```

[Senate Hearing 111-818]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-818

 
OVERSIGHT OF THE SEC INSPECTOR GENERAL'S REPORT ON THE ``INVESTIGATION 
  OF THE SEC'S RESPONSE TO CONCERNS REGARDING ROBERT ALLEN STANFORD'S 
          ALLEGED PONZI SCHEME'' AND IMPROVING SEC PERFORMANCE

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING THE OVERSIGHT OF THE SEC INSPECTOR GENERAL'S REPORT ON THE 
  ``INVESTIGATION OF THE SEC'S RESPONSE TO CONCERNS REGARDING ROBERT 
 ALLEN STANFORD'S ALLEGED PONZI SCHEME'' AND IMPROVING SEC PERFORMANCE

                               __________

                           SEPTEMBER 22, 2010

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                 Available at: http: //www.fdsys.gov /

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                   Dean V. Shahinian, Senior Counsel

                 Levon Bagramian, Legislative Assistant

                Brian Filipowich, Legislative Assistant

              Hester M. Peirce, Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     William Fields, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                     WEDNESDAY, SEPTEMBER 22, 2010

                                                                   Page

Opening statement of Chairman Dodd...............................     1
    Prepared statement...........................................    40

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Vitter...............................................     5
    Senator Hutchison............................................     6
    Senator Johnson
        Prepared statement.......................................    41

                               WITNESSES

H. David Kotz, Inspector General, Securities and Exchange 
  Commission.....................................................     7
    Prepared statement...........................................    41
Robert Khuzami, Director, Division of Enforcement, Securities and 
  Exchange Commission............................................    26
    Prepared statement...........................................    47
    Responses to written questions of:
        Chairman Dodd............................................    59
        Senator Shelby...........................................    63
Carlo V. di Florio, Director, Office of Compliance Inspections 
  and Examinations, Securities and Exchange Commission...........    27
    Prepared statement...........................................    47
    Responses to written questions of:
        Chairman Dodd............................................    59
        Senator Shelby...........................................    63
Rose L. Romero, Regional Director, Fort Worth Regional Office, 
  Securities and Exchange Commission.............................    27
    Prepared statement...........................................    56
    Responses to written questions of:
        Chairman Dodd............................................    67
        Senator Shelby...........................................    69

                                 (iii)

OVERSIGHT OF THE SEC INSPECTOR GENERAL'S REPORT ON THE ``INVESTIGATION 
  OF THE SEC'S RESPONSE TO CONCERNS REGARDING ROBERT ALLEN STANFORD'S 
          ALLEGED PONZI SCHEME'' AND IMPROVING SEC PERFORMANCE

                              ----------                              

                     WEDNESDAY, SEPTEMBER 22, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:13 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher J. Dodd, Chairman of 
the Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The hearing will come to order. Let me first 
of all express my apologies to my colleagues and to our 
witnesses and to those who gathered for being a few minutes 
late getting started. I was just with the National Head Start 
Association, which has a gathering and invited Senator George 
Voinovich and I to address them and we were backed up a little 
late in getting our program going this morning, so I am late 
getting up here and I apologize to everyone.
    I will make some brief opening comments, then I will turn 
to Senator Shelby for any opening comments he may have, and my 
hope is we can go right to our witnesses so we don't delay. 
Obviously, we are a little behind and want to complete the 
hearing if we can by noon. And so if people want to be heard, 
obviously, I always give people the right to express themselves 
on these issues.
    Today is an important hearing. And by the way, let me thank 
my colleagues yesterday, as well. I had a funeral to attend in 
the morning, and I want to apologize to Richard Shelby and the 
others. These things happen, and I understand it was a very 
good hearing on the Infrastructure Bank issue----
    Senator Shelby. It was.
    Chairman Dodd. ----and I am very grateful to Senator 
Merkley and Senator Jack Reed, who chaired the hearing, and my 
colleagues who showed up to participate. Kay, I have been 
talking about you and that Infrastructure Bank idea, and we 
have talked about that possibly pilot program in that San 
Antonio-Dallas-Houston triangle, and so I encourage these 
Members who are going to talk about this--I said, go and see 
you and talk to you about this if you have an interest in the 
subject matter.
    Senator Hutchison. Yes. I very much am interested in doing 
something that would promote infrastructure and private sector 
investments.
    Chairman Dodd. Exactly.
