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The SEC’s Own Report Says that It Missed Tips and Clues in a Giant Ponzi

Why did the SEC miss a 2002 letter that warned about the Stanford Ponzi scheme? An SEC internal investigation blames "institutional influences" within the SEC. The SEC investigation report release date? The day the SEC brought the fraud case against Goldman.

Remember Friday April 16 when the Securities and Exchange Commission filed its high-profile fraud case against Goldman Sachs? How could you not? Every media outlet covered that complaint as the SEC was publicly tooting its own horn. (“We got those evil Goldman people!”)

Were you also aware that on that same day the SEC’s own Office of the Inspector General (OIG) released the 159-page Report of Investigation, Case No. 01G-526 Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme (ROI)? You might recall the Stanford case, in which Allen Stanford was allegedly running a Ponzi scheme since as far back as 1997. Moreover, the SEC’s ROI suggests that Stanford's scheme was able to flourish because of questionable "institutional influences" within the SEC.

You missed that Stanford post mortem report? Course you did, the report was issued under the heavy flak provided by the Goldman case. Now the SEC Inspector General David Kotz will have to respond to U.S. House Representative Darrell Issa’s (R-CA) April 16 letter calling for a probe of the circumstances of the timing of the filing of SEC v. Goldman. Some have alleged improper political motives, which the SEC has denied.

Anyway, while you are pooh-poohing those off-the-wall conspiracy theories, consider this tidbit posted on the SEC’s website. It seems that on April 22, SEC Inspector General Kotz sent a Memorandum to SEC Chairman Mary Schapiro, and a copy to the SEC’s Ethic Counsel William Lenox. The Memorandum is part apology, part reiteration, part bizarre.

Red Flag Was Raised in 2002
Section IV of the ROI states that the SEC had received a letter dated October 28, 2002 from, a citizen of Mexico who raised concerns about Robert Allen Stanford and his companies, and their certificates of deposit in which the writer’s mother had invested. I have reprinted the relevant section below:

C. During the 2002 Examination, the FWDO Enforcement Staff Received a Letter From the Daughter of an Elderly Stanford Investor Concerned That the Stanford CDs Were Fraudulent

On December 5, 2002, [Harold] Degenhardt [then head of the SEC’s Ft. Worth office] received a letter dated October 28, 2002, from a citizen of Mexico who raised concerns about Stanford similar to those raised by the Examination staff. See October 28, 2002 Letter from to SEC Complaint Center, copying Degenhardt (the “Letter”), attached as Exhibit 76. The Letter stated:

My mother is an old woman with more than 75 years of age
and she has all her money my father inherited to her for his
life work in CDs of Stanford Bank. This is the only money
my mother has, and it is necessary for my mother, my
sisters and me for living. My mother put it in the United
States because of the bad situation in Mexico and because
the most important thing is to look for security. …
I am an accountant by profession and work for a large bank
in Mexico. I know some banking regulations of my
country that are very different from practices in Stanford
Bank and for that reason I am very nervous. Please look at
this bank and investigate if everything is honest and
correct. There are many investors from Mexico in this
bank. My questions and doubts are listed here.

1. Stanford says the CDs have insurance. My mother
receives two statements of accounts. One from Stanford
bank in Antigua with the CDs and another one from
Stanford and Bear Stearns in New York. I know Bear
Stearns is a very good company, but the statement of Bear
Stearns only has cash that my mother uses to take out
checks. This cash is the interest that the CD pays.
Is the bank in Antigua truly covered by insurance of the United States Government?

2. The CD has a higher than 9% interest and I know
other big banks like Citibank pay interest of 4%. Is this
possible and secure?

4. In December of 1999 the bank had a lot of
investments in foreign currencies and in stocks. In all the
world many stocks and foreign currencies came down in
2000. If a lot of money was in investments that came
down, how did the bank make money to pay the interest
and all of the very high expenses I imagine it has. …

5. The accounting company that makes the audit
(C.A.S. Hewlett & Co) is in Antigua and [no]body knows.
I saw the case of Enron with bad accounting and I am
preoccupied with another case of fraud accounting. Why is
the auditor a company of Antigua that [no]body knows and
not a good United States accounting company?

I know some investors that lost money in a United States
company named InverWorld in San Antonio. Please
review very well Stanford to make sure that many investors
do not get cheated. These investors are simple people of
Mexico and maybe many other places and have their faith
in the United States financial system.

Without responding to, or investigating the writer’s concerns, the SEC Staff forwarded the Letter to the Texas State Securities Board (TSSB) on December 10, 2002. No one called the writer back. No one communicated with her. Frankly, the SEC might just have well folded the letter into a paper airplane and tossed it out its window. Given that the letter was received by the SEC staff on December 5, it’s surprising that those dutiful industry cops sat with the missive for a full five days before passing it on to the State of Texas. Of course, December 5 was a Thursday, so, to be fair, the staff only had three business days to review the thoughtful warning (if you don’t include the date of receipt). And Christmas was only 20 days away. Then there was New Year’s . . .

We Got Nuthin’ From Nobody
Based upon interviews with TSSB Commissioner Denise Crawford, and with a TSSB employee whose name was redacted in the official report, the OIG was advised that the TSSB had searched its files and found no record of receiving the Letter. Crawford stated that she was confident that the TSSB had not received the Letter from the SEC because the TSSB's internal tracking system for such correspondence would have evidenced its receipt. Further, Crawford and the unnamed TSSB employee all stated in interviews that they had never seen the letter.

That’s pretty much the fate of the letter as of the end of 2002. Eight years later, the tale takes an odd twist. Turns out Crawford’s staff at the TSSB found the letter sometime after talking to the SEC’s OIG. Guess how the letter—something like the Harry Markopolos letter warning the SEC of Madoff’s Ponzi—was found? A TSSB administrative assistant was cleaning out a file cabinet that contained "miscellaneous information" and stumbled upon it.

TSSB noted that the letter should not have been filed in the cabinet where it was found and that it clearly had not been handled properly or in accordance with TSSB's procedures for handling such correspondence. TSSB staff provided no further information or explanation for the mishandling of this letter or their failure to locate it during the course of our investigation.

Final Thoughts
Although it’s the little suspicions and minor leads that often build into the historic cases, someone has to painstakingly stack the bricks, slap on the mortar, and build the wall . . . brick by brick by brick. In short, someone has to do some work and build the case bit by bit. Unfortunately, the regulators seem to need the fully gift-wrapped evidence to bring a case.

Bill Singer, Registered Rep.’s legal columnist, is a securities lawyer and the publisher of and This article was adapted from his blog post of April 27.

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