How Allen Stanford kept the SEC at bay

(Reuters) – In 2009, federal investigators
finally arrested Houston financier R. Allen Stanford. For twenty
years, Stanford allegedly had run a $7 billion Ponzi scheme from
his offshore bank on the Caribbean island of Antigua. U.S.
authorities had been nosing around Stanford’s empire for longer
than a decade but hesitated to open a full-blown probe.
As Stanford’s trial began this week, one question left
unanswered was: How did he keep authorities at bay for so long?

Allen Stanford
Allen Stanford

A Reuters examination of his case finds that the answer lay in
part in the legal advice he obtained from former SEC officials
and other ex-regulators and law-enforcement officials.
Among those Stanford sought help from was famed securities
lawyer Thomas Sjoblom . Then a partner at the
international law firm of Proskauer Rose and chair of its
securities practice, Sjoblom also was a former 20-year veteran
of the U.S. Securities and Exchange Commission’s enforcement
division.
What Sjoblom allegedly did next for Stanford has drawn the
scrutiny of federal prosecutors. The Justice Department has been
investigating Sjoblom for possible obstruction of justice,
witness tampering, and conspiracy related to his efforts to
persuade the SEC to stand down from its investigation of
Stanford, according to people familiar with the probe.
Sjoblom is one of the most senior attorneys ever to be
investigated for allegedly crossing the line from legal advocacy
on behalf of a client to violating the law. He hasn’t been
charged, however, and it is possible he never will be.
Stanford went on trial on Monday in federal court in Houston
on charges that he defrauded more than 30,000 investors from
more than 113 countries, and also obstructed the SEC’s
investigation of him . Only Bernard Madoff is alleged
to have stolen more. Stanford has pleaded not guilty.
Prosecutors are likely, in making the obstruction portion of
their case against Stanford, to detail Sjoblom’s alleged role in
assisting Stanford in that effort. Attorneys began their opening
arguments on Tuesday.

IMMUNITY SOUGHT, AND REJECTED
People with first-hand knowledge of the matter say that
Sjoblom had offered the Justice Department his testimony against
Stanford in exchange for a grant of immunity from prosecution
for himself – an offer rejected by the Justice Department.
Prosecutors demanded a formal acknowledgment by Sjoblom of his
own alleged criminal participation in an attempt by Stanford to
derail investigations by the SEC, according to people involved
in the discussions.
Sjoblom declined to answer questions when reached by
telephone as well as inquiries submitted to him by email.
Ordinarily, attorneys are precluded from being witnesses
against former clients because of the attorney-client privilege.
But under a legal doctrine known as the crime-fraud
exception, an attorney can tell what he knows if his client has
sought advice that would abet the commission of that fraud or
some other criminal act – or in rare instances, if the attorney
himself aided a crime. The crime or fraud disclosed or discussed
must also then occur for the attorney to be able to testify.
If Sjoblom had testified against Stanford, he would have been
one of the most prominent attorneys to turn against such a
client.

THE STANFORD EIGHT
The trials could cast light on the broader mystery of how
the alleged Stanford fraud could have gone on so long even
though federal regulators were examining the Texas financier for
years. The case has put the SEC and other federal agencies in an
embarrassing light, creating fresh fodder for critics of the
revolving door between government and the private sector.
Stanford, Reuters has found, paid at least eight former
senior U.S. and foreign regulators and law-enforcement officials
for legal advice or investigative services.
Among the former government figures who worked for Stanford
is Spencer C. Barasch, who headed the enforcement division of
the SEC’s office in Ft. Worth, Texas.
Barasch agreed this month to pay a $50,000 fine for
allegedly violating federal ethics laws by representing Stanford
after overseeing regulation of Stanford’s U.S. brokerage
businesses. It is illegal for many former federal regulators,
including those at the SEC, to represent private clients if they
have “personally and substantially” participated in any matters
related to those clients during the course of their government
employment.
Examiners at the SEC had suspected as early as 1997 that
Stanford was engaged in a Ponzi scheme and felt the SEC should
investigate. But year after year, until 2005, their warnings and
calls for investigation were ignored by higher-ups.

