SEC Fails To Protect Investors

The Securities and Exchange Commission (SEC) is supposed to protect investors from pyramid schemes and other types of investment fraud. Now, there is no way that any investigative agency can catch all fraud, but when the agency gets a suspicion that fraud may be happening they are supposed to investigate it, and if fraud is discovered, take immediate action to stop it. Unfortunately, that is not necessarily the way the agency has been operating.

Take the case of Texas swindler R. Allen Stanford. For many years, he headed the Houston-based Stanford Financial Group, which over the years took in as much as $7 billion in "investments". The problem is that Stanford's investment group was nothing more than a glorified Ponzi scheme (pyramid scheme). He used later investment money to show early investors a return on their money, while siphoning off the lion's share of the money to support his own plush lifestyle.

Starting in 1997, investigators in the Fort Worth office of the SEC did at least four cursory reviews of Stanford Financial Group, and each time they thought it looked too good to be true. The investigators asked repeatedly for permission to launch an in-depth investigation into Stanford's financial dealings, and they were turned down every time. Finally, 8 years later in 2005 the investigation was launched, and that resulted in fraud charges being filed against Stanford in 2009.

Stanford may not have been in Madoff's class as a crook (where investors lost upwards of $18 billion), but $7 billion is not exactly chicken feed either. Why did it take the SEC so long to investigate after suspicions had been aroused (at least an 8 year delay)? You won't believe the answer!

It seems that senior officials in the SEC's Fort Worth branch felt like they were judged on the number of cases they investigated (and not the quality of those cases). This made them concentrate on smaller fish, whose cases could be quickly investigated and disposed of. Complex investigations into financial giants like Stanford Financial Group could take several years (it wound up taking nearly 4 years), so they were ignored or put off so the office could keep their numbers up.

While the SEC investigated small-time crooks, Stanford was given an extra 8 years to bilk many more investors of their money. That is inexcusable. While congressional investigators didn''t fault the competence or honesty of the Fort Worth investigators, I have to wonder. Someone sure screwed up there.

In addition, it turns out that at least one of the senior officials wound up leaving the SEC to go into private practice. Guess who hired him to do some work? That's right -- R. Allen Stanford! There is no proof that the official broke the law by delaying the investigation to enrich himself, but it sure smells funny.

President Obama is trying to change the laws governing the financial industry to prevent another financial meltdown like the one that started the current recession, and this certainly needs to be done. But it seems to me that the SEC could use some revision also.