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THE STANFORD PONZI SCHEME: 

LESSONS FOR PROTECTING 

INVESTORS FROM THE 

NEXT SECURITIES FRAUD 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 13, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–30 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 13, 2011 ..................................................................................................... 1 

Appendix: 

May 13, 2011 ..................................................................................................... 49 

WITNESSES 

FRIDAY, MAY 13, 2011 

di Florio, Carlo, Director, Office of Compliance Inspections and Examinations, 

U.S. Securities and Exchange Commission (SEC) ............................................ 9 

Kauffman, Stan, victim, Stanford Financial Group Ponzi scheme ...................... 32 

Ketchum, Richard G., Chairman and CEO, Financial Industry Regulatory 

Authority (FINRA) ............................................................................................... 11 

Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission (SEC), accompanied by Michael Conley, Deputy Solicitor, SEC ............................................................................................................... 8 

Kotz, H. David, Inspector General, Office of the Inspector General, U.S. 

Securities and Exchange Commission (SEC) ..................................................... 6 

Preuitt, Julie, Assistant Regional Director, U.S. Securities and Exchange 

Commission, Fort Worth Regional Office ........................................................... 29 

Rawl, Charles W., former employee, Stanford Financial Group, and Stanford 

Financial Group whistleblower ........................................................................... 31 

APPENDIX 

Prepared statements: 

Harper, Hon. Gregg .......................................................................................... 50 

Luetkemeyer, Hon. Blaine ............................................................................... 52 

di Florio, Carlo .................................................................................................. 54 

Kauffman, Stan ................................................................................................ 70 

Ketchum, Richard G. ........................................................................................ 78 

Robert Khuzami ................................................................................................ 54 

Kotz, H. David .................................................................................................. 86 

Preuitt, Julie ..................................................................................................... 105 

Rawl, Charles W. .............................................................................................. 112 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Cassidy, Hon. Bill: 

Statements from constituents who have been affected by the Stanford 

Ponzi scheme ................................................................................................. 118 

Harper, Hon. Gregg: 

Statements from constituents who have been affected by the Stanford 

Ponzi scheme ................................................................................................. 199 

(1) 

THE STANFORD PONZI SCHEME: 

LESSONS FOR PROTECTING 

INVESTORS FROM THE 

NEXT SECURITIES FRAUD 

Friday, May 13, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 11:22 a.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

Pearce, Posey, Hayworth, Canseco; and Capuano. 

Ex officio present: Representative Bachus. 

Also present: Representatives Harper, McCaul, and Cassidy. 

Chairman NEUGEBAUER. Good morning. The committee will come 

to order. 

I would like to thank everyone for being here today. 

I know that we have a number of visitors in the gallery today, 

and we appreciate you being here; we just would remind folks who 

are in the gallery that you are an observation team only and that 

we would ask not to have any placards or any verbal shows of support for or against the testimony. 

This is a very important hearing on a very important issue. We 

want to have plenty of time for members to give this panel appropriate questions. We want to hear from the panelists, as well. 

We want to remind everyone, particularly the members who are 

here, that you can submit an opening statement for the record, and 

that will be made a part of the permanent record. 

We have four Members who are not currently on the subcommittee or on the committee who have asked to join us today. 

And so I ask unanimous consent that Mr. McCaul, Mr. Cassidy, 

Mr. Harper, and Ms. Schwartz be a part of the panel today. 

What I am going to do here is, I am going to have one Member 

who is going to make a brief statement and then going to submit 

his questions for the record. And so, I am going to go ahead and 

yield 2 minutes to the gentleman from Texas, Mr. McCaul, for a 

statement. 

Mr. MCCAUL. Thank you, Mr. Chairman. Thank you for holding 

this hearing today and allowing me to participate. 

2 

Many of my constituents were hurt by the fraud committed by 

the Stanford Group, and I am pleased to see that Congress is investigating the reasons why this fraud was allowed to continue for 

so long after the SEC received initial warnings that something was 

wrong. 

In addition to learning from past mistakes and correcting them 

to prevent another case like this, we must also do what we can to 

help the investors and the victims in this case recover what they 

can. I believe, as in the Madoff Ponzi scheme, that the Stanford investors should be covered by the SIPC, and I would like to work 

with this committee and the SEC to see that this gets done. 

Unfortunately, due to my flight schedule, I will not be able to 

stay for the entire hearing. So, Mr. Chairman, with your consent, 

I would like to submit questions in writing for the witnesses. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. MCCAUL. Once again, Mr. Chairman, thank you for letting 

me participate. And I yield back my time. 

Chairman NEUGEBAUER. Thank you. 

I am going to yield myself just a few minutes here. 

This is a very important hearing. And I think as we go through 

the hearing today, we are going to see some very alarming facts: 

that here was a Ponzi scheme that really started off from the very 

beginning as a Ponzi scheme and that, along the way, very early 

in the process, people were trying to call attention to the fact that 

this was, in fact, a Ponzi scheme. 

We are going to put a chart up on the screen here in just a 

minute. But, basically, what we see is, in a very short period of 

time, really from 1995, where we were starting off with a fund that 

had a very limited number of investors, around $200 million, at the 

end had nearly $7 billion. And all along the way, where you see 

the little stars, were opportunities where people were saying that 

this fund was a fraud, was a Ponzi scheme, and yet people ignored 

those warnings and let the fund get larger and larger. And then, 

of course, when you look at 2005, as with all Ponzi schemes, the 

larger they get, the larger the appetite for more funds, and so the 

more pressure to bring more money in. 

I had the opportunity recently, when I was back in Texas, to 

meet with some of the victims. And what I think we will learn is 

that a good number of the victims were people who came in here 

at the end. It is just egregious that so many points along the way 

would have saved so many billions of dollars but not—I want to 

take the dollar signs off of it—and saved the life savings of a number of people. 

And so the questions are going to be tough today, because we 

had people trying to make others act on the fact that this was, in 

fact, a Ponzi scheme and yet they were ignored by not just one 

agency, but two agencies. 

I hope that several things will come out of this hearing. 

One, it is important for regulators to do their job. And one of the 

things we are going to hear today is that, even if we would have 

had Dodd-Frank in place, it wouldn’t have prevented this from happening; the resources were there, the infrastructure was in place, 

and yet people just didn’t do their job. So when people call for more 

regulations in a lot of cases, it is sometimes when we find governVerDate Nov 24 2008 17:24 Aug 25, 2011 Jkt 066868 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\66868.TXT TERRIE
3 

ment not living up to its expectations. And, unfortunately, the 

Washington answer generally has been, we just need more people 

and we need more regulations. This is a case where more people 

and more regulations wouldn’t have solved it. What would have 

solved this problem is if we would have had regulators actually 

doing their job. 

And I think it also points out the importance of what happens 

when regulators don’t do their job, particularly in these agencies 

where the people in our country have—expecting these agencies to 

have integrity inside the agencies and to address these issues, and 

yet we have seen a fairly systemic failure. 

In many ways, I don’t want to minimize the Madoff issue, but 

this is a case different from Madoff, in that Madoff was—toward 

the end, people realized that was a Ponzi scheme. But what is so 

egregious about this is, from the very beginning, people realized 

that this was a Ponzi scheme, and yet it went unanswered. 

And so, I look forward to having a very robust hearing today. 

And now it is my pleasure to yield to the ranking member, Mr. 

Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. Thank you for having 

this hearing. 

And for the victims who are in the audience listening to this, I 

can only tell you that, as part of the government, I apologize. I 

agree with what the chairman said, that the government failed you 

in this situation. 

But I also think that it is indicative of the situation that was 

going on for the last 15 years. This country has continuously let 

itself believe that the lack of regulation or the lack of enforcement 

of regulations, somehow everything would just take care of itself. 

And it was endemic, across-the-board, which, in my opinion, caused 

the economic collapse that we witnessed in the last 10 years. 

This is certainly a part of it, and I agree with the chairman that 

no laws can stop illegal behavior. But the attitude that is endemic 

upon all of us for the last 15, 20 years, that somehow regulation 

is not necessary, somehow a free and unfettered market, free of 

any oversight, would police itself and everything would just be 

okay is wrong. This is more proof that it is wrong. 

Regulators must regulate. Enforcers must enforce. And when we 

don’t, we owe an apology to the people who have been hurt and we 

owe them our best efforts to make it right. 

With that, Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. The Chair now recognizes the gentleman from New Mexico, Mr. Pearce, for 2 minutes. 

Mr. PEARCE. I think the chairman. 

Any time a nation makes a promise that it does not keep, the entire nation loses confidence in itself and in its capabilities, especially when middle-class and just working-class families are affected. 

So I appreciate the chairman calling the hearing today, and we 

are listening with interest to the comments that are made from the 

people whom we asked to be in charge. We appreciate your service, 

but we also have questions about why it arose. 

Thank you very much. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

4 

And I now yield 2 minutes to Mr. Harper, the gentleman from 

Mississippi. 

Mr. HARPER. Thank you, Mr. Chairman. I appreciate very much 

you holding this very important hearing, something that is extremely important to our office and to many of our constituents. 

And I think about all of the natural disasters that my State of 

Mississippi has and is enduring, but at least we had warning. At 

least we had a little early detection on what was going on there 

so you could take action to protect your families. But the Stanford 

financial Ponzi scheme and the lives it shattered in my home State 

stands in stark contrast to those natural disasters. For years, while 

this calamity was brewing, there were many warning signs and reliable forecasts that could have been given by our government but 

were not. 

Mr. Chairman, by and large, these were not wealthy investors. 

On the contrary, these were hardworking people—parents, grandparents, factory workers, school teachers, retired individuals—who 

lost their life savings. Eighty percent of those victims invested less 

than $500,000. Of the $7 billion in total losses, $2 billion was lost 

by over 5,000 victims in the United States. Of those, 125 that we 

know of were from my State of Mississippi alone, totaling over $64 

million. 

From many meetings that we have had and research that has 

been done, there was a monumental breakdown within our regulatory and enforcement agencies. From what I have seen, the SEC’s 

own Inspector General uncovered problems as far back as 1977, 

when the first examinations were conducted and when there was 

only $250 million in deposits with Stanford. And yet, investors 

were not warned, and investments continued until 2009, when deposits totaled $7.2 billion. 

I find that absolutely unbelievable, how this could happen. How 

could it go unnoticed by the SEC? Why did former SEC employees 

receive jobs in the Stanford company? Why did the SEC hesitate? 

Why weren’t investors alerted years earlier? Indeed, how could this 

happen in our country? And what do we do now? 

It is my understanding that the SEC’s own forensic accounting 

investigators determined that none of the invested funds ever went 

to purchase a security. This is absolutely amazing, the lavish and 

extravagant lifestyle that was done by these Stanford leaders. 

It is quite clear that there is a very hyper-technical dispute on 

whether these victims warrant coverage by the Securities Investor 

Protection Corporation. So we have to ask, if they failed to do their 

job, then why would these victims’ investments not be covered by 

SIPC? 

Mr. Chairman, I thank you for holding this very important hearing. We need closure and a final resolution by the SEC and their 

government. 

Mr. Chairman, I have in my possession a document here representing over 80 Stanford Financial constituents’ stories. And I 

ask unanimous consent that it be entered into the permanent 

record of this subcommittee. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

And I thank the gentleman. 

Mr. HARPER. Thank you, Mr. Chairman. 

5 

Chairman NEUGEBAUER. And now the gentleman from Louisiana, 

Mr. Cassidy, for 2 minutes. 

Mr. CASSIDY. I thank the chairman and the ranking member for 

holding these hearings and allowing me to join. 

It is estimated that 1,500 Stanford victims live in Louisiana, 

with more than $500 million in assets lost. But ‘‘an asset lost’’ is 

kind of a nice way of saying ‘‘a human tragedy.’’ The typical person 

in my district worked in a petrochemical plant, and saved a lifetime so their kids could go to college and have a better life. They 

paid their mortgage, and then they sacrificed a little extra so that 

after retirement, they could live independently. That said, after 

they retire, they took their savings, put it with Stanford, and, poof, 

it is gone—a lifetime of work not there. 

You can imagine how they feel, particularly when the IG’s report 

looked at the SEC and found that, as early as 1997, there were indications that something was wrong. Double-digit returns on these 

CDs could not be possible, it was said. 

But it wasn’t pursued, presumably because—or at least, according to the IG’s report, because that Fort Worth office preferred 

slam-dunk cases, as opposed to complex things. Unfortunately, this 

was complex—unfortunately, for the victims in my district. 

But the level of victimization doesn’t stop there. It is perceived 

that the court-appointed receiver was more interested in billable 

hours than in pursuing the best interests of those victims. And, 

lastly, there is one more level of victimization: They don’t qualify 

for SIPC, supposedly because they were given CDs which had a 

value. But the value of that CD was fictitious. 

We cannot make these people whole most of the time, but about 

80 percent of them were teachers, petrochemical workers, blue-collar folks who did it right, planning for independence. What we can 

do is extend them the SIPC coverage to allow them to have a second chance at that for which they worked a lifetime. 

With that, I ask for unanimous consent to enter these reports 

from my constituents on their personal fraud, and I yield back. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

That concludes our opening statements. And I will remind members that their full statements will be made a part of the record, 

and we will hold the record open. 

At this time, I will introduce our first panel: 

Mr. H. David Kotz, Inspector General, Office of the Inspector 

General, U.S. Securities and Exchange Commission; Mr. Robert 

Khuzami, Director, Division of Enforcement, U.S. Securities and 

Exchange Commission; Mr. Carlo di Florio, Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission; and Mr. Richard Ketchum, Chief Executive 

Officer, Financial Industry Regulatory Authority, or FINRA. 

Welcome. 

Mr. Kotz? 

6 

STATEMENT OF H. DAVID KOTZ, INSPECTOR GENERAL, OFFICE OF THE INSPECTOR GENERAL, U.S. SECURITIES AND 

EXCHANGE COMMISSION (SEC) 

Mr. KOTZ. Thank you for the opportunity to testify before this 

subcommittee. I appreciate the interest of the chairman, the ranking member, and the other members of the subcommittee in the 

SEC and the Office of Inspector General. 

On October 13, 2009, we opened an investigation into the handling of the SEC’s investigation into Robert Allen Stanford and his 

various companies. In the course of our investigation, we obtained 

and searched over 2.7 million e-mails from a total of 42 current and 

former SEC employees for pertinent time periods from 1997 to 

2009. We also conducted 51 interviews of individuals with knowledge relating to the SEC’s examinations and investigations of Stanford. 

On March 31, 2010, we issued to the Chairman of the SEC a 

comprehensive report of our investigation in the Stanford matter, 

containing over 150 pages of analysis and 200 exhibits. The report 

found that the SEC’s Fort Worth office was aware since 1997 that 

Stanford was likely operating a Ponzi scheme, having reached that 

conclusion merely 2 years after Stanford Group Company, Stanford’s investment advisor, registered with the SEC in 1995. 

We found that, over the next 8 years, the SEC’s Fort Worth examination group, including Julie Preuitt, who is a witness in this 

hearing, conducted four examinations of Stanford’s operations, finding in each examination that the CDs Stanford was promoting 

could not have been legitimate and that it was highly unlikely that 

the returns Stanford claimed to generate could have been achieved 

with their purported conservative investment approach. The only 

significant difference in the exam group’s findings over the years 

was that the potential fraud was growing exponentially, from $250 

million to $1.5 billion. 

