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Securities Regulation

SEC Looked Into Stanford CDs in 2005; Why Didn’t Feds Act Sooner in $8B Case?

Posted Feb 18, 2009 7:38 PM CDT
By Martha Neil

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In 2005, the U.S. Securities and Exchange Commission sent letters to holders of certificates of deposit at Stanford International Bank of Antigua, seeking information about how the instruments had been marketed.

And, as two former brokers for R. Allen Stanford contend in a lawsuit they filed in January 2008, they were forced to resign from his Houston-based business because they wouldn't participate in alleged improper practices there, reports the Houston Chronicle.

The lawsuit filed by investment advisers D. Mark Tidwell and Charles “Charlie” Rawl apparently sparked additional investigation by the SEC, according to the newspaper, which says they were subpoenaed and interviewed by federal agents last year. (In a countersuit, Stanford contended that the two men were disgruntled fired employees who owed the firm some $500,000.)

However, it wasn't until a lawyer for the bank "disaffirmed" what Stanford was telling clients that the SEC pounced this week, accusing Stanford, the bank and other defendants, in a civil lawsuit, of operating a massive fraud, and seeking to freeze assets and appoint a receiver, as discussed in earlier ABAJournal.com posts. The allegations focus on some $8 billion in certificates of deposit that the bank issued, making what the securities regulator describes in the suit as improbable claims of double-digit annual returns.

Now, despite claims by the SEC that it acted promptly to shut the alleged Stanford operation down, questions are being raised about whether it and other regulators were lax in performing their watchdog duties.

"Despite years of controversy and concern, regulators appeared to ignore the ample warning signs," writes Houston Chronicle in an earlier article about the case.

In one troubling episode, the Financial Industry Regulatory Authority levied a $10,000 fine on the Stanford Group Co. in November 2007 because of the brokerage's distribution of marketing material that “failed to present fair and balanced treatment” of CD risks, reports Bloomberg. The brokerage is also a defendant in the SEC suit.

“From what we know, the problem that led to the fine was a red flag,” law professor Robert Hillman of the University of California at Davis tells the news agency. “If you have a red flag of this nature, then you have to do something more than simply levy a fine and close the file.”

Additional coverage:

ABAJournal.com: "Texas Billionaire R. Allen Stanford Accused By SEC of Operating ‘Massive’ Fraud "

ABAJournal.com: "Proskauer Lawyer Raised ‘Red Flag’ in Billionaire Probe"

ABAJournal.com: " Where is Billionaire Defendant, Following SEC Lawsuit?"

Daily Mail: "Girls, greed and a £6 billion sting"

Independent: "Stanford: panic spreads as fraud inquiry widens"

London Times: "Hunt for Allen Stanford and his billions"

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