How Did the SEC Miss the Red Flags on Stanford, Madoff? And How Many More Billion-Dollar Scams Are Out There?

For years, red flags had been popping up in the financial empire of flamboyant Texas billionaire banker R. Allen Stanford. Financial advisers were selling clients on millions of dollars in complicated investments neither fully understood and a tiny accounting firm in Antigua few had even heard of was the billion-dollar company’s accountant.

Meanwhile, New York City money manger Bernard Madoff was spinning an alleged $50 billion Ponzi scheme built entirely on lies and catering to everyone from well-heeled millionaires to blue-collar types hoping to build on their retirement money, college funds, and other investments. Former employees and frustrated investors complained about questionable tactics being used by Madoff.

And the whole time, the U.S. Securities and Exchange Commission was asleep at the switch as two epic financial disasters unfolded.

News that financial regulators failed to detect two multi-billion-dollar scams carried out over several years by a pair of well-known investment brokers raises serious questions about the ability of the SEC and other agencies to ensure the security and integrity of the nation’s money markets.

Stanford: Circa 2003

As early as 2003, employees of Stanford International Bank and other financial holdings in Stanford’s emerging offshore banking empire were asking serious questions about how the outfit was being operated. One employee, a Miami-based broker named Charles Hazlett, raised questions about the certificates of deposit he was selling to clients, promising them insanely high interest rate returns for their investments.

Hazlett was a rising star in Stanford’s financial galaxy, becoming a top performer and earning a new BMW for selling $10 million of the certificates in one quarter of 2002 alone. Investigators now say those very certificates, based on falsified data and outright lies, were at the very center of Stanford’s $8 billion investment scam.

According to Hazlett, when clients asked him details about how the certificate investments worked, he didn’t always know what to say. When he went up the Stanford chain of command to get answers to some pretty basic questions, like how risky the investments were and where the assets for them were held, he didn’t like what he heard: Essentially, “shut up or get out.”

Small Accounting Firms Not an Alarm for SEC

Hazlett also was troubled by Stanford’s lack of detailed balance sheets and the fact that the growing international financial empire relied on CAS Hewlett, a small and little-known accounting firm based on the Caribbean island of Antigua, to balance its books.

When the former top seller was shown the door by Stanford, he said he alerted SEC investigators about his concerns and thought that was that, figuring the whole financial charade would soon be revealed. In fact, it would take years for the scandal to see the light of day.

Ironically, Madoff’s use of a relatively unknown auditor also failed to set off warning bells at the SEC until his arrest in December 2008. By then, Madoff had apparently single-handedly made off with billions of dollars given to him by clients who trusted the money manager to invest it wisely. Instead, Madoff pocketed every dime without purchasing a single security on behalf of his clients, investigators say.

Where Was the SEC?

In light of the Stanford and Madoff scandals, serious questions must be raised about how well the SEC is functioning. For years, the two men orchestrated separate but similar financial frauds on thousands of unsuspecting investors. Numerous former employees of the firms talked to the SEC, but nothing was immediately done to stop the activities.

One has to wonder, if Madoff and Stanford were able to pocket nearly $60 billion between them over the course of just a few years, how many other similar financial schemes are playing out now, right under the nose of the SEC?

No related posts.