A FRIEND IN FT. WORTH
In January 2009, the SEC was seeking the sworn testimony of
both Stanford and James Davis, the chief financial officer for
Stanford International Bank. Davis, Stanford’s top deputy, has
since pled guilty to securities-fraud and mail-fraud charges and
has become a government witness against Stanford and others.
Stanford sought to delay and wear down regulators and
investigators, Davis and other witnesses told the government,
according to a 2009 plea agreement between Davis and federal
prosecutors filed in federal court in Houston.
In 1997, 1998, 2002, 2004, and 2005, according to internal
agency records seen by Reuters, examiners for the SEC
recommended that the agency investigate Stanford. In three of
those instances, Barasch, at the time an SEC official in Ft.
Worth, personally overruled the examiners’ recommendations,
according to those records. Those decisions helped the Ponzi
scheme to continue unabated for several additional years,
costing investors additional billions of dollars, according to a
report by the SEC’s Inspector General.
Barasch told the SEC Inspector General that he made those
decisions because he was not sure the SEC had the statutory
authority or jurisdiction to investigate. He blamed his
superiors and a broader culture within the SEC for pressuring
the staff not to pursue complex and difficult cases, according
to the Inspector General report.
In his final days at the SEC in 2005, Barasch overruled
examiners one last time on a request to investigate Stanford,
according to the Inspector General report and interviews with
SEC officials. The SEC’s formal investigation of Stanford began
exactly one day after Barasch left the agency.
Barasch referred questions to his lawyer; his attorney
didn’t respond to requests for comment.

‘I HATED BEING ON THE SIDELINES’
Barasch was told at the time by an SEC ethics officer that
he was legally precluded from representing Stanford. Barasch
went to work for Stanford anyway. In a later investigation of
the failure to catch Stanford earlier, the SEC Inspector General
asked Barasch why he did so. His reply, according to the
Inspector General’s report: “Every lawyer in Texas and beyond is
going to get rich over this case. Okay? And I hated being on the
sidelines.”
FBI agents and prosecutors also uncovered evidence that on
at least two occasions Barasch sought confidential information
regarding the SEC’s probe of Stanford during his brief
representation of the banker, Justice Department officials said
in court records and a press release.
In agreeing to pay the fine, Barasch denied any misconduct,
settling the matter “to avoid the expense and uncertainty of
protracted litigation,” his attorney, Paul Coggins said.
In a related action, the commissioners of the SEC rejected a
settlement negotiated between Barasch and SEC staff under which
Barasch would have agreed to an order barring him from
practicing before the agency for six months. The commissioners
rejected the proposed settlement as too lenient, to send a
message that its former staff should abide by its rules and
federal laws regarding the revolving door.

‘REVOLVING DOOR’
“This misconduct highlights the dangers of a ‘revolving
door’ environment between the SEC and the private securities law
bar,” outgoing SEC Inspector General H. David Kotz said in
statement about the Barasch case.
The Justice Department’s agreement with Barasch was reported
by Reuters earlier this month. The SEC, which
has the authority to bar professionals from practicing before
the agency, has not announced any disciplinary action.
The SEC is also preparing a separate civil case against
another former regulator, Bernerd Young, who worked as a
compliance officer for Stanford’s bank, said a person familiar
with the matter. Before he worked for Stanford, from 1999 to
2003, Young was a district director of the Dallas office of the
National Association of Securities Dealers, which was then the
brokerage industry’s self-regulator. Regulation of the industry
has since been taken on by a successor agency, the Financial
Industry Regulatory Authority.
Young was notified by the SEC staff last June that they were
preparing a civil complaint against him for securities-law and
other violations and seeking a lifetime ban on his employment in
the securities industry, according to a person who reviewed the
SEC’s notification to Young. Young hasn’t been charged with any
wrongdoing.
In November 2007, the Financial Industry Regulatory
Authority charged that Stanford had used “misleading, unfair and
unbalanced information” and fined him $10,000, but with no
admission of guilt. Young was central to decisions by the NASD
not to take tougher action against Stanford, according to
government officials involved in the matter.
Randle Henderson, an attorney for Young, said Young had
“done absolutely nothing wrong” and that he and Young had been
cooperating with SEC investigators. If an enforcement action was
brought, Henderson said, he and his client would engaged in a
“full and complete and aggressive defense” of the allegations.