We found that the Fort Worth examination group, and particularly Ms. Preuitt, made multiple efforts after each examination to 

convince the enforcement group to conduct an examination of Stanford. However, no meaningful effort was made by the enforcement 

group to investigate the potential fraud until late 2005. 

Even in 2005, the enforcement group missed an opportunity to 

bring an action against Stanford Group Company for its admitted 

failure to conduct any due diligence regarding Stanford’s investment portfolio, which could have potentially halted the sales of the 

Stanford CDs and also could have provided investors and prospective investors with notice that the SEC considered such sales to be 

fraudulent. 

In our investigation, we found evidence that SEC-wide institutional influence with enforcement factored into its repeated decisions not to undertake a full and thorough investigation of Stanford. We found that senior Fort Worth officials perceived that they 

were being judged on the number of cases they brought, so-called 

‘‘stats,’’ and communicated to the enforcement staff that novel or 

complex cases were disfavored. We found that because Stanford 

was not going to be a quick hit, it was not considered to be as high 

a priority as other easier cases. 

7 

We also found that the former head of enforcement in Fort 

Worth, who played a significant role in multiple decisions over the 

years to quash investigations of Stanford, sought to represent Stanford on three separate occasions after he left the Commission and, 

in fact, represented Stanford briefly in 2006 before he was informed by the SEC’s ethics office that it was improper for him to 

do so. 

We provided our report of our investigation on Stanford to the 

SEC Chairman, with numerous recommendations to improve the 

operations of the SEC. We have followed up with those offices and 

Divisions, and they have all been implemented and closed to our 

satisfaction. 

In addition, we recently completed an audit of the process by 

which the compliance group refers examination results to enforcement in all of the SEC’s regional offices to determine if the concerns about the Fort Worth office existed in other offices. Our audit 

found that examiners across the regional offices are generally satisfied with actions taken by enforcement in response to exam-related 

referrals. We further found that where there was dissatisfaction 

with the referral process, the level of concern dramatically dropped 

over time and particularly in 2010. We also found that the large 

majority of examiners in these other offices do not believe that enforcement will only take referrals that involve high-dollar amounts; 

and, in addition, even those who did, believed that this approach 

was more evident in the past. 

In September 2009, we completed another investigation involving 

the SEC’s Fort Worth office and Ms. Preuitt. In this investigation, 

we found that Ms. Preuitt and a former colleague in the Fort 

Worth office voiced their differences at a planning meeting about 

management’s initiative to begin conducting a certain type of examination. Shortly thereafter, Ms. Preuitt’s supervisor called her 

into several meetings and admonished her for opposing the office’s 

exam initiative. And a few months later, Ms. Preuitt’s supervisor 

issued her a letter of reprimand. Eventually, Ms. Preuitt was involuntarily transferred to non-supervisory duties. 

Ms. Preuitt’s former colleague, who also voiced opposition to the 

new exam initiative, complained to senior management at SEC 

headquarters about the initiative and about the treatment of Ms. 

Preuitt. Shortly after he sent his complaint, he was issued a performance counseling memo. And less than a month later, he was 

issued a letter of reprimand for discussing, ‘‘unfounded and inaccurate allegations with senior management.’’ 

Our investigation concluded that it was improper for Fort Worth 

management to take action against employees for voicing opposition to program initiatives and for complaining. Based on our investigative findings, we recommended the consideration of performance-based or disciplinary action against the two senior officials. 

In conclusion, I appreciate the interest of the chairman, the 

ranking member, and the subcommittee in the SEC and my office 

and, in particular, in our investigative reports. Thank you. 

[The prepared statement of Mr. Kotz can be found on page 86 of 

the appendix.] 

Chairman NEUGEBAUER. Thank you. 

8 

Excuse me. I think, Mr. Khuzami, you have someone with you 

that I didn’t introduce. As you make your opening statement, if you 

would introduce— 

Mr. KHUZAMI. I will, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. You are recognized. 

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF 

ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC), ACCOMPANIED BY MICHAEL CONLEY, DEPUTY 

SOLICITOR, SEC 

Mr. KHUZAMI. Thank you. 

Chairman Neugebauer, Ranking Member Capuano, and members 

of the subcommittee, thank you for the opportunity to testify on behalf of the Securities and Exchange Commission. 

I have served as Director of the Division of Enforcement since 

March 2009. Prior to that, I was a Federal prosecutor in New York 

doing criminal securities fraud prosecutions in the U.S. Attorney’s 

Office for the Southern District of New York and as chief of the Securities and Commodities Fraud Task Force. Prior to that, I also 

served in the Office of Counterterrorism Unit, where I was involved 

in the prosecution of the ‘‘blind sheik,’’ Omar Ahmad Ali AbdelRahman, and nine codefendants for operating an international terrorism conspiracy responsible for, among other things, the 1993 

bombing of the World Trade Center. I previously served as general 

counsel for the Americas for Deutsche Bank AG and as the bank’s 

global head of litigation and regulatory affairs. 

Mr. di Florio, who is Director of Compliance, and I are joined 

today by Michael Conley, who is the Commission’s Deputy Solicitor 

for the Office of the General Counsel. Mr. Conley is involved in the 

Commission’s analysis of the issues surrounding a potential liquidation of the Stanford Group Company under the Securities Investors Protection Act. He is here to answer any questions you may 

have in that regard. 

The Commission commends the work of the Inspector General 

and the staff investigating the Stanford matter and in their April 

2010 report. Their investigation clearly identifies that the SEC 

missed opportunities in the Stanford investigation. We did not do 

our job. We did not protect the Stanford investors as we should 

have, as our mission of investor protection requires us to do. We 

cannot evade responsibility for this failure, and we deeply regret 

our failure to act more quickly. 

We cannot undo the past; what we can do is to act as a responsible agency going forward, which means, in this case, to take steps 

to prosecute those who perpetuate the fraud, to maximize recovery 

for the victims, and to change the way we operate in order to minimize the chance of this happening again. That is happening in four 

ways. 

First, we are vigorously pursuing Mr. Stanford. In February 

2009, we filed an emergency civil action to halt sales of the Stanford CDs and to seek return of funds to harmed investors. We later 

filed an amended complaint against Stanford and other perpetrators, alleging a massive Ponzi scheme. We also sued at that time 

Leroy King, the former CEO of Antigua’s Financial Services Regulatory Commission, whom we alleged accepted bribes to conceal 

9 

Stanford’s activities. Our investigation of the Stanford fraud continues, and we are closely focused on the conduct of others connected to the fraud, while also working closely with the Department of Justice, which has filed criminal charges against Stanford. 

And that trial is scheduled for September 12th. 

Second, we are working with the Stanford receiver, the criminal 

authorities, and others to recover assets for the Stanford investors. 

That includes assets in Switzerland, Canada, and the United Kingdom which are subject to government restraints. For example, in 

April 2010, we worked with the receiver and Panama’s regulatory 

authorities to secure millions of dollars from the sale of certain 

Stanford-related entities located there. 

Third, the Inspector General’s report identified a need for reforms in the Division of Enforcement and the Office of Compliance 

Inspections and Exams, seven of which related to the Division of 

Enforcement. They included: revamping the way we handle the 

tens of thousands of complaints and tips and referrals we get every 

year; improving coordination between enforcement and examination; adopting written investigative plans that make sure we coordinate with other experts in the AG, including those in the Office 

of International Affairs and the Division of Risk, Strategy, and Financial Innovations; and enhancing our procedures for opening and 

closing investigations. All seven of these have been deemed closed 

to the satisfaction of the Inspector General. 

And, fourth, in the 2 years I have been with the Commission, we 

have undertaken a top-to-bottom review of our Division in what 

has been described as the largest restructuring in the history of the 

Enforcement Division. We have hired experts from the private sector with extensive knowledge of complex products, transactions, 

and practices; streamlined management; put attorneys back to the 

front line of conducting investigations; improved coordination; initiated new steps to prevent fraud; and improved our training. 

Despite the many changes in the Division, more needs to be 

done. This will require commitment and creativity, and that I commit to you we will do. It also requires that we not forget how and 

why we fell short in the Stanford investigation. 

We thank the Stanford Victims Coalition, the Official Stanford 

Investors Committee, the examiner, and others for their help and 

assistance, and hope and expect to work cooperatively with them 

in the future. 

Thank you. 

[The joint prepared statement of Mr. Khuzami and Mr. di Florio 

can be found on page 54 of the appendix.] 

Chairman NEUGEBAUER. Mr. di Florio? 

STATEMENT OF CARLO di FLORIO, DIRECTOR, OFFICE OF 

COMPLIANCE INSPECTIONS AND EXAMINATIONS, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) 

Mr. DI FLORIO. Thank you, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. Thank you 

for the opportunity to testify today on behalf of the U.S. Securities 

and Exchange Commission regarding the lessons learned from the 

Stanford Ponzi scheme. 

10 

As Mr. Khuzami said, we deeply regret that the SEC failed to 

act more quickly to limit the tragic investor losses suffered by 

Stanford’s victims. 

I joined the SEC last year, in January 2010. Prior to that, I was 

a partner with PricewaterhouseCoopers in New York in the financial services regulatory practice. Since joining the SEC, I have initiated a top-to-bottom review of the exam program to strengthen our 

effectiveness and our efficiency. 

The SEC’s examination program helps protect investors to ensure market integrity by examining for fraud, monitoring risk, informing policy, and promoting compliance as the eyes and ears of 

the SEC in the field. Our exams assess whether registrants are 

treating investors fairly or whether they are engaged in fraud, such 

as insider trading, market manipulation, Ponzi schemes. 

In the Stanford matter, examiner Julie Preuitt showed the kind 

of determination that we encourage in all of our skilled and dedicated examiners, and I commend her. Unfortunately, Fort Worth 

leadership at that time did not act on the concerns about Stanford 

raised by Ms. Preuitt and the exam team. Those individuals are no 

longer with the SEC. 

The SEC’s Inspector General’s recommendations identify the 

need for better coordination between enforcement and examination, 

and we are committed to doing just that. OC and enforcement are 

working together on multiple fronts to identify misconduct earlier 

so we can shut it down more rapidly. 

During 2010 and 2011, nearly 200 enforcement investigations 

were opened and significant cases brought as a result of good exam 

work. We have introduced joint referral committees to proactively 

review referrals at a very senior level and a new governance process to ensure early escalation of any issues or concerns about how 

referrals are being handled. 

Our new tips, complaints, and referral system helps ensure that 

we have one system of record for logging, tracking, escalating, and 

resolving referrals from the exam program to the enforcement program across the country. 

More broadly, over the past year, we have been engaged in a topto-bottom review of our exam program, taking a critical look at our 

strategy, our structure, our people and skills, our processes, and 

our technology. This has resulted in comprehensive improvement 

initiatives to become more effective and more targeted. 

For example, we have implemented a new national governance 

process that breaks down silos and facilitates coordination, consistency, effectiveness, and accountability across the country, across 

Divisions, and across regulatory partners, including FINRA. We 

have implemented a new central Risk Analysis and Surveillance 

Unit to enhance our ability to target those firms, individuals, practices that present the greatest risk to investors and our capital 

markets. We have begun to recruit experts and launch new specialty groups that will bring deep technical knowledge and experience to our exam program in critical areas. And we are working to 

implement a new certified examiner training program across the 

country that raises technical training and certification standards. 

As the Inspector General noted, he has also recently noted a report on an audit of the process by which examination findings are 

11 

referred to enforcement. I am pleased that the report was generally 

positive and found satisfaction among examiners with enforcement’s responsiveness to exam referrals, particularly over this past 

year. The IG’s audit report also made some very valuable recommendations, which will further improve our process and which 

we are currently working to effectively implement. 

In conclusion, both OC and enforcement are committed to the reforms that strengthen our programs and address the lessons 

learned from the Stanford fraud. Thank you, and I welcome your 

questions. 

[The joint prepared statement of Mr. Khuzami and Mr. di Florio 

can be found on page 54 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

I assume, Mr. Conley, you don’t have an opening statement? 

Mr. CONLEY. That is correct, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. 

And now, Mr. Ketchum. 

STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND CEO, 

FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) 

Mr. KETCHUM. Thank you, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. I am Richard 

Ketchum, chairman and CEO of the Financial Industry Regulatory 

Authority, or FINRA. On behalf of FINRA, I would like to thank 

you for the opportunity to testify today. 

Unfortunately, we are here today because of a massive fraud that 

had tragic results for many investors. No regulator can feel good 

about its performance regarding Stanford. FINRA clearly could 

have done better, and we deeply regret that we did not. 

In the wake of Stanford, we took a hard look at our regulatory 

programs and approaches and searched for ways to more effectively 

uncover misconduct, especially fraud, and enhance our programs to 

better protect investors. In early 2009, the FINRA board of governors established a special committee to conduct a review of 

FINRA’s examination program as it related to the detection of 

fraud and Ponzi schemes, including the one Alan Stanford is 

charged with perpetrating. 

The committee, which was chaired by former U.S. Comptroller 

General Charles Bowsher, found that FINRA missed opportunities 

to investigate the Stanford firm’s role in this scheme involving offshore CDs. First, FINRA’s Dallas office curtailed a 2005 investigation because of a concern that offshore CDs were not securities regulated under Federal securities laws. Second, FINRA procedures at 

the time did not set forth criteria for escalation of a matter to senior management or the use of especially trained investigators based 

on the gravity and substance of fraud allegations. Finally, during 

this period, FINRA did not have a centralized database that gave 

examiners direct electronic access to all relevant complaints and referrals associated with the firm. As a result, no single FINRA staff 

member was aware of the totality of information our organization 

had relating to the Stanford firm. 

Following its review, the special committee made a series of recommendations intended to enhance the effectiveness of FINRA’s 

examination program by increasing its ability to detect fraud. 

12 

FINRA approached the special committee’s recommendations with 

the utmost seriousness and immediately instituted a plan to address each of them. FINRA has either implemented or is in the 

process of implementing all of the recommendations that did not 

require action by the SEC or Congress. 

One of the first initiatives FINRA undertook to implement the 

committee’s recommendations was the creation of the Office of 

Fraud Detection and Market Intelligence, or OFDMI, in October 

2009. This group is responsible for the centralized intake and 

triage of regulatory filings and investor compliance. In 2010 alone, 

OFDMI referred more than 550 matters involving potential fraudulent or illegal conduct to the SEC or other Federal law enforcement 

agencies for further investigation. 

FINRA’s Office of the Whistleblower, first established in March 

2009 and now part of OFDMI, received and triaged over 390 substantive calls and e-mails in 2010. 

FINRA also enhanced its examination programs and procedures 

in a variety of ways intended to help us better detect conduct that 

could be indicative of fraud: 

First, we are focusing resources on the highest-priority matters. 

In response to the special committee report, FINRA’s staff created 

an ‘‘urgent’’ designation of those regulatory matters posing the 

greatest potential for substantial risk to the investing public. The 

committee also identified that the lack of a formal mechanism for 

the escalation of policy issues created risk within the organization. 

FINRA issued new procedures to enhance the process for escalation 

and documentation of complex legal and policy issues. 

Second, we have undertaken efforts to enhance the expertise of 

our regulatory staff. We have increased the number of staff in district offices tasked with realtime monitoring of business and financial changes occurring at the firms we regulate. 

Third, we have enhanced our use of third-party information to 

inform our regulatory programs. We have established procedures 

for third-party verification of customer assets. 

Finally, we have established a multiyear technology enhancement program to strengthen our programs. 