    Senator Hutchison. You started that operation. I think you 
have passed the baton to Senator Kerry, and I attended a 
meeting yesterday----
    Chairman Dodd. Good.
    Senator Hutchison. ----where we talked about some of the 
concerns and parameters.
    Chairman Dodd. How to make it work. Great.
    Well, this morning, this is a hearing, an oversight hearing 
of the SEC's Inspector General's report on the Investigation of 
the SEC's Response to Concerns Regarding Robert Allen 
Stanford's Alleged Ponzi Scheme and Improving SEC Performance.
    And I will mention that Senator Shelby and Senator Vitter 
were two of our colleagues who wanted to see this Committee 
conduct this hearing, and rightfully so, in my view. We have 
new leadership at the SEC, but I think it is very important to 
go back and examine what happened, how did it happen, what is 
presently occurring to minimize this from ever happening again, 
and so it is an opportunity for us to discuss. I am grateful to 
Senator Shelby and Senator Vitter for raising the spectrum of 
this particular question and the hearing this morning is as a 
result of their efforts.
    The Banking Committee today is holding a hearing, as I 
said, on the oversight of the SEC Inspector General's report on 
the Stanford alleged Ponzi scheme. The Committee will review 
the Inspector General's report on the Commission's failure to 
stop the Stanford financial fraud in a timely manner, and we 
will hear about the steps that it has taken to fix the problems 
and restore investor confidence.
    Last August, the Banking Committee held a field hearing on 
the alleged Stanford Financial Group fraud, regulatory and 
oversight concerns, and the need for reform at the request of 
my colleague. Senator Vitter had a hearing in Louisiana. In 
fact, he asked me if he could do that and I agreed to allow him 
to do it. He did a very good job, I might point out, with that 
hearing in Louisiana. It was a very well conducted hearing, 
done in a very responsible manner, and I thank him for that.
    Last year, we held two hearings surrounding the SEC's 
failures in regard to the Bernard Madoff fraud. Those three 
hearings contributed to reforms that we included in the Dodd-
Frank Wall Street Reform and Consumer Protection Act to better 
empower and equip the SEC to do its job.
    Today's hearing builds on those and reflects our work with 
Ranking Member Richard Shelby. The hearing looks not only to 
the past Commission performance, but also to future Commission 
actions for improvement.
    Let me review very quickly this situation. In January of 
2009, the SEC charged Robert Allen Stanford and several 
associates with orchestrating an $8 billion Ponzi scheme. 
According to the SEC's complaint, the defendants for almost 15 
years promised improbably high interest rates and 
misrepresented to purchasers of Certificates of Deposit that 
their deposits were safe, falsely claiming that the bank 
reinvested clients' funds primarily in liquid financial 
instruments.
    Although the Commission examine staff found strong evidence 
that Stanford was likely operating a Ponzi scheme as early as 
1997, the Commission did not bring charges against Mr. Stanford 
until 2009, 12 years later, only months after Bernie Madoff's 
own Ponzi scheme was exposed. Both cases revealed deeply 
troubling failures by the SEC.
    In March of this year, the SEC Office of the Inspector 
General released its report on the Commission's response to 
Stanford's scheme. The report found that a central problem was 
the failure of the SEC Fort Worth District Office Enforcement 
staff to heed the warning of the Examination staff. The IG 
report shows that the examiners at the Fort Worth District 
Office raised red flags about Mr. Stanford's operation in four 
exams conducted over 8 years, beginning in 1997, concluding in 
each examination that Stanford's CDs were likely a Ponzi scheme 
or a similar fraudulent scheme.
    However, the Enforcement staff disregarded the examiners' 
repeated warnings, continually turning a blind eye for nearly a 
decade. We seemed to have an instance in which one side of the 
agency was screaming that there was a fire and the other side 
said that the fire was too hard to put out or that it didn't 
exist. The Inspector General's report found that one reason 
that the Enforcement Division did not want to investigate Mr. 
Stanford was the perception that the case was difficult, novel, 
and not the type favored by the Commission.
    The report also raised a number of troubling facts about 
the former Enforcement head of the Fort Worth Office, who 
played a significant role in multiple decisions over the years 
to quash investigations of Mr. Stanford. All these pieces paint 
a picture of regulatory disconnects and mistakes that allowed 
this fraud to harm families and communities all across our 
Nation.
