Investigation of the SEC's Response to Concerns Regarding Robert
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This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General’s approval. REPORT OF INVESTIGATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL Case No. OIG-526 Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme March 31, 2010 REDACTION KEY AC = Attorney-Client Privilege DPP = Deliberative Process Privilege LE = Law Enforcement Privilege PII = Personal Identifying Information PP = Personal Privacy WP = Attorney Work Product This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General’s approval. Report of Investigation Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme Case No. OIG-526 Table of Contents INTRODUCTION AND BACKGROUND ....................................................................... 1 SCOPE OF THE OIG INVESTIGATION ......................................................................... 2 I. E-MAIL SEARCHES AND REVIEW OF E-MAILS......................................... 2 II. DOCUMENT REQUESTS AND REVIEW OF RECORDS.............................. 3 III. TESTIMONY AND INTERVIEWS ................................................................... 4 RELEVANT STATUTES, RULES AND REGULATIONS ........................................... 10 EXECUTIVE SUMMARY .............................................................................................. 16 RESULTS OF THE INVESTIGATION .......................................................................... 29 I. IN 1997, THE FWDO EXAMINATION STAFF REVIEWED STANFORD’S BROKER-DEALER OPERATIONS AND MADE A REFERRAL TO ENFORCEMENT DUE TO A CONCERN THAT ITS SALES OF CDs CONSTITUTED A PONZI SCHEME............................................................................................... 29 A. Two Years After Stanford Group Company Began Operations, the SEC Identified It as a Risk and a Target For an Examination Based on Suspicions That Its CD Sales Were Fraudulent........................................................................................ 29 B. After Conducting a Short Examination, the Examination Staff Concluded That Stanford Was Probably Operating a Ponzi Scheme............................................................................................ 30 C. As a Result of Their Concerns That Stanford Was Operating a Ponzi Scheme, the Examination Staff Referred Their Stanford Findings to the Enforcement Staff.................................... 33 This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General’s approval. II. EIGHT MONTHS AFTER THE EXAMINATION STAFF REFERRED STANFORD, THE ENFORCEMENT STAFF OPENED, AND QUICKLY CLOSED, A MATTER UNDER INQUIRY........................................................................................................... 34 A. The 1998 Stanford MUI Was Likely Not Even Opened in Response to the Examination Staff’s Referral, But in Response to a Concern From the U.S. Customs Department That Stanford Was Laundering Money..................................................... 34 B. After Stanford Refused to Produce Documents, No Further Investigative Steps Were Taken................................................................ 36 C. The Enforcement Staff Closed the 1998 Stanford MUI Three Months After It Was Opened.......................................................... 37 1. The Enforcement Staff Told the Examination Staff That an Investigation of Stanford Was Not Warranted Because of the Lack of U.S. Investors..............................................38 2. The Enforcement Staff Told the Examination Staff That an Investigation of Stanford Would Be Too Difficult Because of the Staff’s Inability to Obtain Records From Antigua......................................................................39 3. SGC’s Outside Counsel, a Former Head Of The SEC’s Fort Worth Office, May Have Assured Barasch That “There Was Nothing There”.......................................40 III. IN 1998, THE FWDO EXAMINATION STAFF EXAMINED SGC’S INVESTMENT ADVISER OPERATIONS AND REACHED THE SAME CONCLUSION AS THE BROKER- DEALER EXAMINERS: STANFORD’S CD SALES WERE PROBABLY FRAUDULENT........................................................................... 42 A. The 1998 Examination Concluded That SGC’s Sales of SIB CDs Were Not Consistent With SGC’s Fiduciary Obligation to Its Clients Under the Investment Advisers Act............................................................................................................. 44 B. The Enforcement Staff Failed to Consider the Investment Adviser Examiners’ Concerns in Deciding Not to Investigate Stanford Further ..................................................................... 46 ii This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General’s approval. IV. IN 2002, THE SEC EXAMINERS EXAMINED SGC’S INVESTMENT ADVISER OPERATIONS AGAIN AND REFERRED STANFORD TO ENFORCEMENT ............................................ 47 A. In the 2002 Examination, the Examiners Found That Stanford’s CD Sales Had Increased Significantly, Which Led to Concerns That the Potential Ponzi Scheme Was Growing .................................................................................................... 47 B. The 2002 Examination Found That SGC Was Violating the Investment Advisers Act By Failing to Conduct Any Due Diligence Related to the SIB CDs ............................................................ 50 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 ................................................................................................. 53 Complainant 1 D. The FWDO Did Not Respond to the Letter and Did Not Take Any Action to Investigate Her Claims............................... 55 Complainant 1 E. Although a Decision Was Made to Forward the Letter to the Texas State Securities Board, the Letter Was Never Forwarded ...................................................................................... 56 F. In December 2002, the Examination Staff Referred Their Stanford Findings to the Enforcement Staff ............................................. 56 Complainant 1 G. Based on the Earlier Decision to Forward the Letter to the TSSB, the “Matter” Was Considered Referred to the TSSB Even Before the 2002 Examination Report Was Sent to Enforcement.......................................................................... 57 H. The Enforcement Staff Did Not Open an Inquiry Into Stanford and Did Not Even Review the 2002 Examination Report........................................................................................................ 58 I. The Enforcement Staff Did Not Refer the 2002 Examination Report Findings to the TSSB............................................... 59 J. In December 2002, the SEC Examination Staff Attempted to Interest the Federal Reserve in Investigating Stanford, But Concluded That the Federal Reserve Had DPP DPP of Stanford ................................................................................... 60 iii This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General’s approval. V. IN 2003, THE SEC ENFORCEMENT STAFF RECEIVED TWO COMPLAINTS THAT STANFORD WAS A PONZI SCHEME, BUT NOTHING WAS DONE TO PURSUE THOSE COMPLAINTS.................................................................................................. 63 Confidential Source A. in a Ponzi Scheme Case Filed By the SEC Noted Several Similarities Between That Case and Stanford’s Operations ............................................................................... 63 B. An Anonymous Insider Warned That Stanford Was Operating “a Massive Ponzi Scheme” ...................................................... 65 VI. IN OCTOBER 2004, THE EXAMINATION STAFF CONDUCTED A FOURTH EXAMINATION OF SGC IN ORDER TO REFER STANFORD TO THE ENFORCEMENT STAFF AGAIN.................................................................................................. 70 A. The Examination Staff Was Alarmed at the Increasing Size of the Apparent Ponzi Scheme, and Accordingly, Made Another Enforcement Referral of Stanford a “Very High Priority”..................................................................................................... 70 B. The 2004 Examination Report Concluded That the SIB CDs Were Securities and Were Part of a “Very Large