In addition to the internal initiatives I have described, FINRA 

has increased communication and coordination with the SEC relative to our programs. FINRA and SEC staff meet routinely to 

share details about strategic design and tactical delivery of information to our regulatory programs, as well as risk assessment, including models to measure risk for broker dealers, branch offices, 

and registered representatives. 

The special review committee’s report and recommendations provide an important roadmap for FINRA to enhance our ability to 

quickly identify and investigate conduct that could indicate fraud 

or other serious customer harm. I assure this subcommittee that I 

am fully committed to continue making the necessary changes to 

strengthen our programs and raise the level of protection for all investors. 

Again, I appreciate the opportunity to testify today and I would 

be happy to answer any questions you may have. 

[The prepared statement of Mr. Ketchum can be found on page 

78 of the appendix.] 

13 

Chairman NEUGEBAUER. I thank the panel. 

I would like for the folks to put our chart back up. I think some 

of you have a copy of the chart, but let’s put the chart back up. 

Mr. Kotz, you mentioned that in 2005, there was a very significant event that happened that was not executed on, in your testimony. Do you want to go back over and just kind of frame what 

happened in 2005 where there was a real opportunity there, an opportunity missed? 

Mr. KOTZ. Sure. 

So, over time, even before that, this issue was raised. And then, 

finally, in 2005, the Enforcement Division in the Fort Worth office 

decided to take on the case. But instead of going forward with sort 

of emergency relief and immediately taking an action, they spent 

more time investigating and doing research and didn’t actually 

bring an action until many years later. 

And we found that there was a possibility, even though we didn’t 

have enough evidence of any alleged fraud at that point, to bring 

an action based on the lack of due diligence. Stanford Group Company was an investment advisor, and they were referring and getting referral fees for folks to invest in the CDs for Stanford International Bank. But they didn’t have information about why they 

were able to achieve these returns, what they were getting the fees 

for. 

So there was certainly a strong argument to be made that you 

could have brought an action saying that Stanford Group Company 

didn’t perform appropriate due diligence. If that action had been 

brought, then, even if it hadn’t been successful, it would have triggered for the investors out there that the SEC believes that there 

is a potential fraud in Stanford Group Company. 

There are always difficult cases, and sometimes cases take a long 

time to fully go forward with. But if you are in a situation where 

you realize in 2005 that there has been a fraud growing for 8 years, 

then you need to take action immediately, even if you lose in court 

eventually. 

Nevertheless, we did interviews and we spoke with lots of victims, and we did a survey, and an overwhelming percentage of 

those folks said if they had heard any whiff of a problem with 

Stanford, even any lawsuit that was brought, they would have immediately taken out their money. So— 

Chairman NEUGEBAUER. Thank you. 

Mr. KOTZ. —we believe that there is an obligation on the part of 

the regulators to do something to let investors know that there are 

issues, even if you don’t have enough evidence, necessarily, to go 

forward with a full-blown Ponzi scheme case. And we believe that 

that opportunity was in 2005. 

Chairman NEUGEBAUER. Okay. 

I want everybody to look up at this chart. This is basically the 

fund balance of Stanford through the process. And I think the 

thing that is so discouraging and really incenses, I think, a lot of 

members of this panel today is, had—of course, there were other 

opportunities, there were four other opportunities that were missed 

there, but in 2005, what we see is the amount of money flow increased exponentially. 

14 

So who was the head of enforcement in the Fort Worth office 

during this time? 

Mr. KOTZ. There was an individual named Degenhardt and then 

Addleman over time, depending on the periods of time. 

Actually—I am sorry—the enforcement head was a man named 

Spencer Barasch, who, as we indicated in our report, after he left 

the SEC and had been involved in efforts to not allow the SEC to 

go forward with the Stanford case, made efforts to represent Stanford against the SEC and, in fact, was able to represent Stanford 

for a short period of time. 

In fact, Julie Preuitt, as she was trying to push the SEC to go 

forward and bring this case, actually prepared a memo and waited 

for Spencer Barasch to leave the agency because she knew, while 

Spence Barasch was there, they were never going to go ahead with 

the case. 

And immediately after the decision was made to go forward with 

the case because Spence Barasch had left, then Spencer Barasch 

wanted to try to represent Stanford in the case on the other side. 

Chairman NEUGEBAUER. Now, in your report, I think if I am correct on this, did you refer your report to the SEC’s Ethics Counsel 

for referral to the Texas bar? 

Mr. KOTZ. Yes. And there was a referral to both the Texas Bar 

and the D.C. Bar. Both of them are continuing to actively look at 

that matter. We also referred it to the U.S. Attorney’s Office and 

the FBI, and there is an active matter on that, as well. 

Chairman NEUGEBAUER. Mr. Khuzami, do you agree that Mr. 

Barasch engaged in unethical and improper professional conduct? 

Mr. KHUZAMI. Congressman, the rules clearly prohibited him 

from representing, in my view, my personal view, prohibited him 

from representing Mr. Stanford. That was a matter under his control and management at the time. So my personal conclusion would 

be, certainly the evidence appears to be the case. 

I will say one thing. He called the Fort Worth office twice and 

asked about representation, and both times the people in the Fort 

Worth office told him, no, you cannot do that. He called a third 

time to the ethics office, who gave him the same advice. And then, 

he later went ahead and represented Mr. Stanford, I believe, for, 

I think the records show, 10 hours or so thereafter. 

So my only point is that I think the ethics office and the Fort 

Worth people gave him the right answer in this case. 

Chairman NEUGEBAUER. But when he violated that, is there any 

kind of action that the SEC would take to prohibit him, then, for 

future opportunities? What is the policy on that? 

Mr. KHUZAMI. I think the problem here was we did not know 

that he represented Mr. Stanford for that period of time. Had we 

known, we would have made the same referrals that were made in 

this case years later when that fact became apparent. 

Chairman NEUGEBAUER. So now that you know that, what kinds 

of action have you taken? 

Mr. KHUZAMI. Against Mr. Barasch? He is no longer an employee, since 2005. So the referrals have been made, and the criminal authorities and the ethics authorities are conducting their investigations. 

15 

Chairman NEUGEBAUER. But could he represent a client before 

the SEC today? 

Mr. KHUZAMI. He has a permanent ban on any matter in which 

he was personally or substantially involved in while he was an 

SEC employee, so I think the answer is ‘‘no.’’ 

Chairman NEUGEBAUER. But, today, he can actively represent 

clients before the SEC? 

Mr. KHUZAMI. He is permanently banned from anything he was 

involved in. 

Chairman NEUGEBAUER. But what about things he was not involved in? 

Mr. KHUZAMI. Without speaking to the particulars, in general, 

SEC employees who leave are subject to a 1-year cooling-off period; 

they can’t represent anything. After 2 years, they can’t represent 

a client in any matter that they managed or were involved in. And, 

like I said, a permanent ban on anything they were personally and 

substantially involved in. 

Chairman NEUGEBAUER. I understand that the ban currently is 

such that I can advise a client, that I might have had an enforcement or something, but I can’t represent that client. Is that correct? 

Mr. KHUZAMI. You can’t represent the client before the Commission, which means you can’t appear, you can’t sign papers, and 

stuff like that. 

Chairman NEUGEBAUER. But you can advise them. 

Mr. KHUZAMI. You could advise them, that is correct, subject to, 

I believe—I have to get back to you on that. I am not sure whether 

or not the 1- or 2-year prohibitions prevent even that kind of conduct. 

Chairman NEUGEBAUER. I think one of the things that hopefully 

comes out of this is some title rules on that and where we have 

seen this kind of behavior for that individual to be able to continue. 

I understand that Mr. Barasch is still practicing law. In fact, I 

think on his firm’s Web site, he is listed as the leader of corporate 

governance in the securities enforcement team. So, obviously, that 

is very alarming. 

I have gone way over my time, so we will now go to Mr. 

Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr. Kotz, in your opinion, did the SEC have the authority and 

the resources at their disposal to prevent the Stanford Ponzi 

scheme from occurring? 

Mr. KOTZ. I do believe that they certainly were aware of the possibility of a Ponzi scheme back since 1997, and they had the manpower to be able to bring an action to attempt to stop the alleged 

Ponzi scheme from going forward. So I don’t think that this was 

a question of lack of resources, no. 

Mr. FITZPATRICK. If you had to pinpoint the failure, where was 

it? Not resources. 

Mr. KOTZ. It was an attitude failure. It was that the office at 

Fort Worth, at that time, was concerned about numbers. They 

wanted to show that they brought more cases than other offices. 

And in order to bring more cases than other offices, you have to 

bring easy, slam-dunk, quick-hit cases. If you brought a case like 

16 

Stanford, which was complicated and complex, involved Antigua, 

foreign issues, the question of whether the CD was a security, etc., 

that wouldn’t give you a number very quickly. It would take a long 

time. 

It would have saved investors billions of dollars, but, at that 

time, their focus was on the numbers. And that, we believe, was 

the primary reason. 

Mr. FITZPATRICK. And so, would the enactment of the DoddFrank legislation have prevented the Ponzi scheme? 

Mr. KOTZ. I don’t believe that Dodd-Frank or either the procedures involved or the resources would have made a difference, in 

this case. 

Mr. FITZPATRICK. Mr. Kotz, I believe that this case and the 

Madoff case have demonstrated that more resources were not needed at the SEC, that more regulations were not needed. What we 

needed were the regulators to just do their job. Yet, the SEC has 

been before this committee asking for further appropriations after 

repeatedly failing investors in this country. 

Along those lines, I am aware of a report that you are working 

on related to the SEC’s decision to lease $400 million of office space 

without a competitive bidding process. And that occurred just 2 

weeks after the Dodd-Frank Act passed, an act which authorized 

lawmakers to double the agency’s budget to 2015. 

Can you elaborate on your findings of that report thus far? 

Mr. KOTZ. We are looking at that. We haven’t completed it yet. 

We are almost near completion. We actually plan to issue that report very, very shortly. But we are looking into the whole circumstances of how the SEC got to a point where they obligated the 

Federal Government for over $550 million with respect to that 

lease. And so, we will get that report to you shortly and be able 

to give you a full reckoning of what happened. 

Mr. FITZPATRICK. Are you able to elaborate on any of the details 

of the report at this point? 

Mr. KOTZ. I would rather not get into too many details. I can say 

that some of the things we are finding are quite disturbing, in 

terms of what the SEC’s actions were in this case. 

Mr. FITZPATRICK. I have nothing further. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now, the gentleman from New Mexico, Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. di Florio, you mentioned that the managers are no longer 

with the SEC. Did you recommend any punitive action? Did you 

terminate them? Or did they just quit and look for greener pastures? 

Mr. DI FLORIO. These were the enforcement managers who were 

involved in not accepting the referral at that time, and I believe 

that they left the SEC. 

Mr. PEARCE. I am asking, did you terminate them or did they 

leave? 

Mr. DI FLORIO. I believe they left. I don’t believe they were terminated. 

Mr. PEARCE. So you had two managers. Who were the managers 

during that period of time? 

Mr. DI FLORIO. I believe that was Spencer Barasch, principal. 

17 

Mr. PEARCE. Only 1 for 10 years? 

Mr. DI FLORIO. Was there another Director of Enforcement? 

Mr. KHUZAMI. Mr. Barasch was the Enforcement Director until 

2005. An interim Director was there from 2005 to 2006. 

Mr. PEARCE. How about from 1997 on? If you would put that 

chart back up there, that is kind of an effective chart showing that 

things are happening all around and somebody is ignoring it. 

And so you only had two managers then, temporary managers, 

from 1997 on? 

Mr. KHUZAMI. No, no, I am sorry. Mr. Barasch was there, I believe, from about late 1997–1998 through 2005. Then for 1 year, 

there was an interim manager and then a permanent manager in 

2006. 

Mr. PEARCE. Okay. Now, somewhere in that period of time, someone wrote a letter of reprimand, did I hear that, on Ms. Preuitt? 

Mr. DI FLORIO. Congressman, if I could— 

Mr. PEARCE. Who wrote that letter of reprimand? And they wrote 

the letter of reprimand because she kept insisting that the agency 

do its job, right? 

Mr. DI FLORIO. Correct, Congressman 

Mr. PEARCE. And so who wrote that letter of reprimand? 

Mr. DI FLORIO. I believe that was the letter written in the 2008 

timeframe, and it was written by the Associate Director for Examinations in the Fort Worth regional office. 

Mr. PEARCE. He was uncomfortable that she kept pressing the 

envelope here, wanting some action, and he said that is inappropriate on her part, is that right? Is that the basic context of the 

letter? He didn’t like that she was pushing the deal? 

Mr. DI FLORIO. My understanding, Congressman—this was before I was at the SEC, obviously—was that there were circumstances and facts regarding behavior that the Associate Director was— 

Mr. PEARCE. Having to do with Stanford? 

Mr. DI FLORIO. Not having anything to do with Stanford. 

Mr. PEARCE. Nothing to do with Stanford? 

Mr. DI FLORIO. Nothing to do with Stanford. 

Mr. PEARCE. So the Fort Worth office was an anomaly; they were 

more concerned about numbers. Who reviewed the stuff up above? 

Surely those four instances on the chart there, surely those four 

red stars on the chart got reviewed by somebody above Fort Worth. 

Did it ever get reviewed by anybody above Fort Worth? 

Mr. DI FLORIO. Congressman, I believe that one of the points that 

is made in the Inspector General’s report that is disturbing is that 

it was not escalated outside of Fort Worth and reviewed above. 

Mr. PEARCE. Who would have been responsible to review that on 

a higher level? 

Mr. DI FLORIO. On a higher level— 

Mr. PEARCE. What department, what office? 

Mr. DI FLORIO. If there was any concern in Fort Worth that a 

matter wasn’t being addressed effectively, I would expect and certainly under my leadership today that would be escalated directly 

to my attention. 

Mr. PEARCE. Are those people who were in that office still employed at SEC? 

18 

Mr. DI FLORIO. No, they are not, Congressman. 

Mr. PEARCE. Were they terminated or did they quit? 

Mr. DI FLORIO. They left, Congressman. 

Mr. PEARCE. Have you brought official actions against anybody 

from Mr. Barasch on up? In other words, have you brought proceedings against them to— 

Mr. DI FLORIO. We don’t have authority over folks once they 

leave the SEC, so we have— 

Mr. PEARCE. You don’t have a Web page that describes the actions of people while they are in your employ so that people could 

come on and take a look and see what your report is? Did you prepare any final report on that so that people who would want to 

know, people who were going to hire him as a lawyer? Did you ever 

do anything like that? 

Mr. DI FLORIO. Congressman, I believe, if we take action, we do 

make that public so people are aware, if they want to hire that individual or they want to do business with that individual, that individual has an action. 

Mr. PEARCE. Mr. Khuzami, you gave us your four-point plan. 

Which exact item—you said you are fixed, it is all okay now. Which 

item on your four-point plan, if it were in place before, would have 

stopped the circumstances from moving forward, would have made 

sure that manager did not have the ability to push the stuff under 

the rug? Which point would have stopped this? 

Mr. KHUZAMI. Congressman, first, we are never done. We have 

done a lot, and we are going to keep ongoing. 

Mr. PEARCE. No, I want to know which point. Because I don’t believe, myself—I don’t think that the agency is going to change 

much, because I don’t see anything where people are being held accountable and responsible. So I am suspicious that your four-point 

plan is mostly just a little bit of eyewash, and we warmed it up 

and we shined it up. 

