While the Senate Holds Goldman Hearings, Here Is What You're Missing (Cleverly hidden, perhaps?)

April 27, 2010

Silly season is now if full bloom among Wall Street's regulators.  As we all wait this morning with bated breath to hear the testimony of Goldman Sachs' executives before the Senate Permanent Subcommittee on Investigations, we learn that the industry's cops are still up to their old shenanigans.


Consider this absurd tidbit posted on the Securities and Exchange Commission's ("SEC's") website at http://sec.gov/news/studies/2010/oig-526-memo.pdf.


It seems that on April 22, 2010, SEC Inspector General (OIG) H. David Kotz sent a Memorandum to SEC Chair Mary Schapiro, with a copy to the SEC's Ethic Counsel William Lenox. The subject of that Memo was: Report of Investigation, Case No. 01G-526 Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme


Oh my, it seems that someone's feelings may have been hurt when the above Report of Investigation ("ROI") was released on Friday, April 16, 2010.  You can read the full ROI at http://www.sec.gov/news/studies/2010/oig-526.pdf  You missed this damning ROI?  Geez, wonder why.  Oh, yeah, I remember, the SEC just happened to choose that same day to coincidentally released the SEC v. Goldman Sachs et al. Complaint.  That lawsuit seems to have gotten a lot more press.  

For those of you who were unaware of the April 16th 159-page Stanford ROI, the OIG alleges that the SEC  knew that Allen Stanford was involved in a Ponzi scheme as far back as 1997.  Moreover, the OIG suggests that STanford's scheme was able to flourish because of questionable "institutional influences" within the SEC.   

The Play By Play


Section IV of the ROI states that the SEC had received a letter dated October 28, 2002 ("the Letter"), from, a citizen of Mexico [Ed: The letter writer's name has been redacted by the regulatory community and does not appear in the ROI or the Memo] who raised concerns about Robert Allen Stanford and his companies ("Stanford"), and its CDs in which her mother had invested. See ROI at 53. 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, Degenhardt 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 Harold 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.



Okay, you might ask (go ahead, ask), what happened to the Letter after the SEC got it in December 2002? Hey, great question - thanks for asking! 


The SEC Punts to the TSSB


The OIG reported that it found evidence that without responding to or investigating the writer's concerns, the SEC staff decided to forward the Letter to the Texas State Securities Board ("TSSB") on December 10, 2002,  ROI at 56.  There is so much that I can think of saying -- would you mind if I just let it go at "pathetic?"


Incomplete Pass


The OIG also reported, based on interviews with TSSB Commissioner Denise Crawford, and with a TSSB employee whose name was redacted in the official report, that the TSSB had searched its files and found no record of receiving the letter. The OIG also reported Crawford's statement 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. Id. Further, the OIG noted that Crawford and the unidentified TSSB employee all stated in interviews that they had never seen the letter. Id. at 56, n. 35.


Okay, so let me recap here. The SEC gets a letter warning about Stanford. The SEC doesn't communicate with the letter writer but sends the letter to the TSSB.  TSSB claims that it never got the letter. Ya got all of that?  Eight years roll by.


Late Hit


On April 16, 2010, TSSB's Crawford called the OIG and stated that while the information provided to OIG about the Letter was accurate at the time she and her staff were interviewed by OIG, a copy of the letter had subsequently been located in TSSB files.


The OIG followed up with TSSB officials and learned that a TSSB administrative assistant was cleaning out a file cabinet that contained "miscellaneous information" that TSSB staff had kept for potential use in future examinations and found a copy of the letter. It was explained to OIG that this file cabinet had not been searched when the OIG requested that the TSSB ascertain whether it had received the Letter. TSSB also 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. They provided no further information or explanation for the mishandling of this Letter or their failure to locate it during the course of our investigation.


Okay, let's look at the instant replay. The SEC gets a letter warning about Stanford. The SEC doesn't communicate with the letter writer but sends the letter to the TSSB.  TSSB claims that it never got the letter. Ya got all of that?  Eight years roll by. TSSB finds the letter in a file cabinet, where it should not have been filed. How it got there, no one knows.  Why it was there, no one knows. Oops.


Off-Setting Penalties


The new information does not change the OIG's finding that the SEC Staff had decided to forward the Letter to the TSSB without responding to or investigating the writer's concerns. It also does not change the OIG's finding that the decision to refer the matter to the TSSB was not revisited when, one week later, the SEC examination Staff referred the Stanford matter to the Division of Enforcement staff because of its concerns that Stanford was operating a Ponzi scheme. See ROI at 56-57.


However, in order for there to be a full and complete record of this matter, and, you know, in the spirit of fairplay and all, the OIG provided Chair Schapiro with this newly-discovered information.


Bill Singer's Comment: I dunno about you but, wow, I'm feeling much better about all of this.  I mean things are getting better among the ranks of Wall Street's cops.  They are at least uniform in their antics. Don't respond to complaints. Don't follow-up. Jealously guard your own regulatory turf. Dump the crap in a file cabinet. Lose the leads for nearly a decade.  Don't keep a document inventory worth jack. Deny that you have anything.  When you find it, blame some low level shnook.  Generate higher-profile, publicity hogging events when you're criticized.  Finally, make sure to prominently post the apology letters even though you aren't blameless.  Ah . . . progress!