    So we look forward this morning to learning to what the 
Commission attributes this regulatory shortcoming. Investors in 
Stanford's Ponzi scheme may have lost as much as $8 billion, as 
I mentioned earlier, and the damage to investor confidence, 
obviously you cannot put a number on that as a result of news 
such as this one and the Bernie Madoff scam, as well.
    So I look forward, as my colleagues do, to Inspector 
General Kotz's insights and a discussion of his findings and I 
appreciate the SEC being here with us to let us know what the 
Commission is doing to correct what went wrong. I hope that 
this hearing will provide the Committee, the Senate, and the 
American public with a clear view of how such a large and 
audacious fraud was allowed to perpetuate and to grow and what 
is being done to fix the system and prevent similar frauds in 
the future.
    The Dodd-Frank bill was one step in a long journey to 
righting this ship, giving the SEC more power, doubling its 
funding over 5 years, and having periodic GAO reviews. But our 
work is obviously not done. The Inspector General's report also 
makes several thoughtful recommendations regarding bringing 
enforcement actions in complex cases, evaluating the 
performance of the Enforcement staff, coordination among SEC 
offices and divisions, staff training, and other matters. 
Investors deserve to know there is a cop on the beat working 
hard to protect them from the scam artists like Robert Allen 
Stanford and Bernie Madoff.
    Restoring investor confidence and certainty in the fairness 
of our financial system is vitally important as we recover from 
this economic crisis. The SEC should use all of its resources 
at its disposal to work toward that end.
    Let me also say very quickly, before I turn to Senator 
Shelby, because I always think it is important to make this 
point, obviously we are going to talk about an office in Fort 
Worth. We are going to talk about some people even here in 
Washington who should have done a better job. But I always 
think it is important in moments like this to also point out 
and recognize that there are thousands of people who work in 
the SEC who do an incredible job every day, and I don't want a 
hearing like this, where we focus on the misfeasance or 
malfeasance even of some to contaminate the hard work done by 
others who do a good job every day.
    So even though our remarks are tough and the questions will 
be tough this morning about what happened here, I want also the 
employees who are not in this room but work for the SEC to know 
how much we appreciate how hard they work every day and how 
determined they are to do a good job for our country. And so I 
want our opening remarks to reflect those attitudes, as well, 
as we go forward.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you very 
much for holding this hearing.
    The Stanford case, as you have pointed out, represents a 
major failure by the Securities and Exchange Commission in 
carrying out its investor protection mandate. Investors, as you 
have pointed out, were defrauded of billions of dollars and 
thousands of victims have had their lives shattered as a 
result. One of those victims from my home State of Alabama, 
Craig Nelson, testified at last August's field hearing on the 
Stanford case that you referenced Senator Vitter presided over.
    We now know that Allen Stanford openly flaunted the money 
that he stole from his victims. He used it to buy part of a 
Caribbean island, to bribe foreign securities regulators, and 
fund sporting events. His victims deserve to know how this 
could have happened, hence this hearing.
    Last October, Senator Vitter and I sent a letter to the 
Inspector General of the SEC asking him to supplement the 
limited review that had been conducted of the SEC's record in 
the Stanford matter. We asked him to look into, among other 
things, the history of the SEC's oversight of Stanford. What we 
learned was extremely disturbing.
    The IG's findings, which we will get into later here today, 
indicate that the SEC produced reports, as Senator Dodd pointed 
out, in 1997, 1998, 2002, and 2004 that determined that fraud 
was occurring at Stanford. Further, the IG found that 
enforcement action was not taken following the findings, even 
though the Examination staff repeatedly requested that the 
Enforcement staff pursue such action at the SEC. Finally, the 
Inspector General found that a particular member of the 
Enforcement staff involved in making the determination not to 
pursue enforcement action later sought employment with 
Stanford.
    Ultimately, it was not until after the Madoff Ponzi scheme 
was uncovered that any action was taken in the Stanford case, 
despite all these warnings. In the end, SEC inaction allowed 
the fraud to grow larger and swallow the life savings of 
numerous additional victims.
    I believe that the SEC's gross negligence with respect to 
the handling of the Stanford case involves even more 
significant failures than were present in the Madoff fraud in 
some ways. In contrast to Madoff, where the SEC's examiners did 
not find fraud, in the Stanford case, give them credit. The 
SEC's examiners were not only aware of the fraud, they 
prevailed upon the Enforcement Division in the SEC to take 
action and they refused.