But I would like to know which point in your four-point plan 

would have stopped this thing from moving forward so that any of 

those stars at any point would have been pushed further and so 

that you would have had somebody at a higher level say, something 

is not right down there. Which point in your four-point plan? 

Mr. KHUZAMI. We do quarterly reviews, and we review every case 

that each senior officer has within their docket, and we discuss 

problems, roadblocks, investigative challenges, theories. We have 

more expertise available across the Division. We have escalation of 

the process so that if an exam personnel does not get satisfaction 

in how their referral is being treated by the Enforcement Division, 

that gets escalated. 

And, in fact, the Inspector General’s report, which he just indicated, showed that, in the last couple of years, the level of dissatisfaction in that regard has dropped dramatically. 

Mr. PEARCE. I am not convinced. 

Thank you, Mr. Chairman. My time is up. 

Chairman NEUGEBAUER. I appreciate the gentleman. 

The gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. di Florio said that some of the individuals involved in this 

are no longer with the agency. And Chairman Schapiro shared that 

19 

with us, about the 50-some investigators and examiners who are 

culpable in the Madoff crimes, as well. That doesn’t do anybody a 

whole lot of good, to know that they are no longer with the agency. 

A question that always begs for an answer is, where are they 

now? Are they examining or investigating for somebody else? And 

now, we have learned that this guy is actively involved in a law 

practice, apparently. 

We have said that the authorities were given a referral. What 

authorities, and when were they given the referral? Can you share 

that with us? 

Mr. KHUZAMI. I believe Mr. Barasch was referred to both the 

State ethics boards of Texas and the District of Columbia, as well 

as criminal authorities. 

Mr. POSEY. What about the Justice Department, racketeering? 

Mr. KHUZAMI. I am sorry. By criminal authorities, I meant the 

Justice Department. I am sorry. 

Mr. POSEY. Thank you. When? 

Mr. KHUZAMI. Shortly after the release of Mr. Kotz’s report in 

April of 2010, I believe. 

Mr. KOTZ. Yes, and we have been working with the Justice Department and the FBI on the ongoing case against Mr. Barasch. 

Mr. POSEY. Okay. 

In regard to the IG’s report that is forthcoming, we were all privy 

to the opportunity to look at the Madoff report, which was very incriminating, wasn’t quite as bad as Mr. Markopolos’ book, but it 

was still very incriminating. Over 50 examiners and investigators 

botched it. The IG was kind of silent on the head management people who were culpable, but obviously, there were some. 

Can you tell us, at this point, the depth to which we have examiners and investigators who failed to do their job in the Stanford 

investigation? 

Mr. KHUZAMI. I am sorry. The extent to which they are out there 

working in the industry, is that the question? 

Mr. POSEY. How many of them failed to do their job? We know 

there were over 50 in the Madoff case. Are we finding a similar 

depth in this case? 

Mr. KHUZAMI. Congressman, in my opinion, the failure here was 

largely the result of the senior management. The staff who were 

working the case on the enforcement side are the same staff who 

eventually brought the case in 2009. So, from my personal opinion— 

Mr. POSEY. Okay. That is good. 

Mr. KHUZAMI. —just primarily the managers who refused to— 

didn’t let the case go forward. 

Mr. POSEY. The next question. Have we canonized Julie Preuitt 

yet? 

Mr. DI FLORIO. Congressman, as I said in my opening statement, 

I publicly commend Julie Preuitt. She did a terrific job, exactly 

what we expect and hope from our examiners in uncovering this 

fraud, in referring it and trying to persistently— 

Mr. POSEY. Have we done anything to thank her? Has she been 

promoted? She probably should be running the agency. 

Mr. DI FLORIO. Congressman, we are working closely with Ms. 

Pruitt right now to structure a portfolio of responsibilities that we 

20 

think will let her demonstrate her talents to their fullest potential 

and include not only critical issues like oil and gas fraud in the 

Southwest region but also examines issues of national significance 

and importance. 

Mr. POSEY. My point is we should reward her foresight and courage and dedication to her job with more than a mere ‘‘thank you.’’ 

It should be something to be recognized for decades, something 

that other employees should look up to and seek to emulate. 

Most importantly, my concern is with the rightful compensation 

of the victims. 

Mr. POSEY. I have written the chairman as recently as April 

27th. She has responded—actually, her response is April 27th—and 

said, I expect the Commission will make final decisions on whether 

the Securities Investor Protection Corporation should initiate a 

civil proceeding as soon as all this information has been thoroughly 

reviewed, which should occur in the near future. It has only been 

3, 4 years now. Are we at a point where we can make a call on 

this and get this on the table and see if the acceptances are valid 

and the rejections are invalid and this can be debated? 

Mr. CONLEY. Congressman, this matter is now with the Commission, and we do anticipate that there will be a decision in the very 

near future. 

Mr. POSEY. Could you define ‘‘near future’’ for me? 

Mr. CONLEY. I would say within the next few weeks we will have 

an answer from the Commission on this question. 

Mr. POSEY. Very good. 

Next of all, what type of enhanced restrictions on employment do 

you foresee—any of you, feel free to speak up on this—as necessary 

to stop the revolving door of regulators to exploiters. I look at this 

current financial crisis. You are aware of the players from top to 

bottom. You are aware of the key positions in the highest levels of 

government that people have gone from regulator to profiteer to 

manager when it was convenient and a good reason to sell off their 

stock and take profits and run. What do you think we should do, 

in your professional opinions, to tighten up the regulations, to stop 

the revolving door from regulator to exploiter or profiteer or whatever you want to call it? 

Mr. DI FLORIO. Congressman, I would note that, under Chairman 

Schapiro’s leadership, we have started to undertake a top-to-bottom 

review of the ethics and compliance function at the SEC to make 

sure that we do have appropriate controls around the revolving 

door. So under Chairman Schapiro’s leadership, she has appointed 

the first ever Chief Compliance Officer for the SEC, a new Senior 

Ethics Council that has embarked on looking at how to strengthen 

those controls and make sure that there aren’t revolving door 

issues. 

We have put in place a system that is one of the leading systems 

in the Federal agency—among the Federal agencies—concerning 

conflicts of interest and managing those conflict of interests. So I 

think there are a lot of positive steps under Chairman Schapiro’s 

leadership that have been taken. 

In addition, GAO is looking at the revolving door. We are working closely with them and their report is due out soon. We expect 

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21 

ther strengthen those controls and make sure there aren’t those 

conflicts of interest. And we will certainly implement those recommendations. 

Mr. POSEY. Thank you for your forthright answers. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. 

I am going to change order here and have the gentleman from 

Mississippi, Mr. Harper. 

Mr. HARPER. Thank you, Mr. Chairman. 

I thank each of the witnesses for being here in a very difficult 

situation and to those in the Stanford Victims Group, our hearts 

go out to you. This matter is not over. And I certainly admire and 

all of us admire your diligence and your persistence in staying in 

the fight. 

Mr. Kotz, I want to say, first of all, thank you for your hard 

work, your very long but very detailed and revealing report. And 

so I just wanted to express on my behalf that we really appreciate 

the effort that you made in putting this together. 

Mr. KOTZ. Thank you very much, sir. 

Mr. HARPER. Now, Mr. Ketchum, when we look at this issue and 

we look at the things here, we look at the efforts of FINRA, did 

FINRA review— and I have a few of their marketing materials— 

these materials, your agency? 

Mr. KETCHUM. FINRA reviews advertising materials that specifically go to the sale of products, yes. They don’t review every material that broker-dealers put out. 

Mr. HARPER. But you do review most or at least you make an effort to review? 

Mr. KETCHUM. We review products that in one way or another 

try to sell securities. 

Mr. HARPER. Do you request those materials from them or do 

they send them to you on a voluntary basis? 

Mr. KETCHUM. No. They are obligated by rule to send them to 

us. 

Mr. HARPER. When you look at many of these, it says here in the 

fine print in most of these that security products and services in 

the United States are offered through the Stanford Group Company, member FINRA and SIPC. Would the average investor conclude from reading that that there was SIPC coverage? 

Mr. KETCHUM. It is difficult without seeing the full thing there 

and what they say about the CDs that were being sold. But clearly, 

Stanford cynically used the broker-dealer to create the impression 

there was going to be coverage, yes. 

Mr. HARPER. I guess if this hearing underlies the contention that 

the victims believed that they were indeed purchasing registered 

securities and, in fact, they were not and that the SEC failed to 

do its job, then the question for all of the victims here and for us 

is, why would these victims’ investments not be covered by SIPC? 

Mr. KETCHUM. I think that is a fair question, though fairly, I 

think I properly should defer that to the SEC that has the oversight responsibility with respect to SIPC. 

Mr. HARPER. Tell me what efforts FINRA made to protect the investors, the Stanford investors. 

22 

Mr. KETCHUM. As I indicated in both my written statement and 

oral statement, clearly not enough. We as well missed red flags 

that indicated concerns. We, as well as the SEC, became overly intimidated by the jurisdictional issues and the issues as to whether 

the CDs were securities and didn’t focus on the fundamental exposure and risk to investors. And that was unacceptable behavior and 

unacceptable from the standpoint of how we responded. 

Mr. HARPER. When this is being reviewed and you are looking at 

information—go back to 2007. When it is determined that SGC had 

an almost $3 million overdrawn account in 2007, what did FINRA 

do in response to that? 

Mr. KETCHUM. I am sorry. I don’t know exactly what you are referring to with respect to the $3 million over— 

Mr. HARPER. In the investigation looking at—maybe it is a question that one of the other witnesses could answer better. But did 

FINRA take any action—when was the first action that FINRA 

took to protect investors? 

Mr. KETCHUM. Our actions were cooperative with the SEC from 

the standpoint of the investigation that finally led to the actions of 

2009. We also commenced investigations, just as the SEC does, in 

part from a Dallas/Fort Worth referral with respect to the case that 

did not lead to actions other than a minor action with respect to 

advertising that Stanford put out. 

Mr. HARPER. Mr. Chairman, I thank you. 

And with that, I yield back my time. 

Chairman NEUGEBAUER. Thank you. 

Now we go to Mr. Cassidy. I am sorry. 

I messed up there. 

Mr. Canseco, after you have been so polite—exactly. Cassidy, 

Canseco, you know. The gentleman from Texas. 

Mr. CANSECO. Thank you, Mr. Chairman. 

And, gentlemen, thank you very much for appearing here today. 

Just before I get started with questioning, I do want to say several 

things. It is a little disconcerting to sit here today and see how for 

over a decade, employees of the SEC continuously notified their superiors and the enforcement group that something needed to be 

done with Stanford. And for a number of reasons, they were ignored. Nobody in a position of authority seemed interested in drawing outside the lines, whether it was because SIB was located outside of the United States or because the SEC was only focused during that time on taking on cases that could be quickly resolved. 

Nobody seemed to step back from the situation and say, something doesn’t look right here. And as a consequence, people were 

hurt, investors were hurt. And I want to point out someone from 

my district—one of the ones who was hurt from my district, Mr. 

Barney Hallman from Alpine, Texas, wrote to me. And I am just 

going to read a little excerpt from it. He said, ‘‘I went to the SEC 

and FINRA’s Web site and checked the history of the FA as well 

as the history of Stanford Group Company. Both Web sites reported no allegations, no fines and no discernible problems with either.’’ 

And he goes on to say, ‘‘At that time, I had no idea that the SEC 

had been investigating SGC for 10 years since 1997, nor did I know 

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23 

port 526 clearly believed that SGC was part of Stanford’s Ponzi 

scheme. I also didn’t know that for over a decade, the SEC knew 

investors who used their Web site and FINRA’s to base their critical decisions would lose their money with certainty.’’ 

It highlights what fell between the cracks here. And it is particularly disconcerting given the fact that recent legislation has thrown 

new burdens on the SEC and other agencies without allowing for 

structural problems to be fixed first. The worst part about this is 

even if Dodd-Frank bill had been in place beforehand, its provisions 

still wouldn’t have stopped the Stanford case. The laws were there. 

The regulators were there, but the regulators failed. And so now, 

the honest companies in the industry are paying the price for Stanford, as well as the good citizen investors who invested with Mr. 

Stanford. 

It is a travesty that these companies need to pay the price and 

that these individuals need to pay the price of the SEC and 

FINRA’s failures. 

Let me start by asking Mr. Kotz, in your March 31st report from 

your office, you noted that by early summer of 2003, you say, ‘‘It 

had been approximately 6 years since the SEC examination staff 

had concluded that SIB CDs were likely a Ponzi scheme. During 

that period, the SEC had conducted three examinations resulting 

in two enforcement referrals. An enforcement inquiry had been 

opened and closed with no meaningful effort to obtain evidence related to the Ponzi scheme. It would take almost another 6 years, 

another examination and enforcement referral and the collapse of 

the Madoff Ponzi scheme before the SEC acted to shut down Stanford’s Ponzi scheme.’’ 

Are enforcement personnel who were involved—and this is the 

question—in the Stanford matter still employed by the SEC and in 

what capacity? 

Mr. KOTZ. The managers who made the ultimate decisions left 

the SEC some time ago. 

Mr. CANSECO. And have any SEC personnel been disciplined for 

missing the Stanford fraud? 

Mr. KOTZ. Not to my knowledge, no. 

Mr. CANSECO. Okay. I still have some time. 

Mr. Khuzami and Mr. di Florio, the SEC in the Fiscal Year 2010 

report notes that the Division of Enforcement completed structural 

reforms that were the most significant in 4 decades and noted that 

the Office of Compliance, Inspections, and Examinations established a new national governance structure. But absent in the Fiscal Year 2010 report, it seems, is any description of how these two 

Divisions are going to improve their communication and work with 

one another. The divide between the two was at the heart of the 

Stanford matter. What are your two Divisions doing to improve 

your work with one another? 

Mr. KHUZAMI. From the Division Enforcement’s perspective, Congressman, we are doing a lot. We have much better integration between the two Divisions. We meet early on in investigation cases. 

We educate ourselves about the particular registrant that might be 

under examination. There is much better communication. We track 

referrals. We have an escalation approach to make sure the referrals are properly handled by the Enforcement Division, and we 

24 

have expertise that we have hired in each Division to deal with 

particular types of market practices that might be under scrutiny. 

All in all, I think, a change of culture and, frankly, also due to 

the change in personnel who understands the value of the examination staff and what they bring. 

Mr. CANSECO. Thank you. We are short on time. 

Mr. di Florio? 

Mr. DI FLORIO. I would just endorse what Mr. Khuzami said. I 

think it starts with the tone at the top. And we have a commitment 

to a culture of teamwork and collaboration, starting with the chairman setting that tone. We meet regularly. Our staff meet regularly. 

We have put in place governance processes that bring us together 

to talk about cases earlier, raise concerns earlier, think about ways 

we can collaborate to stop fraud and rapidly shut it down. So there 

are a number of mechanisms, and I think we are very competent 

here today that this kind of situation wouldn’t occur, we would nip 

it in the bud, we would have mechanisms in place to ensure that 

it got escalated and addressed. 

Mr. CANSECO. Thank you. Mr. Chairman, may I have one more 

question, sir? 

Chairman NEUGEBAUER. Quickly. 

Mr. CANSECO. Yes, sir. 

Mr. Ketchum, have the rules and regulations promulgated by 

Dodd-Frank—would they have helped solve the situation at Stanford? 

