Today we are holding an important hearing on the Stanford Ponzi scheme. This case represents a massive failure by the SEC and FINRA to carry out their central missions of investor protection. Sadly, these failures allowed Allen Stanford to defraud investors out of $7.2 billion, which resulted in thousands of shattered lives. Stanford’s victims deserve to know how such a colossal failure could have taken place. It is also incumbent upon this Committee to work with today’s panelists to ensure that this never happens again.

In many respects the Stanford case is more troubling than the Madoff Ponzi scheme. In contrast to the Madoff case, the SEC regional examination team actually uncovered the potential Stanford fraud early on. According to Mr. Kotz’s report, the SEC’s Fort Worth Examination group concluded in four separate examinations in 1997, 1998, 2002, and 2004 that the CDs sold by Stanford Financial were likely the instrument of a Ponzi scheme. However, the Division of Enforcement never acted on these findings because the complexity of the Stanford case didn’t lend itself to the “quick-hit” approach favored by the SEC’s Washington office.

From the time the examinations team at the SEC first determined in 1997 that the CDs sold by Stanford were likely fraudulent to the February 2009 action to finally shut down Stanford’s operations, the fraud grew from $250 million to $7.2 billion. During this period of inaction by the SEC, unsuspecting Stanford clients invested their hard earned money and in some case their life savings in CDs that many at the SEC KNEW were not legitimate. For an agency that holds companies and individuals to such high standards of honesty, integrity, and transparency this is simply unacceptable.

The IG report also uncovered other troubling aspects related to the Stanford case. For example, the former head of Enforcement who played a central role in numerous decisions to deny investigations into Stanford sought to represent the company on three separate occasions and actually did represent Stanford briefly in 2006. This is a clear violation of the Code of Ethics for the Texas State Bar Association, the SEC’s Code of Conduct Regulations and the Standards of Ethical Conduct for Employees of the Executive Branch. Yet to my knowledge this individual is still practicing law with impunity.

While the SEC is most responsible for the failures associated with the Stanford case, it is also worth noting that FINRA failed to heed multiple warnings related to the Stanford fraud. From 2003 to 2008 FINRA received credible information from at least 14 different sources claiming that Stanford was operating a Ponzi scheme. This included anonymous tip letters, information from former Stanford brokers -including Charles Rawl who will be on the second panel today- and even a 5-page referral letter from the SEC’s Fort Worth’s Office that explained why the high returns on the Stanford CDs were impossible given the purported investment strategy. None of these tips failed to trigger any enforcement measures by FINRA.

The fact of the matter is that Mr. Stanford was permitted to operate a $7 billion dollar Ponzi scheme due to our financial regulators’ failure to act. Our regulators, including FINRA and the SEC, had the authority and the resources to protect Stanford’s clients and put an end to this massive fraud. More regulations were not needed; regulators just needed to do their jobs. And it is worth noting that not one of the 2300 pages of the Dodd-Frank Act do anything to compel the regulators to do their jobs.

Finally, I am extremely disappointed to learn that despite multiple failures by the SEC and FINRA to uncover the Stanford fraud, not one person was disciplined or held accountable for actions related to the Stanford case. However, I am aware of one individual who was reprimanded and subsequently demoted for expressing reservations about the SEC’s culture that allowed the Stanford fraud to grow exponentially. We will hear from this individual, Julie Preuitt, on the second panel.

As Chairman of the Oversight Subcommittee, I have a vested interest in ensuring that whistleblowers in the federal government receive protection and fair treatment. I am concerned that the SEC’s actions related to Ms. Preuitt’s case paint a picture of a culture that endorses retaliation against individuals who voice dissent within the Commission.

I look forward to hearing from our witnesses today as well as learning what steps have been taken to protect investors from the next securities fraud.

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