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Friday, March 11, 2011

Divided Fort Worth office of SEC was plagued by inaction

FORT WORTH -- Julie Preuitt is into NASCAR, stopping con men and doing what she believes is right -- even when it meant flushing her career down the SEC commode.

She was an SEC branch chief examining securities brokers and dealers when a routine look at a company put her on high alert. Preuitt believed her staff had found a scam: An off-shore bank was offering CDs with payoffs that were, to her thinking, "absolutely ludicrous."

It should have been a Tom Clancy moment. But in the Fort Worth regional office of the Securities and Exchange Commission where Preuitt worked, leaders regarded the case as what they called a "goat screw." They passed on orders to kill it.

Snap a picture: It's June 2009. The SEC announces bad news for a Texas billionaire. He's being sued, accusing of running a Ponzi scheme that any aspiring Bernie Madoff could appreciate. Singled out for hard work on the case was the Fort Worth office. Plaudits went to many, including two high-ranking Fort Worth officials.

What the picture doesn't show: The lawsuit against R. Allen Stanford came 12 years and about $7 billion too late.

And the praise didn't go to Preuitt, who first raised concerns in 1997. Instead, two people who pushed Preuitt aside enjoyed the acclaim. That is, until it began biting them on the ankles.

Soon after the announcement, the SEC's watchdog, the inspector general, began getting complaints that the office had not diligently pursued a probe until the SEC came under fire for failing to spot Madoff's Ponzi scheme.

Now, a starkly different image of the Fort Worth office is emerging from the watchdog report, government documents obtained by the Star-Telegram, and interviews with current and former staff members.

They show a troubled organization where senior managers for years resisted efforts to pursue complex cases in favor of the quick and easy that could run up its stats -- and they badly botched the Stanford case in its early years.

"The commission is very interested in a 'fraud of the day.' And [Stanford] wasn't ever the fraud of the day," Preuitt told the inspector general.

Stanford steadfastly maintains he did nothing wrong.

While Preuitt and the examination staff repeatedly flagged the Stanford companies as a Ponzi scheme, enforcement attorneys wouldn't budge. They ignored tips, largely disregarded state and federal concerns, and tried to fob off the matter to a private, less powerful financial regulator. The enforcement staff failed twice to read examiners' reports on Stanford.

All the while, investor losses swelled, the watchdog report says.

While the Fort Worth office was once gun-shy, SEC officials say those failings have largely been resolved since leadership changed and investigative powers were streamlined. They also say that the matter was complex, entangled in international law and a criminal investigation by the Justice Department, among other obstacles.

"I would say the public has every reason to be confident in both the performance and productivity of that office," said Robert Khuzami, head of the SEC's enforcement division in Washington.

"To the extent that there are personnel or other issues, those will be dealt with appropriately," he said. But "the performance of the office has been overwhelmingly positive."

Less focus is now placed on competing with other SEC offices' statistics for the number of cases closed, an SEC document says.

And Rose Romero, a former assistant U.S. prosecutor who now leads the Fort Worth office, said it is operating at its peak in spotting and stopping fraud, even though it has limited resources and a broad region.

"I think right now our staff is probably the best qualified staff that this office has probably ever seen," she said.

The office has rolled out some solid cases. Last year, it halted what it called frauds of $31 million, $24 million and $8.4 million, among others in Texas. An investigator even used Google to root out fraud at a major company.

Yet Romero and Kimberly Garber, who beat out Preuitt to become associate district administrator for examinations, are criticized by current and former staff members as being even more concerned with style over substance. When Preuitt opposed their decision to conduct quick-hit examination reviews, the office divided into two camps.

And Romero and Garber struck back, according to the inspector general.

Some staff members, speaking on the condition of anonymity, said they have no confidence in senior leadership. In Fort Worth, the office's strength had historically been in people like Preuitt, who were impolitic, willing to speak their minds and push co-workers and the D.C. bureaucracy to get things done. Management instead wants "tools to do away with people who have a dissenting opinion," one employee said.

And a lingering issue is how Romero has depicted the Stanford investigation. Testimony she gave to a U.S. Senate committee conflicts with records of her own office.

