SEC Inspector General H. David Kotz told Congress that the SEC discouraged enforcement staff from taking on complex cases or cases that were not considered as being “slam dunks,” according to an InvestmentNews article by Mark Schoefer entitled “SEC monitor: Only ‘slam-dunk’ enforcement cases were encouraged.” For example, even though the SEC saw red flags as early as 1997 about certificates of deposit that Robert Allen Stanford was offering with unusually high interest rates, the enforcement staff refused to pursue the matter.
“We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought, so-called stats, and communicated to the enforcement staff that novel or complex cases were disfavored,” Mr. Kotz was quoted as saying. “As a result, cases like Stanford, which were not considered “quick-hit’ or “slam-dunk’ cases, were not encouraged.”
Stanford, who defrauded investors out of $8 billion, ran an unusual scheme, which included the purchase of part of a Caribbean island. The SEC finally filed an enforcement action against him in February 2009.
Mr. Kotz recommended that the SEC change its mindset to ensure that potential harm to investors outweighs concerns about litigation risk in pursuing fraud cases and improve coordination between inspection and enforcement.
SEC officials tried to assure Congress recently that its examination and enforcement divisions are working together more effectively, and are willing to tackle big, complex cases that have a significant impact on markets and investors.
But Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate Banking Committee, said, “I believe this should mark just the beginning of our review of this troublesome episode.”
“We need to know exactly why evidence of fraud was not more thoroughly pursued,” he added. “This is a colossal failure of the SEC.”
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