By Dan Jamieson
Financial Industry Regulatory Authority Inc. chief executive Richard Ketchum issued a mea culpa today for Finra’s failure to uncover R. Allen Stanford’s alleged $8 billion Ponzi scheme.
“Finra clearly could have done better and we deeply regret we did not,” Mr. Ketchum said today in prepared testimony to the House Financial Services Committee’s Subcommittee on Oversight and Investigations.
Mr. Ketchum recapped the findings of a September 2009 Finra review of its missteps in the case.
|That internal review found that in 2005, Finra’s Dallas office curtailed an investigation of Stanford, which had been prompted by an SEC referral letter.
Finra enforcement staff weren’t sure whether they had jurisdiction over Stanford’s offshore CDs, Mr. Ketchum said.
The Securities and Exchange Commission, though, is perhaps more to blame for missing the alleged Stanford fraud.
A separate March 2010 report from the SEC’s inspector general found that the SEC’s Fort Worth branch was aware since 1997 that Mr. Stanford was possibly operating a Ponzi scheme.
Despite numerous exams of the Stanford firm that raised a number of red flags, SEC enforcement staff in Fort Worth refused to investigate.
SEC enforcement staff believed that “novel or complex cases were disfavored” by the agency’s management, said David Kotz, the SEC inspector general, in testimony today.
Stanford, 61, was indicted in June 2009 on 21 criminal charges claiming he misled clients about the safety and oversight of certificates of deposit issued by his Antiguabased Bank. Investors, lawmakers and the SEC’s inspector general have accused the agency and the Finra of ignoring warnings about Stanford years before he was arrested.
“It’s a tragedy that the investors have to pay the price of the SEC and Finra’s failures,” Representative Francisco Canseco, a Texas Republican, said at the hearing.
Julie Preuitt, an SEC employee who worked on an examination of Stanford’s business in 1997, said she had been rebuffed by supervisors after flagging possible fraud and pushing for a more thorough investigation.
Ms. Preuitt, now an assistant regional director in the SEC’s regional office in Fort Worth, Texas, told the panel she was also reprimanded by management after complaining about changes to the examination program in 2007.
“I paid a heavy price for complaining,” Ms. Preuitt said. “I was not only ignored, but was actively rebuffed in my attempts to perform at a fully functioning level.”
Stanford, who has denied the allegations against him, has been in federal custody since 2009 while awaiting trial. He is being held in a hospital at the Butner Federal Correctional Complex in North Carolina, where he is receiving treatment for a prescription drug dependency developed while in prison.
Stephen Harbeck, the president of the Securities Investor Protection Corp., said in an August 2009 letter that Stanford investors weren’t eligible for insurance payments because the government-sponsored regulator doesn’t protect people who are sold worthless securities. SIPC, which was chartered to guard investors against broker theft or brokerage failure, is overseen by the SEC.
“We’re being told our money was stolen the wrong way,” Stanford Kauffman, who invested in the alleged fraud, said in testimony at the hearing. “Stanford stole our savings, but the SEC and Finra held the door wide open.”