    The findings of the SEC's gross negligence in the IG's 
report are not the only troubling aspect of the SEC's conduct 
in the Stanford case. The Securities and Exchange Commission 
chose to release the report in the height of Congressional 
action on regulatory reform and on the very same day that it 
announced its decision to pursue charges against Goldman Sachs. 
Think about it. In many ways, it appears that the timing of the 
release was intended to draw the least amount of scrutiny to 
the SEC for their failures.
    Today, we will hear from the SEC Inspector General, the 
heads of the SEC's Examination and Enforcement programs, and 
the head of the Fort Worth Office. I believe that this should 
mark just the beginning of our review of this troublesome 
episode. We need to know exactly why evidence of fraud was not 
more thoroughly pursued. We need to know who was involved in 
reviewing this evidence and why they failed to connect the 
dots. Moreover, we need to examine the Commission's general 
response to these findings so that we can be sure that 
corrective measures are being taken to prevent a repeat of 
these institutional failures. Otherwise, we will go down the 
road again.
    Senator Dodd, I appreciate again you holding this hearing 
and look forward to the Inspector General.
    Chairman Dodd. Thank you, Senator, very, very much.
    I mentioned, David, before you came in that you had a very 
good hearing in Louisiana, back 6 months ago, 7 months ago, 
whenever it was, and I thank you for that and thank Senator 
Shelby.
    Unless someone would like to be heard, I am going to go 
right to our witness. Yes, certainly, go ahead.

               STATEMENT OF SENATOR DAVID VITTER

    Senator Vitter. I won't take long, Mr. Chairman, but very 
briefly, first of all, thank you and thanks to the Ranking 
Member for all of your help to me and all of your leadership on 
this. This is a very important matter to me for an unfortunate 
reason, because so many victims live in Louisiana, and you all 
have been extremely supportive in helping us follow up on this, 
including that field hearing in Louisiana, including this 
hearing today.
    I completely concur with your comments and Senator Shelby's 
comments. This isn't just one major disappointing scandal. It 
is really three. It is the original Stanford Ponzi scheme 
fraud, which is horrible and created so many victims, including 
so many in Louisiana. On top of that, it is the inaction by the 
SEC, which I think is absolutely scandalous now that we are 
finally discovering all of the facts. And on top of that, 
number three is this conscious effort that Senator Shelby 
alluded to of the SEC to cover its tracks, to basically try to 
rewrite history in terms of when it knew about the problem.
    So this is very disappointing and very frustrating and we 
have to ensure that this doesn't happen again. We also have to 
do everything possible to properly handle the ongoing issues 
with the Stanford victims.
    So thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Hutchison. Mr. Chairman, could I just----
    Chairman Dodd. Yes, certainly, Senator Hutchison.

           STATEMENT OF SENATOR KAY BAILEY HUTCHISON

    Senator Hutchison. I won't belabor this long, but I also 
want to add that so many of my constituents in Texas were 
victims. Reading the IG report, it is stunning. It is stunning, 
the times that the SEC had notice both from the Texas 
Securities Board and from internal reports from within the SEC 
at the field office, and yet years went on.
    And so I thank you for holding this hearing. I hope that 
with the IG report, we will be able to assure that there are 
systems in place at the SEC that will eliminate this in the 
future and go forward so that people can have confidence in 
their investments with someone as big as Mr. Stanford. Thank 
you.
    Chairman Dodd. I appreciate that.
    Senator Johnson. Mr. Chairman?
    Chairman Dodd. Senator Johnson.
    Senator Johnson. May I submit my statement.
    Chairman Dodd. Certainly. By the way, any opening 
statements that all of our colleagues have and any other data 
or information will be included.
    Let me just say, as well, as we will hear obviously from 
our witnesses, and I suspect that we did some things in the 
financial reform bill that we enacted, but as I indicated, I 
think there are a lot of other areas where it may require some 
legislative action, and that will be the job for Tim Johnson 
and Richard Shelby and Members of this Committee. Jim Bunning 
and I won't be here to be a part of it, but I suspect you have 
got some----
    [Laughter.]
    Chairman Dodd. No, no. Well, I will regret not being here. 
I have enjoyed my work with my colleagues immensely, but I 
think there are some areas here that we didn't include and 
cover in our legislation that may warrant some legislative 
action. I will leave that to others to make the determination, 
Tim and Richard in the coming months.