Mr. KETCHUM. No, no. This was a matter from all of our agencies’ standpoint of being able to identify and push through a difficult situation and ensure that a serious fraud didn’t continue. 

This wasn’t about rules and regulations. We had the rules and regulations on our books. 

Mr. CANSECO. Thank you very much, sir. 

I yield back, and thank you for my time. 

Chairman NEUGEBAUER. And now the gentleman from Louisiana, 

Mr. Cassidy. Thank you. 

Mr. CASSIDY. Thank you, Mr. Chairman. The goal of my office 

has been to ensure an effective, transparent, and compassionate response. 

Frankly, it seems as if all three have failed. Not to point fingers, 

because none of you were involved, again, Mr. Kotz, if anyone else 

was supposed to be made a saint, it so should be you because the 

only transparency has come from your office. 

For example, my office, as well as eight or nine other Members 

of Congress, Senate, and bipartisan, bicameral, requested the 

chance to look at an unredacted copy of the IG’s report. Some of 

the redactions seemed to have pertained to someone’s name, but 

others are just redacted. I have no clue what is behind there. We 

sent that letter sometime ago and have never received a response. 

Asking committee staff, an unredacted report has not been sent nor 

made available. Why can’t we get a chance to look at an 

unredacted report? 

Mr. DI FLORIO. Congressman, I don’t know the answer to that. 

I don’t know whether or not there are Privacy Act restrictions that 

come into play. 

25 

Mr. CASSIDY. I am willing to look at it in a room without windows with you standing behind my back to make sure that I don’t 

take notes. But as I try to ensure a transparent response to people 

for whom transparency has been totally lacking, except for Mr. 

Kotz, why not? 

Mr. DI FLORIO. I don’t know. I will find the answer out for you, 

Congressman. My understanding is that a lot of their redactions 

have to do with maybe the ongoing investigations or other sensitive 

matters, but I will get back to you with a response. 

Mr. CASSIDY. Sounds great. 

FINRA apparently or your predecessor in September of 2003 sent 

a letter to SEC suggesting that this may not be on the up and up. 

Mr. Ketchum, did FINRA, your predecessor, send it to the Fort 

Worth office, or did they send it to the D.C. office? Because it 

seems like, if you will, blame is being put on the gentleman who 

was in charge of Fort Worth—and again, the lack of transparency 

has made me a little bit concerned. Do we know that higher-ups 

were not culpable and/or negligent? So I am asking, that report 

sent from September of 2003, to whom did that go? 

Mr. KETCHUM. The communications between the SEC and 

FINRA were done at the Dallas and Fort Worth offices. I think actually the letter you are referring to or at least the primary letter 

you are referring to was a letter from the Dallas/Fort Worth SEC 

office to FINRA providing a partial referral to the thing. 

But, no. Part of the problem I think on both of our sides was an 

absence of escalation. It stayed at the two offices. 

Mr. CASSIDY. One of you, maybe Mr. Conley, I understand that 

SIPC will cover Madoff because the stock transactions were fictitious but the underlying value of the CDs was fictitious. So why 

does the fictitious nature of the stock transaction of Madoff qualify 

for SIPC coverage but the fictitious value of the CDs does not? 

Mr. CONLEY. Congressman, this is one of the questions that the 

Commission is now looking at. The victims in this case through the 

Stanford Victims Coalition have made the argument to the Commission—they have met with the staff and made the argument and 

also in letters to the Commission that they believe that the CDs 

in this case should qualify as fictitious and, therefore, they should 

be—assuming they are customers, they would have an argument 

that they were entitled to the money that they invested. And that 

is a question that the Commission is looking at currently. 

Mr. CASSIDY. I understand the Commission so far has been negative regarding that argument. Is that true or not? 

Mr. CONLEY. There has been no determination made by the Commission at this point. That is something that is currently under review by the Commission. 

Mr. CASSIDY. Let us assume that they rule against. I am a physician, and I know that if a physician does something bad, something 

negligent, there is other recompense. Frankly, this is bureaucratic 

agency negligence. We have heard that. Is there sovereign immunity, or will there be civil cases allowed against the SEC for frankly totally failing their responsibility? Does the SEC have sovereign 

immunity? 

26 

Mr. DI FLORIO. As a general matter, I believe there is sovereign 

immunity, and I believe there have been some lawsuits filed. I 

don’t know the current status of them. 

Mr. CASSIDY. Can you let us know that? 

Mr. DI FLORIO. Certainly, Congressman. 

Mr. CASSIDY. Let us see. Also with the receiver. Now, I actually 

know some of those broker-dealers. They said that they showed up 

for work one day, and they were told to go home. The receiver was 

there. He hacked into their account, and he paid some IT people 

a lot of money to pull up lists that if they had stood behind him, 

he could have opened his account; they could have checked the documents he pulled down against the Pershing account and all of 

those billable hours that Janvey racked up are gone. So more 

money would have been there to compensate victims. I know the 

courts had told Janvey to downgrade his charges. The court was offended by the number of charges. Going forward, is there going to 

be a review of the procedures used to instruct receivers so that 

they can’t maximize billable hours when there are shortcuts to the 

same thing? 

Mr. DI FLORIO. Congressman, we vigorously check bills of receivers and, in this case, in fact, on a number of occasions, have 

achieved reductions in those bills. 

Mr. CASSIDY. I understand that. But my fundamental question is, 

there was an easier way to do it. You just stand behind the guy 

as he opens it up, and you stand behind and have an IT guy there 

to make sure that maybe he opens up a similar computer with the 

same password so somebody who knows about computers can make 

sure there is not a game going on, and boom, you have all the accounts. 

And you don’t take 2 months racking up IT—I am sure $200 forensic accountants, etc., when you say here is the Pershing account 

data that Stanford is using, here is what you showed me. Why 

don’t we do it that way and save a heck of a lot of dough? 

Mr. DI FLORIO. I think that is entirely appropriate and that 

should happen. As the SEC, we don’t control the receiver, and to 

some degree, the court is responsible ultimately for dictating how 

and in what method the receiver approaches his task. But we have 

been doggedly following his expenditures and suggesting ways he 

can do things more efficiently, including not spending money chasing assets that are overseas that are already subject to freeze orders. 

Mr. CASSIDY. So it sounds like—it is understood that this particular receiver is problematic. I guess my question is, what does 

Congress have to do—I am not on this committee, and it is by the 

indulgence of the Chair that I am here—what does this committee 

or Congress need to do so that receivers operate within certain 

guidelines? I keep returning to this, but the perception is the guy 

is just racking up billable hours. It is a gold mine. I am sure he 

has made partner. The fact is that there are cheaper ways to do 

it. Are there guidelines that can be promulgated to help the fellow 

do so? 

Mr. DI FLORIO. Congressman, I am not sure that is something 

that Congress could promulgate, but we will take a look at it and 

get back to you. 

27 

Mr. CASSIDY. You have been indulgent. Thank you. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. Good questions. 

All good questions. 

I just have a quick follow-up. It is my understanding, Mr. 

Khuzami, is that the Texas State Bar has not received any kind 

of referral, and I think you testified that you had referred it, a formal complaint, to the Texas Bar on Mr. Barasch; is that correct. 

Mr. KHUZAMI. My understanding was that there was a referral 

made to both Texas and the District of Columbia, but I could be 

mistaken that it was one or the other and not both. That was my 

understanding. We can certainly confirm that and get back to you. 

Chairman NEUGEBAUER. Would you think it would have been appropriate to refer to both? 

Mr. KHUZAMI. It depends on where he is registered to practice. 

So wherever he is registered, there should have been a referral. 

Chairman NEUGEBAUER. Were you aware that Mr. Barasch had 

business before the Commission last Friday? 

Mr. KHUZAMI. I was not aware of that. 

Chairman NEUGEBAUER. Should he be allowed to do that? 

Mr. KHUZAMI. Congressman, again, the government-wide ethics 

rule would say that if it is not something that he wasn’t personally 

involved in, he is not permanently barred from representing clients 

in front of the SEC. 

Chairman NEUGEBAUER. But I want to understand this. You said 

that you referred charges to—criminal charges; is that correct? 

Mr. KHUZAMI. We made a reference to the criminal authorities, 

correct. But there has been no result of that. If Mr. Barasch is ultimately criminally charged, then he could lose his license and not 

practice anywhere. 

Chairman NEUGEBAUER. Another follow-up question. I think it 

was in the IG’s report that there was a recommendation to discipline the supervisors whom I think most people think unfairly 

disciplined Ms. Preuitt. Have you taken any action against them? 

Mr. DI FLORIO. Congressman, again, this was before I joined the 

SEC. But my understanding is that there was a review done when 

the Inspector General’s report came out regarding the retaliation 

and the need to follow up with regard to those senior managers. 

The findings of that review apparently were that those senior managers had sought the consultation of counsel and experts on human 

resources throughout the process of developing their discipline, and 

so it was inappropriate to discipline them for following the procedures we encouraged them to follow. That is my understanding of 

how that occurred. 

Chairman NEUGEBAUER. Do they have the facts that we all have 

now, that in fact, people were ignoring her, and in fact demoted her 

because she kept raising this flag? Do they have that information? 

Mr. DI FLORIO. Congressman, what we have done since we have 

came on board, Mr. Khuzami and I, is when we learned of further 

concerns regarding treatment of Ms. Preuitt, we assembled a very 

senior team of our most senior deputies and sent them down to 

Fort Worth to do an independent review so that we could take appropriate action if there were circumstances that remained inappropriate. And as I mentioned earlier, we are working very closely 

as a result of that review with Ms. Preuitt to make sure that she 

28 

has an appropriate opportunity to show her talents and to be able 

to work effectively in our mission. 

Mr. POSEY. Mr. Chairman? 

Chairman NEUGEBAUER. Yes, Mr. Posey. 

Mr. POSEY. Can I follow up along that same line? 

Chairman NEUGEBAUER. Sure. 

Mr. POSEY. And it is mainly—probably we should invite Ms. 

Preuitt to come here. 

Chairman NEUGEBAUER. She is here. She is on the next panel. 

Mr. POSEY. Okay. Good. 

Chairman NEUGEBAUER. I agree with you. We do. 

I would close—do any other members have any follow-up comments that they want to make? I would recognize members—because we are about to dismiss this panel, and I don’t want members to come away and say, I wish I had more time. 

Everybody good? 

I think the take-away here hopefully to both FINRA and the SEC 

is this was—this is not even defensible and that the American people deserve better than this. I can assure you as chairman of the 

Oversight Subcommittee, we are going to work extremely hard to 

make sure that the cultures in both of these organizations have 

changed in such a way that this doesn’t happen again. 

When you go back and you look at the history on the number of 

occasions in both agencies where this thing should have been shut 

down when it was less than a billion dollars, really when it was 

in the millions of dollars and yet when we look and—at the escalation from the chart of how much money from 2005, almost $6 billion additional dollars, went into that—and this has been brought 

up; you have to personalize that. In many cases those were peoples’ 

life savings, and it is extremely disturbing that we had a culture 

in agencies that demand high levels of disclosure and integrity that 

within, that very agency there wasn’t the similar amount of integrity inside those agencies. It is inexcusable. 

And so I hope that I am hearing—I have met with Mr. Khuzami 

and Mr. Ketchum, and I hear them talking the talk, but we are 

going to want to see them walk the walk. And with that, we thank 

you for being here. And this panel is excused. 

We want to welcome our second panel. I don’t think the first person needs any introduction after the conversation during the first 

panel, but Ms. Julie Preuitt, who is Assistant Regional Director of 

the U.S. Securities & Exchange Commission, Fort Worth regional 

office. 

Ms. Preuitt, welcome. 

And Mr. Charles Rawl, who is a former employee of Stanford 

Group Company. 

I would now like to yield to my colleague, Mr. Fitzpatrick, for the 

introduction of our third panelist. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I am very pleased indeed to introduce Mr. Kauffman, who traveled here to the Nation’s capital from our home State of Pennsylvania. He and his wife Linda reside in a community right next to 

my community of Bucks County. Mr. Kauffman was a public school 

teacher in the City of Philadelphia where he educated some of the 

29 

State’s most disadvantaged children, making a real difference in 

the lives of many of them. 

Mr. Chairman, Mr. Kauffman retired 6 years ago, which is right 

around the same time that FINRA and the SEC were going back 

and forth about who had the authority do something about Stanford. The Kauffmans sought a safe and secure investment for their 

life savings and eventually chose CDs in the Stanford International 

Bank to invest their retirement savings. 

The tragedy of losing their life savings was only compounded by 

the fact that they were both diagnosed with cancer in 2009. 

Thankfully, they are both survivors, and Mr. Chairman, Mr. 

Kauffman is here today to share his story and to raise some very 

legitimate questions. 

So, sir, thank you for coming to the Nation’s Capital. We look forward to your testimony. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, Ms. Preuitt, you are recognized. Thank you for being 

here. 

STATEMENT OF JULIE PREUITT, ASSISTANT REGIONAL DIRECTOR, U.S. SECURITIES AND EXCHANGE COMMISSION, 

FORT WORTH REGIONAL OFFICE 

Ms. PREUITT. I want to thank you for the opportunity to testify 

before the subcommittee today. I have been asked to discuss my 

work for the Securities and Exchange Commission as it relates to 

R. Allen Stanford and his affiliated companies, as well as my experience as the whistleblower within the Commission. 

I am representing my personal views, which do not necessarily 

reflect the views of the staff, the Commission or the Commissioners. 

First, I really would like to note that I am just a representative 

of the many highly skilled experienced examiners who have done 

their best to protect all investors, including those defrauded by 

Stanford. I know this may not provide comfort. It certainly doesn’t 

lessen Stanford victims’ losses in any way, but I and the examination staff truly care about being an advocate for the investor. And 

behind the public and personal face of a large institution like the 

SEC are many individuals who truly, truly mourn their losses. 

The intertwining of my career with Stanford starts simply 

enough. In August of 1997, I selected Stanford’s broker-dealer for 

examination because of the high-risk nature of its business model. 

That examination resulted in enforcement referral for the likelihood Stanford was engaging in a Ponzi scheme. Enforcement declined to open a formal investigation. 

In July of 1998, Fort Worth’s investment advisory examination 

group also found concerns with Stanford. Enforcement also declined 

to pursue their referral. 

In November of 2002, the investment advisory examination 

group conducted another examination of Stanford. This time the 

Associate Director for Enforcement decided to refer their findings 

to the Texas State Securities Board. 

In approximately September of 2004, the Associate Director for 

Examinations asked me to conduct a fourth examination of Stanford. As expected, the fourth examination supported examination 

30 

staff’s belief that Stanford was engaged in a fraudulent scheme. 

The only difference is that the size of the scheme had gone from 

several hundred million to $1.5 billion. Again, enforcement did not 

want to pursue the findings from the fourth examination. 

That began a battle which went from April of 2005 until November of 2005 when I was able to extract a commitment from enforcement to pursue the investigation. It was still another 11 months 

from that time until enforcement completed the process to get a 

formal order and to get subpoena authority and to kick the investigation to high gear. 

Much has been said about the SEC-wide institutional influence 

that created a disincentive to pursue matters that were resourceintensive and whose outcome was less than certain. And Stanford 

was certainly such a matter. There is no question that during the 

early Stanford timeframe, Fort Worth senior management firmly 

believed that the office’s success was measured strictly by the number of cases filed each year. 

Unfortunately, the mentality that motivated managers in Fort 

Worth to sometimes ignore the best interests of the public into a 

race for numbers has not been limited to the enforcement program. 