Apparent red flags

To its earliest investors, Stanford International Bank must have looked like some West Indies gold mine. The Antigua bank offered CDs paying interest rates markedly higher than those of U.S. banks. The Stanford Group Co., which registered with the SEC as a broker-dealer and investment adviser in 1995, was paid high referral fees for selling the CDs.

As early as the mid-1990s, the Texas State Securities Board passed along a tip to the SEC about Robert Allen Stanford's companies. "We actually found problems with Stanford," said Texas Securities Commissioner Denise Voigt Crawford.

By 1997, the Stanford companies caught Preuitt's attention. She wondered how the bank had gained nearly $307 million in deposits in a couple of years.

The watchdog report on Stanford details dogged efforts by Preuitt and the examination staff over ensuring years to find answers and prod enforcement to take action.

The first examination found apparent red flags. Preuitt concluded that the CDs were fraudulent. The staff labeled it a "Possible Ponzi scheme." The examination report was forwarded to enforcement, where it sat for eight months.

At the time, the Fort Worth office was led by Harold Degenhardt. He believed that the SEC was a beast that fed on a constant diet of cases. "As a result, cases like Stanford, which were not considered 'quick-hit' or 'slam-dunk' cases, were not encouraged," the inspector general concluded.

The Stanford case fell into the too-complex category. Getting bank records from Antigua would be a problem, enforcement said, and besides, the scheme didn't appear to affect U.S. investors. Preuitt's view: Why would that matter, if a broker-dealer in Houston was committing fraud?

In May 1998, with Degenhardt's approval, enforcement opened a matter under inquiry -- a preliminary look at whether an investigation would be appropriate. The inquiry went something like this:

The SEC asked for documents to be handed over voluntarily.

Stanford's bank refused.

Enforcement didn't try to get permission to issue subpoenas.

The office closed the inquiry three months later.

Meanwhile, another examination scrutinized Stanford's investment adviser operation. An examiner concurred that Stanford "was operating some kind of fraud," the watchdog report says.

Enforcement attorneys didn't bother to read the new 1998 examination, the inspector general reported. And yet they also suspected fraud.

"As far as I was concerned at that period of time, in enforcement we all thought it was a Ponzi scheme to start with. Always did," Hugh Wright, former assistant district administrator for the office's enforcement group, told the inspector general.

Still, the case was seen as too messy. The only thing left was to tell Preuitt because an enforcement chief "didn't expect a very happy response."

She was shocked, she later told the inspector general.

An unread report

In November 2002, the examination staff made a third swing at Stanford, and the matter was assigned the SEC's highest risk rating. But at enforcement, examiners struck out -- their report wasn't even read. Leaders thought the Texas State Securities Board could handle the case.

Enforcement also decided to refer to the state a letter from a woman worried that the life savings of her mother, about 75, were at risk.

The letter went to the state, Crawford said. The exam didn't.

In 2003, more complaints came, including one with dire warnings from a purported Stanford insider: "Stanford financial ... is a massive Ponzi scheme ... that will destroy the life savings of many."

Enforcement referred the letter to exam staff, the watchdog report says.

Preuitt felt she was being asked to go to battle with enforcement. She received a chain of e-mails showing enforcement wasn't interested in a Ponzi scheme that wasn't collapsing. "I love this stuff," Preuitt wrote in an e-mail. "We all are confident that there is illegal activity but no easy way to prove [it]. Before I retire, the Commission will be trying to explain why it did nothing. Until it falls apart all we can do is flag it every few years."

Another crimson flag was hoisted in December 2004. An exam concluded that the Stanford companies were violating numerous securities laws. By March 2005, Degenhardt and the office enforcement chief lowered the boom. The case would not be pursued, they said.

In April, the enforcement chief left, and the examination staff made yet another push.

By June, the office decided to pass the matter to a private regulator with no subpoena power. Enforcement did ask Stanford's bank to volunteer documents -- six days after the bank said it wouldn't provide them.

Tense meetings

Over the next few months, the office was in an all-out battle, as the examination staff -- Preuitt in particular -- fought to keep the investigation alive, even after Degenhardt departed in September.

A case was finally opened. But enforcement was getting cold feet by October 2005.

Upset, Preuitt started an e-mail campaign, the watchdog report says. An enforcement attorney complained that Preuitt's objections were forcing work on him. "Julie is just really passionate about this and is fighting hard ... and so we have to do all this stuff," the attorney said in an e-mail. "It's frustrating."

