looks like this was another situation where the returns were too good to be true, and if that’s the case, it usually is.”

Reporting by Martha Graybow; Editing by Gary Hill

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