In 2007, a new Associate Director for Examinations in Fort Worth 

wanted the broker-dealer examiners to conduct a new type of examination which would consist of only a half day of interviews. 

The sole purpose of these examinations was to boost examination 

numbers, even if it was at the cost of legitimate examinations, such 

as the ones conducted on Stanford. 

After 8 years of fighting the shortsighted mentality that kept enforcement from an opening an investigation on Stanford, I now had 

to battle with a similar mentality in my own program. I expressed 

my concerns to local senior management, but my concerns were 

met with hostility. 

I contacted headquarters regarding this new type of exam, and 

headquarters was unaware of this new initiative and also concurred with my belief that it was inappropriate. They ultimately 

stopped these mini-examinations from going forward. 

Unfortunately, I paid a very heavy price for complaining. I was 

given a letter of reprimand that actually cited my lack of support 

for the Associate Director’s program initiatives and for contacting 

headquarters to complain about them. 

Two months later, I was transferred out of my position. My new 

position did not come with any supervisory responsibilities or any 

clearly assigned duties. The goal seemed only to convince me to 

leave the Commission. 

After finding no one within the Commission hierarchy willing to 

speak with me, much less help me resolve the situation, I complained to the IG. And even after the IG concluded in 2009 that 

there was merit to my retaliation claim and suggested discipline 

for the perpetrators, no discipline has occurred to the perpetrators. 

Further, no substantive actions have been taken to correct my situation. 

Many have asked me why I haven’t left the Commission over the 

course of the last several years. And my answer is unwavering: I 

am passionately committed to the mission of the SEC. Thank you. 

31 

[The prepared statement of Ms. Preuitt can be found on page 105 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Mr. Rawl? 

STATEMENT OF CHARLES W. RAWL, FORMER EMPLOYEE, 

STANFORD FINANCIAL GROUP, AND STANFORD FINANCIAL 

GROUP WHISTLEBLOWER 

Mr. RAWL. Chairman Neugebauer, Vice Chairman Fitzpatrick, 

Ranking Member Capuano, and members of the subcommittee, it 

is an honor and a privilege to appear before you today, to speak 

about my experience as a Stanford Financial Group advisor and my 

experience with the SEC and FINRA as a whistleblower. 

Thank you for inviting me to testify. 

My name is Charlie Rawl, and in December of 2007, my business 

partner, Mark Tidwell, and I resigned from Stanford Financial 

Group because of the company’s unethical and illegal business 

practices. We fought an incredibly difficult 15-month battle against 

Stanford and were labeled by Stanford as disgruntled employees as 

management attempted to discredit the very serious allegations we 

made when we left the firm and filed a lawsuit. 

Once the SEC filed its civil suit against Stanford alleging massive ongoing fraud, we became known as the whistleblowers. Our 

testimony and evidence were used to support the SEC’s civil lawsuit against Stanford to take a global network of companies into receivership on February 17, 2009. 

Mark and I believe Stanford would still be operating today if we 

had not come forward to the SEC and FINRA. I would not be here 

today if we had relied solely upon the present regulatory rules and 

procedures. 

I am in business today thanks to a strong business partner, 

Mark Tidwell, and an important third partner, my friend, client, 

and one of our attorneys—Mike O’Brien. It took the three of us to 

survive the past 3 years. 

Shortly after we resigned from Stanford in mid-December of 

2007, Stanford sued Mark and me in FINRA arbitration. Our worst 

fears became reality as we quickly learned that the FINRA arbitration process was in Stanford’s favor. We later have learned that as 

many as 30 other FINRA arbitrations had taken place with other 

former Stanford employees, all alleging fraudulent business practice. FINRA had sided with Stanford in every single one of those 

cases, including at least one case in which a former employee alleged Stanford International Bank was a Ponzi scheme. 

It is an understatement to say that the regulatory process failed 

us. After realizing Stanford would likely crush us in arbitration, we 

accelerated our efforts to ask other regulators and law enforcement 

for help. We came first to the SEC. The allegations we brought to 

the SEC’s attention did not appear to be a high priority, and nothing really happened until Madoff confessed in December of 2008. 

Then, the SEC had a sudden sense of urgency for taking action 

against Stanford. We proceeded to work closely with the SEC, providing testimony and evidence that was crucial to the SEC’s suit 

against Stanford. We helped the SEC craft its legal strategy, legal 

tactic to implicate the U.S. broker-dealer Stanford Group Company. 

32 

Despite the significant contributions we made to the SEC’s fight 

against Stanford, the SEC failed to deliver on its promises to protect us, and we were ultimately sued by the receiver the SEC put 

in place to administer the Stanford estate. The regulatory process 

had failed us a second time. 

It is very important to note that while we learned of many red 

flags and collected evidence of unethical and illegal business practices while working at Stanford Group, we did not know that Stanford was a Ponzi scheme when we resigned. It was only after an 

FBI agent told me he thought Stanford was a Ponzi scheme in August of 2008 that I considered that that might be true. 

We just knew there was fraud and that the investors were not 

being protected. We never imagined the magnitude of the fraud or 

the level of the devastation that resulted that all could have been 

prevented. 

In conclusion, I would like to say that the Stanford Financial 

Group scandal has left an enormous footprint in this country. The 

devastation it has caused has ruined lives. I have met victims who 

are literally on their deathbeds, who have lost their homes, who 

can’t afford their medical care. By and large, these are middle class 

people who needed the protection of this country’s regulators. The 

SEC and FINRA have failed them, and they continue to fail them. 

Chairman Neugebauer and members of the subcommittee, I 

thank you for allowing me to be here today, and I thank you for 

the attention you are giving the very serious regulatory issues that 

have come to light in the Stanford Financial Group fraud. 

[The prepared statement of Mr. Rawl can be found on page 112 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

And, Mr. Kauffman. 

STATEMENT OF STAN KAUFFMAN, VICTIM, STANFORD 

FINANCIAL GROUP PONZI SCHEME 

Mr. KAUFFMAN. Good afternoon, ladies and gentlemen. I would 

like to thank Chairman Neugebauer, Vice Chairman Fitzpatrick, 

Ranking Member Capuano, and the honorable members of the 

House Financial Services Subcommittee on Oversight and Investigations for holding this hearing today and for looking deeper at 

what is surely one of the most inconceivable acts of financial regulatory failure in our Nation’s history. 

I thank you also for allowing me the opportunity to tell my story. 

My name is Stan Kauffman. I live in Blue Bell, Pennsylvania, 

and I am 63 years old. In 2005, I retired from the Philadelphia 

Public School System where I taught science for 31 years. When I 

retired, I withdrew my retirement contributions from the Pennsylvania public school employee’s retirement system, and my wife 

Linda and I sought a safe, conservative investment to protect our 

savings. 

Based on a referral, we met with the Stanford Group Company 

broker-dealer financial advisor. We saw that he had 30-plus years 

of experience with many of the large financial firms and was a 

member of FINRA. We explained to him that we did not want to 

take big risks with my teacher’s retirement as well as our life savings. 

33 

He told us about the Stanford International Bank CDs. He explained the bank was heavily regulated and that the deposits were 

insured. The rate we were offered was a mere 2 percent higher 

than other banks at the time and that the difference was justified 

and the details are in my submitted testimony. We were told that 

the Stanford CDs were safer than a U.S. bank, and we invested our 

savings of $500,000 in these safe CDs, including my teacher’s retirement. 

Now, I am not a savvy investor, and I absolutely relied on the 

professional expertise of a FINRA-licensed and SEC-registered representative who had a fiduciary duty to recommend the most appropriate investments for my needs. 

He explained to me the Stanford Financial Group was based in 

Houston, Texas, and that all the company’s operations were managed in the United States. Knowing Stanford’s operations were in 

the United States and subject to U.S. laws made me comfortable 

with my decision. 

And that is how I ended up with Stanford Group Company and 

investing in bogus CDs. From 2005 to 2009, we watched as the 

company grew exponentially with more than 30 offices in the 

United States. We saw Stanford international bank grow by billions of dollars in deposits. We saw photos of our Senators and 

Congressmen with Allen Stanford. We even received a copy of a letter from President George W. Bush applauding the Stanford Financial Group in 2008. 

My written testimony goes into further detail about my decision 

to invest with Stanford. But in short, we had zero reason to doubt 

the company’s stability, but we did not know what the government 

regulators knew. 

On February 17, 2009, our world was turned upside down when 

we learned that Stanford had been accused of a massive ongoing 

fraud. Massive ongoing fraud. We watched the news coverage in 

shock as we realized our government regulators failed us in an unprecedented manner and that all of our life savings were gone. 

I would like to briefly share with you what my wife and I have 

faced in the last 2 years. My wife lost a job she had for over 11 

years due to downsizing as a result of the economic downturn. We 

were forced to put our house up for sale, and I had to go back to 

work. 

And then we got the bad news: In 2009, my wife and I were both 

diagnosed with cancer and had to undergo multiple surgeries and 

treatments. 

Fortunately, we are survivors, but the stress of Stanford has 

taken its toll. The devastating reality that our government regulators have failed us has taken its toll as well. There are thousands 

of victims like myself. We are not wealthy people, but honest, hardworking Americans. These are everyday, middle-class citizens who 

were preyed upon by a criminal enterprise with a sales force of 200 

of the most qualified professionals in the industry. These are people who were looking for a safe place to protect their savings and 

should have been protected. 

The insult added to injury here is the reality we have been victimized a second time, as the SEC has seemingly gone out of its 

way to not order the protection we feel we legally qualified for from 

34 

the Securities Investor Protection Corporation, SIPC. We were sold 

securities that never even existed, and the receiver’s forensic accountant has provided testimony saying our money didn’t even go 

to Stanford International Bank and that it certainly didn’t go to 

purchase the CDs we were sold. Our money sat in U.S. bank accounts and was used to pay previous investors for bankrolling the 

Stanford Financial Group’s expansion and Allen Stanford’s lavish 

lifestyle. 

SIPC was created to protect investors from a broker-dealer stealing its customers’ funds. The SEC has accused Stanford of stealing 

our funds in a massive Ponzi scheme. When it comes to repairing 

the damage of the SEC’s aborted attempts to protect us in the first 

place, we are being told our money was stolen the wrong way. 

I think it is important to note we are not seeking SIPC protection for a foreign bank product. We are seeking SIPC protection 

from a registered broker-dealer and a SIPC member who stole our 

funds instead of buying the offshore bank CD. 

Our government regulators have abandoned thousands of America’s seniors who have been struggling to get by as they wait month 

in and month out for the SEC to finally respond to an 18-month 

old request to initiate a SIPC liquidation of Stanford Group Company. 

Chairman Neugebauer, Vice Chairman Fitzpatrick, Ranking 

Member Capuano, and honorable members of the subcommittee, 

please do not allow the SEC and FINRA to get away with what has 

transpired in this case. We need your help to get our lives back. 

Stanford stole our savings, but the SEC and FINRA held the door 

wide open. Please don’t stand for that door to now be slammed shut 

in our faces. Thank you for your time and your attention. 

[The prepared statement of Mr. Kauffman can be found on page 

70 of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Kauffman. 

We have been joined by the chairman of the full committee, Mr. 

Bachus from Alabama. And I would yield 5 minutes to him for 

questions. 

Chairman BACHUS. Thank you. We had many Members of Congress just in the past several months who brought this to our attention, that there were some—that this was truly a horror story, 

and when we decided to have this hearing, I had no idea until I 

saw the testimony how widespread this was and what a monumental failure of our regulators to catch this fraud. 

And obviously, there were many innocent victims, including SEC 

employees, and former Stanford employees, as well as thousands of 

people who invested. And it really is depressing even to hear about 

it. I cannot imagine what you have been through, and I am disappointed that you haven’t been protected and that you have really 

been treated not only unjustly, but even after all of the facts were 

out, there has been no attempt to right those wrongs. 

You have been made so many promises that I hesitate to make 

another one because you have been let down so many times. But 

I can tell you that this won’t be the end of this here. I know Mr. 

Posey asked one of the questions I was going to ask. And that is 

whether the SEC employee in Fort Worth who had taken actions 

since he has left which indicate a real conflict of interest and ethVerDate Nov 24 2008 17:24 Aug 25, 2011 Jkt 066868 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\66868.TXT TERRIE
35 

ical misbehavior, whether that had been referred to the Justice Department. And Mr. Posey was told that it had. 

Do any of you have any knowledge as to where that investigation 

is? Has there been an indictment brought? 

Ms. PREUITT. Probably none of us would probably be privy to 

what is happening with that, but I understand there is currently 

no indictment. 

Chairman BACHUS. Thank you. 

Obviously, our staff has investigated this in the past few weeks, 

but we want to continue to work with you to see that your actions, 

which are exemplary and ought to be encouraged by others, that 

what has happened to you, that we try in every way we can to 

right that wrong, because there is also a strong message if that 

doesn’t happen, that others shouldn’t step up. 

And a lot of the testimony by the first panel was, we know about 

this now, and we are going forward. I was encouraged by the Inspector General and some of the acknowledgements, but Ms. 

Preuitt, what is your present situation? Are you with the SEC? 

Ms. PREUITT. I am with the SEC. I am still in the Fort Worth 

office. I still don’t have a staff. My duties are still vague. They have 

currently discussed with me working out some kind of an arrangement where I will report to somebody in another office, and they 

might let one or two people work with me. But that is subject to 

the enforcement—or not—the Associate Director who disciplined 

me in the first place as to whether or not she would let Stanford— 

Chairman BACHUS. And they are still in charge of that office? 

Ms. PREUITT. The head of the office who was noted for retaliating 

against me just recently retired. The Associate Director for Examinations is still there. 

Chairman BACHUS. Who disciplined you? 

Ms. PREUITT. And she has not been disciplined. 

Chairman BACHUS. Has she apologized to you? 

Ms. PREUITT. She has not apologized to me. They still firmly believe that, apparently, that she has not done nothing wrong because not only has she not been disciplined, she was actually elevated. They talked about Mr. di Florio. There is a National Exam 

Program. They created an executive committee for that. And last 

summer, she was put on the executive committee for the National 

Exam Program. 

Chairman BACHUS. Pretty incredible testimony. It is not often 

that we hear of such a devastating failure of regulation and no acknowledgement that they were wrong, that they had treated all 

three of you shabbily. 

I will yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the chairman. 

One of the things that we have been trying to do is ensure that 

we open up the ‘‘People’s House’’ and the ‘‘People’s Congress’’ to 

their participation. 

So we have initiated a ‘‘You Witness’’ question program and people can go online, and they can submit questions for hearings. And 

I think this is going to be—this question that I am going to use 

this morning is our very first question. And it comes from Cassie 

Wilkerson in Austin, Texas. She said, ‘‘My question is to Ms. 

Preuitt. As Allen Stanford’s alleged Ponzi scheme began to rapidly 

36 

grow and it was apparent that losses to the investors would be 

massive, was there ever any conversation with supervisors in your 

department about the impact that this was going to have on the 

investors’ lives and what the SEC’s responsibility is to the investors? If so, whom did you speak with and what was the outcome 

of that conversation?’’ 

Ms. PREUITT. I am thrilled to get to be the first recipient of a 

question that is a novel way. There were many conversations. That 

was a constant nonstop discussion both among the examination 

staff, who truly worried about it tremendously. Those conversations 

with enforcement staff obviously didn’t go very well. 