    But this morning, I want to introduce briefly our Inspector 
General--and I will also just take a minute and introduce all 
of the second panel, as well, and then we will get just right 
to it.
    David Kotz has served as the Inspector General for the SEC 
since December of 2007. He leads a very distinguished team of 
auditors, investigators, administrative staff in the Office of 
the Inspector General's efforts to uphold the effectiveness, 
efficiency, and integrity of the SEC. He has testified before 
this Committee last September, in fact, in our hearing on the 
oversight of the SEC's failure to identify the Bernard Madoff 
Ponzi scheme and how to improve SEC performance, and we thank 
you very much for being back before us again today.
    Robert Khuzami is the Director of the Division of 
Enforcement of the U.S. Securities and Exchange Commission. He 
joined the staff in February of 2009, and as Director, Mr. 
Khuzami is responsible for the civil law enforcement efforts of 
more than 1,200 SEC personnel located in 12 offices around the 
country. Previously, he worked as General Counsel for the 
Americas for Deutsche Bank, and before that served as a Federal 
prosecutor. He also testified before the Committee last 
September.
    Carlo V. di Florio became the Director of the Office of 
Compliance Inspections and Examinations at the SEC in January 
of 2010. Prior to joining the Commission, Mr. di Florio was 
partner in the Financial Services Regulatory Practice at 
PriceWaterhouse Coopers, with expertise in corporate 
governance, enterprise risk management, and regulatory 
compliance and ethics.
    Rose Romero has been the Regional Director for the Fort 
Worth District Office of the SEC since March of 2006. In that 
role, she oversees the enforcement and examination programs for 
the region. Prior to joining the SEC staff, Ms. Romero was the 
Executive Assistant United States Attorney for the Northern 
District of Texas. She testified representing the SEC at the 
Banking Committee's hearing last August on the alleged Stanford 
Financial Group fraud. That was the hearing, David, I think, in 
Louisiana that Ms. Romero testified.
    So we welcome the witnesses this morning, all of you, and 
again, David, we will begin with your testimony. And again, any 
data and information that you and the rest of the witnesses 
have will be included in the record. I will just make a blanket 
acceptance of any documentation you would like for us to have 
on this oversight hearing. With that, the floor is yours.

 STATEMENT OF H. DAVID KOTZ, INSPECTOR GENERAL, SECURITIES AND 
                      EXCHANGE COMMISSION

    Mr. Kotz. Thank you. Good morning. Thank you for the 
opportunity to testify before this Committee today on the 
subject of the SEC Inspector General's report on the SEC 
response to Robert Allen Stanford's alleged Ponzi scheme. I 
appreciate the interest of the Chairman, the Ranking Member, as 
well as the other Members of the Committee and the SEC and the 
Office of Inspector General.
    In my testimony today, I am representing the Office of 
Inspector General and the views that I express are those of my 
office. They do not necessarily reflect the views of the 
Commission or any Commissioners.
    I would like to begin my remarks this morning by briefly 
discussing the role of my office and the oversight efforts we 
have undertaken. The Office of Inspector General has staff in 
two major areas, audits and investigations. Over the past 2\1/
2\ years since I became the Inspector General of the SEC, my 
office has issued numerous audit reports involving matters 
critical to SEC programs and operations, as well as the 
investing public, including an examination of the Commission's 
oversight of Bear Stearns and the factors that led to its 
collapse, an audit of the SEC Division of Enforcement's 
practices related to naked short-selling, complaints and 
referrals, a review of the SEC's bounty program for 
whistleblowers, and an analysis of the SEC's oversight of 
credit rating agencies.
    My office's Investigative Unit has also issued numerous 
investigative reports regarding the failures by the SEC 
Enforcement Division to pursue investigations vigorously or in 
a timely manner, improper securities trading by Commission 
employees, whistleblower allegations of contract fraud, 
preferential treatment given to prominent persons, and 
retaliatory termination.
    In August 2009, we issued a 457-page report of 
investigation analyzing the reasons why the SEC failed to 
uncover Bernard Madoff's $50 billion Ponzi scheme.
    On October 9, 2009, I received a letter from the Ranking 
Member of this Committee, the Honorable Richard Shelby, and the 
Honorable David Vitter, requesting a comprehensive 
investigation of the handling of the SEC's investigations and 
examinations into Robert Allen Stanford and his various 
companies. Very shortly thereafter, on October 13, 2009, we 
opened our investigation.