In early 2006, Romero was named regional director. As the investigation was crawling along, Preuitt, who had become an assistant regional director for exams, and Garber, a branch chief, vied to become associate district administrator for examinations.

Garber won.

Preuitt allies insist she was supportive of Garber. Whatever the case, it got ugly quickly. A conflict shaped up over a Garber initiative to do quick-hit reviews of broker dealers. Preuitt saw them as pointless.

During management meetings, Preuitt and Joel Sauer, a branch chief, voiced disagreements over the initiative, sometimes hotly.

Meetings became tense, with raised voices and "finger shaking" during one gathering.

By June 2008, Preuitt had been written up, pushed aside and stripped of supervising all but one employee, who later left.

Sauer wrote SEC officials in Washington to complain about her fate. The "culture of fear in the ... exam program is pervasive," he wrote. He also complained that Garber used agency funds to book employees at her brother's Kansas bed and breakfast; Romero knew of the family connection but did not object.

Garber responded by writing a letter of reprimand against him for making false statements. She ordered him to be monitored daily.

The inspector general found separately that Garber and Romero had acted inappropriately toward Preuitt and Sauer because of their objections.

Those "improperly led to actions taken against them," according to a September 2009 report. It recommended Garber and Romero face possible disciplinary action. However, they didn't because they cleared their moves with human resources.

On the matter of the Kansas stay, the inspector general found Garber had violated the code of federal regulations by "using her public office for her family members' private gain," according to government documents obtained by the Star-Telegram. She was referred for disciplinary action.

"Appropriate action was taken," Garber said, declining to elaborate.

Preuitt declined to be interviewed. In a statement, she said, "Every working day, I get to devote my energies to thinking of and carrying out ways to prevent, find or stop fraud."

Sauer left the agency. He declined to comment on the matter.

'Performance failures'

Degenhardt and Romero both drew blanks last year on the history of the Stanford case. In a Star-Telegram interview, Degenhardt had indicated he was unfamiliar with it.

"I quite frankly don't know whether the Stanford organization had ever been examined," he said.

He did not respond to messages seeking further comment.

Romero's August testimony to a U.S. Senate committee about the case firmly established its beginning as 2004 and said it was triggered by four tips or complaints. She also said the SEC had followed up on tips over the years. She did not mention the 1997, 1998 or 2002 examinations. She did not explain that enforcement repeatedly tried to ditch the case. Romero declined to comment on her testimony. An SEC spokesman in Washington backed her account.

"The written and oral testimony accurately reflect that the investigation was prompted by several things, including the 2004 exam and tips that were received during the course of that exam. As noted in the inspector general's report, none of the previous examinations resulted in an investigation," he wrote in an e-mail.

It is unclear whether anyone in the Fort Worth office was ever disciplined for the Stanford miscues, even though the inspector general recommended that "performance failures" result in "appropriate action."

Romero declined to talk about any discipline or the inspector general's findings. "What I can say from my personal experience [is] ... both the exam staff and enforcement staff were working together really, really hard to investigate what was a very, very difficult case."

Preuitt remains at the Fort Worth office, with some role in the office's oil and gas task force.

Romero's first version of Preuitt's job: "She is an assistant director and right now she is in charge of the oil and gas task force in implementing" that initiative.

Romero's second version: "I'm in charge of it."

This was also with this article

SEC discontent

As recently as April, a survey showed that discontent in the Fort Worth office persists, according to an e-mail from manager Kim Garber obtained by the Star-Telegram. Personnel complained:

The SEC (and particularly the exam program) has developed a paternalistic culture.

People are being forced to work around those with performance problems, either because they lack tools or management lacks the will to address problems. When managers try to do the right thing, they suffer the consequences, with grievances or complaints to the inspector general.

While confidentiality of personnel actions is critical, high-performing examiners want a strong message to be sent regarding accountability/consequences.

Staffers have learned to effectively use the union as a "threat" to keep managers off their back when addressing destructive/wasteful practices, such as excessive chitchat, long lunches and shortened exam hours.

SEC officials said the survey was part of an effort to be candid about problems.

How this article was reported

This article is based on internal SEC e-mails, a transcript of a Senate banking committee hearing, confidential documents, inspector general reports, and interviews with numerous current and former SEC staff members, among other sources.

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