I many times encouraged them, even if you don’t think we can 

do this at this level, it needs to be elevated to the Commission, and 

let them decide if this is too difficult of a case to follow up on. Because so many investors are being affected, and it is just growing 

rapidly, and there appeared to be no end in sight. 

It was truly a stressful time. But I cannot say how much the examination staff truly cared, and we really tried to find ways to 

make it happen. 

Chairman NEUGEBAUER. And so the culture there was, if we 

couldn’t get a blue ribbon here pretty quick, we just don’t mess 

with it. 

Ms. PREUITT. Yes. To me, I could never really find an acceptable 

reason or answer as to why we weren’t going forward with it. There 

was no reason. There was a variety of different ways that we could 

approach it. And I was actually, I think, considered a pest in enforcement because I was constantly nagging them and pushing 

them forward. And many suggested, ‘‘Why don’t you just drop it? 

This isn’t going to fly.’’ And in case you hadn’t noticed, I am a rather tenacious person and didn’t drop it. 

Chairman NEUGEBAUER. Yes. It is extremely discouraging. I 

guess it begs the question, why have an examination force if you 

are not going to enforce it? 

Mr. Rawl, so, basically, you were in the business—how long have 

you been in the investment advisory business? 

Mr. RAWL. Since 1995. 

Chairman NEUGEBAUER. What were you doing prior to that? 

Mr. RAWL. I was a commercial banker and lender. 

Chairman NEUGEBAUER. I am sorry? 

Mr. RAWL. A commercial banker and lender. I have been in financial services since I got out of college in 1981. 

Chairman NEUGEBAUER. Okay. And so you went to work. Were 

you recruited to come to Stanford? Did they actively recruit you? 

Mr. RAWL. Yes, sir, I was recruited to Stanford. That process 

started in December of 2004. 

Chairman NEUGEBAUER. And what was the arrangement when 

you came to work for them? Did they pay you a bonus to come to 

work for them? 

Mr. RAWL. Yes, sir. As was common in the industry, a fairly 

standard recruiting deal, which included a bonus to come, would be 

given over a period of time, 5 years in my case. I earned different 

bonuses by achieving different levels of success as I brought my 

book of business to the company. This is common in the industry. 

37 

Part of is to make up for what we left behind at the prior firm, 

deferred compensation, etc. And, unfortunately, part of it, in my 

opinion now, is to tie you to the gaining firm. And it creates an incredible conflict of interest for the advisor, particularly where, as 

in our situation, we saw that there was a lot wrong, and yet we 

had an employment contract and we owed money back if we were 

to leave prematurely. 

I hope that this type of practice and this methodology of recruiting advisors, that I said before is common, I hope that it is outlawed because it creates a conflict that is intolerable. That is why 

it was so difficult to leave. We knew we would be sued when we 

left, and we knew we would be sued by a deep-pocketed plaintiff. 

We tried to sit down and pay back a good portion of that money 

which we had saved for that purpose, but, in this case, we could 

never get to the bargaining table. 

Chairman NEUGEBAUER. As I understand it, looking at your testimony, what brought something to your attention that something 

was awry? I think you testified a while ago that you didn’t really 

think that there was a Ponzi scheme that was going on, but you 

were concerned about the returns that were being advertised and 

the returns that were being delivered to your clients, is that right? 

Mr. RAWL. Yes, sir. I was concerned about the advertised returns 

of the traditional managed account program at the broker-dealer. 

I never dreamed that the regulated managed account program, 

that the numbers would not be able to be substantiated. So that 

was one concern. 

But there were many other concerns. And it started, unfortunately, not long after I arrived at Stanford. The advisors were 

called into the manager’s office to talk about these inquiry letters 

the SEC had sent to many new customers of the bank. 

That began a time, over the next couple of years, where I just 

continued, my partner and I as well as other advisors, continued 

to dig up things that didn’t make sense. We didn’t understand the 

way management would handle certain issues we brought to attention. Decisions were made not for good business reasons. We 

learned that certain Treasury regulations were not being followed 

with respect to the investments in the offshore CD. We accumulated a long list of what I call red flags, and these accumulated 

over time. We dug and we dug, and we were known for due diligence, and we didn’t forget. We pressed management. Generally, 

we were dismissed, lied to, covered up. 

Finally, these things became untolerable. My partner, Mark Tidwell, and I both decided that we had to figure out how to leave, 

because we were very concerned about the well-being of our clients. 

So we started— 

Chairman NEUGEBAUER. So here is my final question. With a 

banking background—I was in the banking business for a while, 

and the CD business is a competitive way to attract funds for 

banks and financial institutions. And, the spread was—maybe 

bank ‘‘X’’ was 25 basis points more. Maybe if they were trying to 

really recruit some funds and manage—there might be a 35-, 40- 

basis-points difference. 

But when you look at some of the numbers, how much were the 

spreads over what you could offer your clients a domestic U.S. CD? 

38 

Mr. RAWL. That is a very good question, and it has been the subject of a lot of confusion. 

The CDs did not offer exorbitant returns, themselves. From my 

experience, the CDs were priced at typically 200 or 300 basis points 

above what you could get in the United States. And Stanford had 

a very well-orchestrated answer to that, that did make sense: the 

bank being located in Antigua, domiciled in Antigua, where there 

is no corporate income tax. That is a huge multiplier to the bottom 

line. 

There were a lot of reasons. I feel gullible to some extent, of 

course, for ever going there. But it was a well-orchestrated fraud 

that had been—the bank had been around 25 years. 

And there have been media comments about the CDs and these 

exotic returns. It is not true that the returns were not exotic. It 

was the investments behind them that we have learned were— 

those were the fraudulent returns. 

Chairman NEUGEBAUER. I see my time has expired. 

I yield to the vice chairman of the committee, Mr. Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I appreciate the testimony of all three witnesses. Your testimony 

is incredible, to say the least. 

Ms. Preuitt, I want to associate myself with the laudatory remarks of Mr. Posey earlier. You described yourself, in your opening 

testimony here, as just another examiner at the SEC. I think that 

is rather humble of you. I think that you have set the standard for 

public servants, not just in the Commission, but across all Federal 

agencies, I hope. 

Now, we were led to believe by the previous panel that the SEC 

is working very closely with you to put all of your talents to use 

at the SEC. Is that a fair description of what is going on right now 

in the Fort Worth office and your employment relationship with the 

Commission? 

Ms. PREUITT. They are trying to work with me to make things 

better. However, it seems to be based on the notion, still, that there 

is to be no—not to restore me to my full position that I was before 

and, also, under the notion that they still should not discipline the 

person who inappropriately retaliated against me. 

In doing so, although I may get partially better than where I was 

before, my talents are still very limited. It also sends an incredible 

message to the staff. It says, ‘‘Don’t speak up,’’ and it says ‘‘We will 

tolerate misbehavior on the part of senior management.’’ And as 

long as that is the case, I don’t think that the situation in Fort 

Worth is going to be resolved. 

Mr. FITZPATRICK. Is it true that you were one of the first, if not 

the first to identify the potential of a Ponzi scheme in connection 

with the Stanford investment program? 

Ms. PREUITT. Yes. I was just going through the annual filings, 

and I noticed that it looked impossible, their business model. And 

so I suspected that there had to be a fraudulent scheme. 

Mr. FITZPATRICK. And so you had referred to enforcement on a 

number of occasions, and those referrals were rebuffed, correct? 

Ms. PREUITT. That is correct. 

Mr. FITZPATRICK. Looking back on it, have you made recommendations about ways to better coordinate today and going forVerDate Nov 24 2008 17:24 Aug 25, 2011 Jkt 066868 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\66868.TXT TERRIE
39 

ward between the exam group and the Enforcement Division, at 

least in the Fort Worth office? Have you made those recommendations? And, if so, what has happened? 

Ms. PREUITT. I have not made those recommendations because, 

in many ways, this was not a process issue. This was managers 

who were not being held accountable for poor decision-making. So, 

in that sense, I have grave concerns that a process will not be better. There has to be, instead, a system that holds managers accountable for poor decision-making and for placing their own interests above the needs of the investing public. 

Mr. FITZPATRICK. And was one of those managers, the one who 

retaliated, the same manager who was promoted? 

Ms. PREUITT. Yes. 

Mr. FITZPATRICK. Mr. Rawl, over the course of your employment 

with Stanford, when did you first suspect fraud at the organization? When was that in the timeline? 

Mr. RAWL. In mid-2006, I became suspicious of the literature 

that was designed to promote the registered managed account program at Stanford. It took 9 months to push and push and push 

management to do a study and come back and report on that. And 

on March 28, 2007, management admitted that they could not substantiate the numbers and that there was a problem. That was one 

of those red flags, so to speak. 

Mr. FITZPATRICK. And when did your FINRA arbitration occur? 

Mr. RAWL. We resigned from Stanford in December of 2007, and 

Stanford sued us immediately. And the FINRA arbitration process 

started in January of 2008. 

Mr. FITZPATRICK. And what was the result of your arbitration? 

Mr. RAWL. Unfortunately, there has been no result. We have a 

nice case with—most of our bullet points and charges have been 

proven out, but I think the technical term is that it has been 

‘‘abated.’’ I can’t proceed in our arbitration against Stanford—of 

course, there is nothing to proceed against—but the receiver can 

still proceed against me in the meantime. 

Mr. FITZPATRICK. Were you familiar with this fellow, Barasch, 

who was the head of enforcement at the Fort Worth office while 

you were at Stanford? 

Mr. RAWL. I was not. I certainly knew the name, but I did not 

know him. 

Mr. FITZPATRICK. You had not met him? 

Mr. RAWL. No, sir. 

Mr. FITZPATRICK. Mr. Kauffman, what did employees at the 

Stanford Investment Group, what kind of information or assurances did they give you, as an investor, that your investments 

would be safe? 

Mr. KAUFFMAN. We were told that the investments were insured 

by Lloyd’s of London. We were told that their expenses were less 

since they didn’t have a brick-and-mortar presence in the United 

States, and that made the investment a good investment. 

Mr. FITZPATRICK. Can you describe for the committee how this 

incredible financial loss has affected you and your family? 

Mr. KAUFFMAN. It has been difficult psychologically knowing 

what we have lost, knowing all of the hours I put in. I always 

worked a second job for 31 years. Being a schoolteacher, I had the 

40 

time. And I was proud of the fact that I could put away the funds 

for retirement. 

I didn’t anticipate getting sick, and neither did my wife, but 

when we were slammed with that, as I like to say, the funds that 

would have been there to make it a little bit easier for us were just 

not there. So we have had to cut back, in our expenses and such. 

We don’t eat out that much anymore. 

Mr. FITZPATRICK. Okay. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Posey. 

Mr. POSEY. Mr. Chairman, my microphone doesn’t work. May I 

move down? 

It seems like the SEC has been doing some maintenance on the 

microphone over there. 

Mr. Chairman, I am really sad to say that I expected to get some 

better answers here today. After we heard the last panel, I thought 

we would hear from this panel and it would be encouraging that 

we are on the right track and seeing things going in the right direction. But this is really appalling, to hear what we have heard 

today. The more we hear, the worse it gets. 

And, first of all, on behalf of all my constituents and the others 

who were victimized, before you leave today, I would like to shake 

your hand, Ms. Preuitt. 

And, Mr. Brubaker and Ms. McClure, would you raise your 

hand? 

I want you to get with them, please, before you leave today and 

give them your contact information, because I would like to stay in 

touch with you, just have some idea of what kind of reality goes 

on down in the real world. 

Mr. Chairman, I assume that is okay? With your permission, I 

would like her to feel free to communicate with us—actually, request that she communicate with us, maybe give us a monthly status report, an inside view of what is going on down there. 

I could not possibly have understood your answer correctly. It 

seemed like you said, in response to somebody’s question, that the 

person who trashed you before for trying to do your job is still your 

boss. Tell me that isn’t so. 

Ms. PREUITT. She is not technically my boss. There have been 

times when they have—the person who did retaliate—there were 

two who retaliated against me, the head of the office and the Associate Director. And I was reporting to the head of the office who 

had retaliated against me for the last several years until she retired just last month. 

To get any sort of staff to work with me, to work on projects, 

they are going to have go get the staff from the person who retaliated against me who is still with the Commission. So I am still, 

in some way, subject— 

Mr. POSEY. That is just incredibly hard for me to accept and to 

understand. So, excuse me for being a little bit at a loss for words. 

It seems that SEC management is more interested in protecting 

rotten employees, or too interested in that, at the expense of recognizing or rewarding good behavior. And it seems like it is backward, from this perspective. I don’t know how you could see it otherwise. 

41 

In the real world, people perceive justice is that if somebody 

steals a television set and sells it to somebody else, that when a 

thief is caught, the thief goes to jail. If there were any other bad 

people involved in the process who were culpable, then they have 

some kind of punishment. And then they go recover the TV set, or 

what is left of it, and they give that back to the rightful owner. 

That is just a rough illustration of how I think the public generally perceives justice in the case of a theft. And none of that, Mr. 

Chairman, seems to be working here. None of that seems to translate to this little bit more complex issue we have before us. 

What I wanted to talk about more—and I realize we have time 

constraints, and I am not going to be able to do that—and, at some 

point, maybe if you would like to respond in writing, any of you or 

all of you, what you think would help in the reorganization of the 

SEC, any idea that any of you may have for the reason it has taken 

years to determine whether or not the victims qualify under 

SIPA—I mean the Securities Investor Protection Act. 

I think the investors deserve a timely ‘‘yes’’ or ‘‘no’’ answer: yes, 

to anticipate something good might happen; no, to be able to come 

to grips with the reality that nothing good is going to happen or 

get some closure or to have a grounds challenge the decision, either 

one. But I think just keeping them in the dark year after year is 

just adding insult to injury and totally inexcusable. 

If any of you know—and I would have liked to have heard from 

your panel before the last one—how aggressively we are pursuing 

the recovery of assets and why we are not utilizing the clawback 

efforts that we did with Madoff? 

And, when there are no consequences for bad behavior, it encourages bad behavior. We had a similar case with a life insurance 

company called TRG in Florida. They wrote policies in 49 States, 

Mr. Chairman. They were based in Indiana. They wrote policies in 

every State but their own State because nobody had ever crossed 

State lines to prosecute white-collar insurance fraud before. 

We did that. And to make a long story short, 13 different agencies collaborated over State lines, and those two guys went to prison. And we went from having two dozen companies doing that in 

our State to having none of them doing it. When there are consequences, people behave better. And there is just no evidence that 

there is any consequences for all the bad behavior in the agency. 

So any insight that the three of you may have on that issue, I 

would appreciate that, as well. 

And I thank all of you for appearing here today and sharing your 

insight with us. I am truly sorry for the hardships you have suffered for doing the right thing. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Texas, Mr. Canseco, is recognized 

for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman. 

Mr. Kauffman, I gather you represent the group who is here, 

some of my constituents too. And I congratulate your courage, coming here before this committee. We don’t bite, but we are here to 

listen with you and sympathize with your situation and, hopefully, 

help to solve it. 

42 

Now, if this SIPA were to come across with some funds, is that 

going to help your situation out? 

Mr. KAUFFMAN. Congressman, if SIPA would come to fruition, 

approximately 80 percent of the victims of the Ponzi fraud would 

be made whole. And we would be one of them, yes. 

Mr. CANSECO. Okay. Are you in line in any way with regards to 

the trustee who is handling right now the assets of Stanford? 

Mr. KAUFFMAN. The receiver has about $70 million today. He had $80 million when this started, and he has billed for $70 million. 

