The Stanford Report - A.K.A. "As the S.E.C. Slept..."

The OIG released its report (PDF) on how the S.E.C. handled the Robert Allen Stanford Ponzi scheme.

As you'd expect with anything involving the S.E.C. - it concludes that mistakes were made. From their conclusion:

The OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to that conclusion a mere two years after SGC, Stanford’s investment adviser, registered with the SEC in 1995. We found that over the next eight years, the SEC’s Fort Worth Examination group conducted four examinations of Stanford’s operations, finding in each examination that its sale of CDs through SIB could not have been “legitimate,” and that it was “highly unlikely” that the returns Stanford claimed to generate could have been achieved with its purported conservative investment approach. While the Fort Worth Examination group made multiple efforts after each examination to convince Enforcement to open and conduct an investigation of Stanford, no meaningful effort was made by Enforcement to investigate the potential fraud, or to bring an action to attempt to stop it, until late 2005.

I especially appreciate the last part of this paragraph (emphasis added):

Moreover, the OIG investigation found that even at that time, Enforcement missed an opportunity to bring an action against SGC for its admitted failure to conduct any due diligence regarding Stanford’s investment portfolio, which could have potentially completely stopped the sales of the SIB CDs through the SGC investment adviser, and provided investors and prospective investors notice that the SEC considered SGC’s sales of the CDs to be fraudulent. The OIG investigation found that this particular type of action was not considered, partially because the new head of Enforcement in Fort Worth was not apprised of the findings in the investment advisers’ examinations in 1998 and 2002, or even that SGC had registered as an investment adviser, a fact she learned for the first time in the course of this OIG investigation in January 2010.

As in:

"Really, Mr. OIG investigator (who has come to my office to interview me on what I knew about the Stanford Ponzi scheme which blew up a year ago), you're telling me that my office has the power to regulate SGC as an investment advisor? Wow, I had no idea! We should get on that...

Amazingly, the report goes downhill from there. It details how the culture at S.E.C. enforcement led their regulators to chase stats rather than investigate wrongdoing. Complex cases, or "novel" cases like Standford's Ponzi scheme were thought to be less certain to succeed. Regulators were looking for "slam dunk" cases.

They didn't investigate things like Ponzi schemes - because they though might be hard.

(H/t Felix Salmon)