US SEC had suspected Stanford Ponzi scheme since 1997

A report from the US Securities and Exchange Commission (SEC) says the Stanford fraud was ignored for a decade because it was too big and too complex.

US regulators had been aware Allen Stanford was probably running a Ponzi scheme since 1997, according to a report by the SEC.

Published by the SEC's Office of the Inspector General (IOG), the report is damning of the regulator's enforcement culture, which it says resulted in enforcers at its Fort Worth branch being "reluctant" to investigate Stanford.

"We found that senior Fort Worth officials perceived they were being judged on the numbers of cases they brought, so-called 'stats', and communicated to the enforcement staff that novel or complex cases were disfavoured," says the report. "As a result, cases such as Stanford, which were not considered 'quick-hit' or 'slam-dunk' cases, were not encouraged."

The SEC's Fort Worth office came to the conclusion the Texan billionaire "was probably operating a Ponzi scheme" in 1997, two years after Stanford registered with the SEC.

"We found that, over the next eight years, the SEC's Fort Worth examination group conducted four examinations of Stanford's operations, finding in each one that the certificates of deposit could not have been 'legitimate', and that it was 'highly unlikely' the returns Stanford claimed to generate could have been achieved with the purported conservative investment approach," says the report.

The SEC says its Fort Worth examiners "dutifully" conducted examinations of Stanford in 1997, 1998, 2002 and 2004, concluding each time that Stanford's $8 billion certificate-of-deposit programme was "likely" to be an investment scam.

"Where was the whistleblower?" asks one regulator, who did not want to be named. "Shouldn't somebody have raised their hand to say something was awry? Does the SEC engender whistle-blowing? Or does it engender keeping it under the rug?"

Furthermore, the SEC says the only big shift between the findings of the four investigations was that, within almost a decade "the potential fraud grew exponentially, from $250 million to $1.5 billion".

"Everybody was mindful of stats," said a Fort Worth assistant director, quoted in the IOG report, who was involved in supervising Stanford. "Stats were recorded internally by the SEC in Washington, DC. I think when I was assistant director, there was a lot of pressure to bring a lot of cases. I think that was one of the metrics that was important to the home office and to the regions."

In October 2003, the SEC received a letter forwarded from a Stanford whistleblower attempting to lift the lid on the suspected fraud taking place within the Stanford organisation. "Stanford Financial is the subject of a lingering corporate fraud scandal perpetuated as a 'massive Ponzi scheme' that will destroy the life savings of many; damage the reputation of all associated parties, ridicule securities and banking authorities, and shame the US," it said.

However, it was not until February 27, 2009 that the SEC accused Stanford of operating a "massive Ponzi scheme" through his Stanford Financial Group.

The SEC surveillance regime has already faced strong criticism for systemic risk caused by the collapse or near collapse of investment banks under its supervision, such as Bear Stearns, Lehman Brothers and Merrill Lynch, and for its failure to detect Bernard Madoff's $60 billion Ponzi scheme until it was destroyed by the crisis.

"It would seem to be that a large Ponzi scheme can have systemic implications," says the regulatory source. "Would this have been caught by a safety and soundness regulator rather than a surveillance-focused regulator?"

The SEC report was released on the same day the regulator announced it was launching a civil fraud case against Goldman Sachs, alleging the bank had conspired with hedge fund Paulson to mislead investors by structuring a collateralised debt obligation (CDO) designed to fail.

The SEC also announced on Wednesday it had uncovered another suspected Ponzi scheme, estimated at $900 million, operated by a Miami Beach businessman and philanthropist who had promised investors 26% annual returns on securities through his Capitol Investments USA scheme.

To read the full IOG report on the SEC website, click here.