Mr. CANSECO. All right. So a lot of that is going into administrative costs of the receivership or trustee, whatever that is. 

Mr. KAUFFMAN. Yes, sir. 

Mr. CANSECO. When it should be really going towards paying all 

of the victims of the Ponzi scheme. Is that correct? 

Mr. KAUFFMAN. Unfortunately, that is true. 

Mr. CANSECO. And do you know the name of the receiver? 

Mr. KAUFFMAN. I believe it is Ralph Janvey. 

Mr. CANSECO. Okay. And do you keep contact with the receiver’s 

office? 

Mr. KAUFFMAN. Not on a personal level. There is a Web site you 

can go to see what is happening. But, no. 

Mr. CANSECO. Is there a procedure in place for making your 

claim with a receiver? 

Mr. KAUFFMAN. There is a procedure, but we haven’t gotten back 

any information. We submitted it originally when this all took 

place. It is so long ago, we just haven’t heard anything. 

Mr. CANSECO. Again, I sympathize with your losses, all of you. 

And I would also welcome you to be in touch with my office and 

see how we can help you. 

Brian O’Shea, would you raise your hand? 

I represent Texas, but I represent all of you too. So please make 

sure and contact us on that. 

Mr. Rawl and Ms. Preuitt, I congratulate you for your bravery. 

I know that you all stuck your necks out, and, to a certain extent, 

it has been chopped. And I regret that happened, and it shouldn’t 

happen. 

Mr. Rawl, you have mentioned that your cases with Stanford and 

the arbitrator have been held in abeyance. Is there a reason for 

that? 

Mr. RAWL. I guess it is kind of pointless to prove Stanford wrong 

in my case. It is already a foregone conclusion. There is much bigger, exciting, more newsworthy cases, namely the Ponzi—the unfortunate Ponzi scheme, than whether I am to prevail in my allegations of fraud against the company. 

But it is still open, and we have had a very valid counterclaim 

and claim. And that is, of course, never to be heard. We would 

never want to take money from the pool of money that would go 

to the victims, in any case. So we would like it to go away. 

Mr. CANSECO. Do you have an opinion as to why FINRA ruled 

the way they did against you? 

Mr. RAWL. Against the previous folks? 

Mr. CANSECO. No, against you. 

Mr. RAWL. FINRA hasn’t ruled. 

43 

Mr. CANSECO. Why they sided with you in this— 

Mr. RAWL. The arbitration process is unfair, and it is biased toward the broker-dealer. The entire process favors the broker-dealer, and there is no doubt about it. 

The private nature should be questioned. And, certainly, if there 

is an arbitration between a registered rep or advisor like me in the 

firm, why should that be kept private? That can be a good red flag 

to the public and give warnings and be a good view into the firm 

to see if there is an inordinate amount of potentially fraudulent 

business practices going on. I think that would be a great way to 

warn the public. 

But we sued in State court. That court case got remanded back 

to the arbitration. And, unfortunately, all that did was keep this 

hushed for a long time. 

Mr. CANSECO. Thank you very much for your bravery. 

Mr. RAWL. Thank you. 

Mr. CANSECO. Ms. Preuitt, is there a reason why you think that 

you are being shut off there in your department? 

Ms. PREUITT. I think that management wants to support management. She was more senior than I. 

Nobody has really, from the Commission, discussed with me 

what all happened, all the events leading up to my removal from 

my position. And if they are basing their decisions mostly on the 

person who retaliated against me, as to whether or not I deserved 

it, it just strikes me as shortsighted, obviously. 

Mr. CANSECO. Again, thank you very much for your bravery, and 

for being a whistleblower. 

I yield back my time. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Louisiana, Mr. Cassidy. 

Mr. CASSIDY. Again, as you all heard me say, first, I congratulate 

you all and I commiserate with you all, on behalf of all those in 

Louisiana who have either benefited or have been penalized, such 

as you, Mr. Kauffman. 

And, again, the theme of our office has been to have an effective, 

transparent, compassionate response. I continue to hear from each 

of you that none of those three measures have been achieved. 

Ms. Preuitt, you sent an investigator down to Houston, and, in 

a half a day, that investigator can sense that this is a Ponzi 

scheme. You are looking at their business model and the stuff that 

they have publicly submitted, and you are saying, this is not for 

real. 

Why was it so complex that the office could not take it? 

Ms. PREUITT. I have never really gotten a good answer to that. 

Many different things were brought up to me, but none of them 

seemed like a really good reason. So I think that the best answer 

we ever could come up with was just that it was going to be difficult. 

Part of the reason that it was going to be difficult was, if you 

wanted to pursue it only as a Ponzi scheme, that would mean actually being able to prove where the money is going. Since much of 

the money went to, supposedly, Antigua and the Antiguan bank refused to give us the records, it was very difficult to track all the 

money. We simply could get no response from them regarding it. 

44 

Mr. CASSIDY. But Mr. Kauffman—and I have heard this before— 

said that a lot of the banks—was it a Memphis bank, Mr. 

Kauffman? 

Mr. KAUFFMAN. Houston. 

Mr. CASSIDY. A lot of the money never left the United States. Did 

the SEC not know that? 

Where was the bank, Mr. Kauffman? 

Mr. KAUFFMAN. Houston. 

Mr. CASSIDY. Houston? I also thought there was also a Tennessee 

bank. 

But, anyway, that said, apparently a lot of the money didn’t—I 

should have asked before the other panel left, but the SEC was 

clueless, or they ignored that, or that seemed incidental? 

Ms. PREUITT. No, the SEC was not aware, because the SEC did 

not get a subpoena to take all the actions that it needed to look 

to see what was happening at the firm. 

Mr. CASSIDY. Okay. What is kind of hanging out there is whether 

Mr. Barasch engaged in criminal activity, whether he was—let’s 

just put it out there. It may not be true, but, certainly, in my mind, 

I am wondering, did Stanford have a protector? 

Mr. Rawl, you got one heck of a resourced, researched statement. 

Now, you mention that Stanford had employed as general counsel 

a former head of the Fort Worth SEC office, Wayne something. Oh, 

looking through the IG’s report, I didn’t see that. I am thinking, 

‘‘Man, Rawl has done a great job.’’ 

And I don’t have his name down here, but, I am sorry, Wayne— 

Mr. RAWL. Wayne Secore. 

Mr. CASSIDY. Did Secore and Barasch have a personal relationship? Do they play golf every Sunday? 

Mr. RAWL. I do not know. 

Mr. CASSIDY. Okay. I just thought I would ask because, again, 

I am sitting here thinking, it appears that Stanford was being protected. Was there something beyond a fear of taking on a complex 

case, which apparently an accountant can figure out in a half an 

hour was something fishy? So I am looking for another reason. 

Mr. RAWL. In my written testimony, you will see that, at the latest days, even weeks before the SEC filed suit, they had problems—their problem was jurisdiction over a bank in Antigua. That 

was one of the excuses that they used. 

But, to be more responsive to your question, there are different 

entities, and the U.S. Government had been investigating different 

things over different periods of time. There are a lot of questions 

as to what might be being covered up. 

Mr. CASSIDY. Okay. And I don’t mean to interrupt, but I don’t 

have much time. So I am going to—again, I have such admiration 

for you. 

The other agents—you mentioned there were about 30 folks over 

time who complained and filed complaints against Stanford. I think 

a lot of people want to know, should their agent have known? Did 

you have a particular position that allowed you to see that the 

business structure was not right? Or should anybody working for 

Stanford have known that? 

And I address that both to you, Ms. Preuitt, and to Mr. Rawl. 

45 

Mr. RAWL. I was a financial advisor. I was not in management. 

I was, once upon a time, fairly well-liked amongst management 

and a lot of people at the firm, so I had friends in all different departments. And those were the folks I gathered intel from over 

time. 

Mr. CASSIDY. So you were a connector. So the person in the front 

office, as in the retail office—somebody walks in and says, ‘‘Hello, 

how are you?’’ I say, ‘‘I am Mr. Smith; I am going to help you 

today’’—that person may not have known, but, rather, your position as a connector kind of gave you that ability. Is that you are 

saying? 

Mr. RAWL. I gained a lot of information because of friendships, 

more than most other advisors. 

Mr. CASSIDY. Okay. 

Now, Ms. Preuitt, again, just to repeat, we heard from the first 

panel a real effort to change the culture of the SEC. What we are 

hearing from you, at least in your experience, is that those efforts 

may not be bearing fruit. 

Ms. PREUITT. I think that many of the efforts they are making 

are certainly of value. But if you really want to get the trust of the 

staff and the trust of the public that you are making changes, then 

you have to make some tough decisions, and one of those is actually holding people accountable for inappropriate behavior. And 

that has not happened in this situation. So, although I applaud 

many of the changes they are trying to make, none of those will 

be of value. 

Mr. CASSIDY. Is it a question of due process? Is the person on administrative leave, or are they, frankly, going scot-free so far? 

Ms. PREUITT. They are not only going scot-free, like I said, they 

have been promoted. Additionally, right after the report came out 

that there was retaliation against me, I understand that both the 

people who retaliated against me received a large bonus. 

Mr. CASSIDY. And can I have one more question, please? 

Mr. Kauffman, I mentioned to the first panel—you are not an attorney, but you are obviously a smart man. You know a heck of a 

lot more about this than I do. So if you can answer this, it is fine, 

but if not, that is okay. 

The Commission is trying to decide whether or not there will be 

SIPA coverage. And you pointed out that, as regards the CD, the 

argument against giving SIPA coverage is that there was an underlying asset, and so it is just that the asset was overvalued, and 

that makes it different than the Madoff case, where there actually 

were no assets. 

But you have pointed out that there was a group of folks who 

sold CDs for whom there was no underlying asset. If you will, that 

is exactly the same as in the Madoff case. 

Is the Commission treating those two sets of ‘‘CD holders’’ differently, i.e., those who had an asset with a fictitious value versus 

those for whom there actually was no underlying asset? 

Mr. KAUFFMAN. There is absolutely a difference in how they are 

treating the two victims. We are being denied the coverage. 

Mr. CASSIDY. You are one of those guys who had no underlying 

asset. Are you also being denied coverage? 

Mr. KAUFFMAN. Yes. 

46 

Mr. CASSIDY. And what is the legal rationale for that? 

Mr. KAUFFMAN. We are waiting for an answer. 

Mr. CASSIDY. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

I just have one follow-up question with Ms. Preuitt. 

So you are in the Fort Worth office, and I believe your title is— 

Ms. PREUITT. My title is Assistant Regional Director. 

Chairman NEUGEBAUER. Where is your boss? 

Ms. PREUITT. In the last couple of weeks, they have now assigned 

me to a supervisor in Denver. 

Chairman NEUGEBAUER. So how is that working? 

Ms. PREUITT. I am obviously—I don’t feel like this is a good resolution. 

Chairman NEUGEBAUER. So, you are in the Fort Worth office, but 

they have just kind of fenced you off. Basically, you don’t have any 

responsibilities in the Fort Worth region at this point in time. 

Ms. PREUITT. Nothing that is defined. I have been searching for 

work and finding projects that I can pitch in on, but, no, I don’t 

have any clearly defined— 

Chairman NEUGEBAUER. And so, what would you say that—how 

do the other employees in that Fort Worth office relate to you? 

Ms. PREUITT. Some have been afraid to relate to me. At least 

one, in particular, after she was noted speaking with me, she then 

was harangued for an hour about, in part, her association with me. 

So some staffers are afraid to deal with me. 

I have had another very dear friend who was—we were so close, 

she was actually there with me when my husband died, some years 

back. We had a very close relationship. And she told me that she 

felt like she was getting pushback for our friendship and has essentially withdrawn her friendship because she felt like it would place 

her in an uncomfortable position at work. 

It has been very difficult, very stressful. 

I do have many supporters, though, and many examiners who 

still seek me out for counsel and who would like to work with me 

if I had supervisory authority and responsibilities again. 

Chairman NEUGEBAUER. Obviously, it doesn’t send a signal that, 

when you find an inequity in the organization, there is reward in 

that, does it? 

Ms. PREUITT. No. No, it doesn’t. And I am proud of what I have 

done. So it is very, very difficult to be treated this way. 

Chairman NEUGEBAUER. This is a great panel. 

I want to just ask any Members—oh, Mr. Cassidy. 

Mr. CASSIDY. Ms. Preuitt, while I was talking, my staff was researching something and just handed this to me, and I just want 

to speak with you. 

This says that you testified at one point—let me see, I am going 

to read this. This is from a blog, and blogs are a little bit, they may 

be true, they may not be true, kind of like Democratic Party press 

releases. 

This says that the first referral by an SEC examiner was sent 

to Barasch in 1998. According to the testimony of Julie Preuitt, 

who authored the request, Barasch declined to investigate after 

discussing the matter with Stanford’s legal counsel at the time, 

former SEC Fort Worth District Administrator Wayne Secore. 

47 

Is that true? 

Ms. PREUITT. I asked Mr. Barasch in—I think it was the summer 

of 2009 why he had never pursued the case, because it was never 

clear to me. And he told me it was that Wayne Secore, who was 

representing Stanford at the time, and had told him that there was 

nothing there. 

Mr. CASSIDY. I did not see that in the IG report. Now, I am not 

criticizing the IG report— 

Ms. PREUITT. It is in the IG report. 

Mr. CASSIDY. It is in the IG report. So I just missed that. Okay. 

Thank you again. 

Chairman NEUGEBAUER. Mr. Canseco? 

Mr. CANSECO. If I may just follow up with one question? 

Chairman NEUGEBAUER. Sure. 

Mr. CANSECO. Ms. Preuitt, was there ever any doubt in your 

mind that the product sold by Stanford was a security? 

Ms. PREUITT. No, I never doubted at all it was a security. I would 

like to say Mr. Stanford liked to just misname things. Because he 

called it a CD didn’t mean it was a CD. Because he called it a bank 

didn’t mean it was a bank. It is sort of like, I have a doghouse in 

the backyard, and instead I believed it was a Ferrari. It doesn’t 

matter how often I went out there, I would never find the ignition 

switch, so— 

Mr. CANSECO. Why was there so much handwringing by FINRA, 

for years, before they actually got involved in this? 

Ms. PREUITT. I have never understood it. I had written up a fair 

amount of information related to why I believed it was a security 

and shared it with the SEC. I don’t know that I ever shared that 

information with FINRA. 

But the reality was, it was not a bank. By Stanford’s own admission, the bank was not behaving any banking activities. So, therefore, it would not meet the definition of a bank under the 1940 Act. 

I also don’t think it would have qualified as a bank underneath 

Federal court cases that had come out that had discussed when a 

CD was a CD or not, and one of them was it had to be from a bank 

under a regulatory regime. 

But the bank was not engaged in any banking activities, so it 

was just—I never understood. It was a play on words. He also said 

they didn’t pay Commissions; he said it was just referral fees. 

Again, it was a nonsensical statement that he was making. And 

why it would cause so much consternation, to me, seemed a small 

interest in pursuing it. It is potential, maybe, that a court would 

take a different view, but that should not stop you from pursuing 

the case. 

Mr. CANSECO. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the panel. It has been a great 

panel. 

I thank the members. 

And the Chair notes that some members may have additional 

questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

48 

This hearing is now adjourned. 

[Whereupon, at 2:20 p.m., the hearing was adjourned.] 

(49) 

A P P E N D I X 

May 13, 2011 

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