SEC Dates Stanford Probe to 2005


The SEC offered up the revised time frame for its investigation of alleged CD fraud at Stanford Financial to rebut charges from critics that it had dropped the ball

Securities regulators, who are under fire from critics for the pace of their investigations into two major financial frauds, now say they were on the trail of financier R. Allen Stanford as far back as the spring of 2005, nearly 16 months earlier than previously believed.

Stanford has been accused by the Securities & Exchange Commission of running an $8 billion fraud relating to certificates of deposit issued by a Stanford-controlled bank on the Caribbean island of Antigua.

New Start Date

The SEC says its investigation into the business practices of the Texas-born billionaire and his Stanford Financial Group began soon after it completed a formal examination of the Houston-based firm. The regulatory agency says the investigation remained an active matter up until the filing of civil fraud charges against Stanford and two of his top deputies on Feb. 17 of this year.

The SEC previously had pinned the starting date for its investigation to October 2006. Regulators now suggest that 2006 date may refer to the first time it issued investigatory subpoenas seeking documents and testimony.

"The SEC investigation was initiated in the spring of 2005," SEC spokesman John Nester said on Feb. 25. "It has been active ever since and has included cooperation with other federal agencies."

Former Broker Initiated Investigation

Meanwhile, BusinessWeek has learned that the SEC examination was the result of information provided to regulators by a former Stanford Financial broker who told investigators that the financial services company was running a Ponzi scheme. In 2004 the broker contacted the SEC's office in Fort Worth to voice concern about the investment firm's focus on selling high-yielding CDs issued by an offshore bank in Antigua that Stanford controlled.

The former broker, who declined to be identified but talked to BusinessWeek, spoke to two investigators in the Fort Worth office and told regulators that the unusually high yields on the CDs weren't sustainable. The Stanford whistle-blower was aware of the SEC examination but had no further contact with regulators until January, a month before the SEC filed civil charges against Stanford. The former broker's account was verified with other sources familiar with the investigation.

The SEC offered up the revised time frame for its investigation to rebut charges from critics that it had dropped the ball with regard to the 58-year-old Stanford. Regulators charged Stanford with orchestrating an $8 billion fraud involving the sale of the CDs issued by his Stanford International Bank in Antigua. In the wake of the SEC charges, a federal judge appointed a receiver to run Stanford Financial's U.S.-based brokerage arm, and froze much of Stanford's assets.

Stanford has not been criminally charged. But sources say the FBI and the Justice Dept. are investigating the matter.

Why Charges Were Delayed

The regulatory agency has been under fire ever since the December arrest of Bernard Madoff on charges he ran a massive $50 billion Ponzi scheme at his New York financial services firm. The SEC has been taken to task by political leaders and investor advocates for failing to act promptly on a nearly 10-year-old tip from whistle-blower Harry Markopoulos that Madoff's consistent double-digit returns were impossible to replicate and should be scrutinized.

Nester declined to comment on why it took the SEC four years to investigate Stanford before it was prepared to file civil fraud charges. But generally, he said, the pace of an investigation can be affected by numerous factors, including the agency's ability to prosecute a matter and the jurisdiction in which the alleged offense takes place.

Others within the SEC have said the investigation was slowed by a 27-year-old Supreme Court decision that ruled that a bank CD is not the same thing as a stock or a bond and is not governed by federal securities laws. Regulatory sources have said the ruling tied investigators' hands and led to an internal debate about whether the agency had the authority to pursue the investigation.

Goldstein is a senior writer at BusinessWeek.

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