THE AIRCRAFT HANGAR SESSION
Sjoblom began work for Stanford as early as 2005,
as the SEC began a formal investigation. Barasch began
representing Stanford in Sept. 2006.
Barasch’s successor at the SEC had reversed course and given
a green light for the SEC to investigate. Stanford believed that
hiring former SEC officials was the best course to thwart the
agency, according to emails written by Stanford to subordinates
and later cited by the SEC’s Inspector General.
Barasch worked on the case until Dec. 2006, dropping out
after SEC ethics officers warned him that any further
involvement would violate a federal law.
On January 21, 2009, Stanford, his deputy Davis and other
senior executives of the Stanford International Bank met Sjoblom
in an aircraft hangar in Miami, Florida, to devise a strategy
for fending off the SEC, according to the Davis plea agreement
entered in Houston federal court.
Stanford, a bulky man with a thick mustache, paced nervously
in the aircraft hangar, according to an account one of the
attendees gave to federal investigators. In contrast, Sjoblom
appeared calm and collected as they discussed their next move,
the attendee told federal investigators.
The group allegedly agreed on a strategy: Sjoblom would go
to the SEC and tell officials that both Stanford and Davis knew
very little about the business they ran. Instead, he would tell
them, two other, lower-ranking executives of the Stanford
International Bank understood much better how the bank invested
customers’ money. He would then propose that they testify in
place of Stanford and Davis, according to the plea filed in
federal court in Houston.

SJOBLOM’S STRATEGY
Sjoblom knew that these assertions were false, and was also
by then aware that Stanford had engaged in a massive financial
fraud, according to the Davis plea. Still, Sjoblom moved forward
with the effort to obstruct the SEC investigation, the Justice
Department alleged in the Davis plea.
Early the next morning, on Jan 22, 2009, Sjoblom met in
Houston with attorneys for the SEC, according to the Davis plea.
There, Sjoblom told the SEC staff that Stanford and Davis did
not “micro-manage” clients’ portfolios. Taking Sjoblom’s word,
the SEC agreed to delay the testimony of Stanford and Davis,
according to the plea filed in Houston federal court.
The Justice Department has since alleged that Sjoblom’s
actions constituted an obstruction of their investigation.
Based in part on information given them by Davis, federal
prosecutors alleged that Sjoblom continued trying to prevent the
SEC from learning the truth even after Sjoblom learned about
Stanford’s massive fraud.
After convincing the SEC to forego Stanford’s and Davis’s
testimony, Sjoblom allegedly helped prepare Laura
Pendergest-Holt, Stanford International’s chief investment
officer, to testify in their absence, according to the Davis
plea and an indictment against Pendergest-Holt in federal court
in Houston.
Prosecutors allege that in reality, Stanford and Davis were
the only two Stanford executives intimately familiar with the
finances of the company. Pendergest-Holt only learned the full
extent of the fraud around the same time that Sjoblom did, when
the two were preparing her to testify before the SEC, federal
prosecutors assert. Pendergest-Holt and Sjoblom learned then
that the firm was insolvent and most of its financial claims
fictional, prosecutors allege in the Pendergest-Holt indictment
and the Davis plea.
On Feb. 5, Stanford admitted to Davis and Sjoblom that his
bank’s “assets and financial health had been misrepresented to
investors, and were overstated,” according to Davis’s plea
agreement with prosecutors.

$4 MILLION MORE?
Instead of dropping Stanford as a client and setting the
record straight with the SEC, Sjoblom went back to Davis and
Stanford with an offer, Davis told the FBI, according to a
person familiar with the case. Sjoblom told the pair that they
both faced serious criminal jeopardy and asked each to pay him a
retainer of $2 million to represent them personally, for a total
of $4 million, this person said. That money would have been in
addition to what Stanford’s firm had already paid Sjoblom’s
firm. It is not clear whether the additional money was paid.
On Feb. 10, Pendergest-Holt gave testimony to SEC officials.
That morning, Davis admitted in his guilty plea, he phoned
Pendergest-Holt and encouraged her to lie to “continue to
obstruct the SEC investigation,” according to the Davis plea
agreement.
During her testimony, Pendergest-Holt said she knew little
about the assets the SEC wanted to know about. All during her
testimony, Sjoblom sat at her side, as five attorneys from the
SEC’s enforcement division fired away questions.
A federal grand jury later indicted her on obstruction of
justice and conspiracy charges related to her allegedly false
testimony. She is currently awaiting trial. Her lawyer declined
to comment.
The indictment of Pendergest-Holt also implicated Sjoblom.
“Holt, Attorney A and others would make false and
misleading statements to the SEC staff attorneys in order to
persuade them to delay” Stanford’s testimony while
Pendergest-Holt would “provide false testimony,” the indictment
alleged.
Days after Pendergest-Holt’s testimony, on Feb. 14, Sjoblom
resigned as a lawyer for Stanford and wrote to the SEC: “I
disaffirm all prior oral and written representations made by me
and my associates to the SEC staff.”
Federal prosecutors are looking to Pendergest-Holt to see if
she corroborates Davis’ testimony regarding Sjoblom, and will
then decide whether to charge Sjoblom, according to sources
close to the case.