SEC Charges Stanford Executives With Securities Violations

The Securities and Exchange Commission ("SEC") announced Friday it had instituted administrative proceedings against three former executives of Stanford Group Co. ("SGC"), which formed part of the massive $7 billion Ponzi scheme perpetrated by R. Allen Stanford.  Former SGC President Daniel Bogar, Chief Compliance Officer Bernerd E. Young, and Private Client Group President Jason T. Green (the "Respondents") were charged with multiple violations of federal securities laws, alleging that they failed to disclose key facts to Stanford investors despite their key roles in the preparation of offering documents and training material to pitch the investments.  The SEC is seeking a hearing to determine whether sanctions should be imposed, including disgorgement of ill-gotten gains, civil penalties, and a cease-and-desist order from committing future violations.

SGC operated as the exclusive conduit for Stanford International Bank ("SIB") to sell its certificates of deposit (CD's) to investors.  These CD's were pitched to clients as safe and secure, owing to their inclusion in a carefully-managed and  well-diversified portfolio of marketable and liquid securities.  Additionally, investors were assured that SIB maintained a comprehensive insurance program, excess FDIC coverage, and other insurance policies that provided depositor security.  However, in reality, SIB was operated as a massive Ponzi scheme by its creator, Allen Stanford, and fabricated  returns while using investor funds to make Ponzi payments to other investors and finance the operations of Stanford's other businesses.  The multiple layers of insurance were also nonexistent.  After being indicted in 2009 along with several other executives, Stanford was convicted by a federal jury in 2012 and sentenced to serve 110 years in prison.

Consistent with their duties at SGC, Bogar, Young and Green oversaw due diligence on SIB and traveled regularly to Antigua to review offering documents and meet with bank officials.  During these meetings, according to the SEC, they knew or should have known that the SIB offering documents made multiple false or misleading representations to investors. Despite these inaccuracies, Bogar and Young allegedly approved the documents and training materials for marketing to investors, each earning several million dollars over the course of their employment with SGC.  Green, who held multiple securities licenses and served as a financial adviser, sold millions of dollars in CDs to investors while making similar misrepresentations.  

Alleging that the Respondents' conduct both violated federal securities laws and aided and abetted SIB and SGC's violations of federal securities law, the SEC instituted administrative proceedings.  The decision to bring administrative proceedings, rather than formal civil proceedings, is an unusual move.  Administrative proceedings are generally more restrictive than civil proceedings, and frequently operate on an expedited schedule. For example, the SEC has ordered that the Respondents must answer the allegations within twenty days, and a hearing must take place on the allegations within sixty days.  Additionally, the administrative law judge overseeing the matter must issue an initial decision within three hundred days.  

The SEC has taken heat for filing administrative, rather than civil, proceedings in the past, most recently by former Goldman Sachs director Rajat Gupta.  Accused of insider trading, Gupta responded to the proceeding with his own lawsuit, accusing the SEC of using an administrative proceeding to deprive him of certain rights including the right to a trial by jury and to be treated as had similar defendants accused of insider trading.  After a New York federal judge allowed Gupta's suit against the SEC to proceed and publicly questioned the choice to bring an administrative proceeding rather than a federal lawsuit, the SEC later dropped its proceeding.  While Gupta hailed the decision as a victory, such optimism was short-lived.  Indeed, several months later, the SEC used its "full might" to charge Gupta with criminal charges of inside trading, where he was subsequently convicted and faces decades in prison when he is sentenced on October 17.  As a prominent New York lawyer later remarked, "If you have done wrong, do not play the matador and wave a red rag against the bull in the arena.”