    As part of this effort, we made numerous requests to the 
SEC's Office of Information Technology for the e-mails of 
current and former SEC employees for times pertinent to the 
investigation. The Office of Information Technology provided e-
mails for a total of 42 current and former SEC employees for 
time periods ranging from 1997 to 2009. We estimate that we 
obtained and searched over 2.7 million e-mails during the 
course of our investigation.
    In addition, we sent comprehensive document requests to 
Enforcement and the SEC's Office of Compliance Inspections and 
Examinations, own as OCIE, specifying the documents and records 
we required to be produced for the investigation. We also 
sought documents from FINRA, including documents concerning 
communications between FINRA or its predecessor, the NASD, and 
the SEC concerning Stanford. We carefully reviewed and analyzed 
the information received as a result of our requests.
    We also conducted 51 testimonies and interviews of 48 
individuals with knowledge of facts or circumstances 
surrounding the SEC's examinations and/or investigations of 
Stanford and his firms. I personally led the questioning and 
the testimony interviews the witnesses in this investigation.
    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. 
Our investigation determined that the SEC's Fort Worth Office 
was aware since 1997 that Robert Allen Stanford was likely 
operating a Ponzi scheme, having come to that conclusion a mere 
2 years after Stanford Group Company, Stanford's investment 
advisor, registered with the SEC.
    We found that over the next 8 years, the SEC's Fort Worth 
Office conducted four examinations of Stanford's operations, 
finding in each examination that the CDs Stanford was promoting 
could not have been legitimate and it was highly unlikely that 
the returns Stanford claimed to generate could have been 
achieved with the purported conservative investment approach 
utilized. The SEC's Fort Worth examiners conducted examinations 
of Stanford in 1997, 1998, 2002, and 2004, concluding in each 
instance that Stanford's CDs were likely a Ponzi or similar 
scheme. The only significant difference in the Examination 
Group findings over the years was that the potential fraud was 
growing exponentially, from $250 million to $1.5 billion.
    The Fort Worth Examination Group made multiple efforts 
after each examination to convince the Enforcement Group to 
open and conduct an investigation of Stanford. However, we 
found that the Enforcement Group made no meaningful effort to 
investigate the potential fraud until late 2005.
    In 1998, the Enforcement Group opened a brief inquiry, but 
closed it after only 3 months when Stanford failed to produce 
documents evidencing the fraud in response to a voluntary 
document request. In 2002, no investigation was opened, even 
after the examiner specifically identified multiple violations 
of securities laws by Stanford. In 2003, after receiving three 
separate complaints about Stanford's operations, the 
Enforcement Group decided not to open up an investigation or 
even an inquiry and did not follow up on the complaints.
    In late 2005, after a change in leadership in the 
Enforcement Group and in response to continuing pleas by the 
examiners, who had been watching the potential fraud grow in 
examination after examination, the Enforcement Group finally 
agreed to seek a formal order from the Commission to 
investigate Stanford. However, even at that time, the 
Enforcement Group missed an opportunity to recommend an action 
against Stanford Group Company, or SGC, for its admitted 
failure to conduct any due diligence regarding Stanford's 
investment portfolio, which could have potentially halted the 
sales of the Stanford International Bank CDs through the SGC 
Investment Advisor and would have provided investors and 
prospective investors with notice that the SEC considered SGC's 
sales of the CDs to be fraudulent. We found that this 
particular action was not considered partially because the new 
head of the Enforcement Group in Fort Worth was not aware of 
the findings of the investment advisors' examinations in 1998 
and 2002, or even that SGC had registered with the SEC as an 
investment advisor, a fact she learned for the first time 
during our investigation in January of 2010.
    We did not find that the reluctance of the Enforcement 
Group to investigate Stanford was related to any improper 
professional, social, or financial relationship on the part of 
any current or former SEC employee. We did find evidence, 
however, that SEC-wide institutional influence within the 
Enforcement Group factored into its repeated decisions not to 
undertake an investigation of Stanford, notwithstanding staff 
awareness that the potential fraud was growing.
    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. As a result, cases 
like Stanford, which were not considered quick-hit or slam-dunk 
cases, were not encouraged.
    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 Ethics Office that it 
was improper for him to do so.
    In summary, our report concluded that the SEC's Fort Worth 
Office was aware since 1997 that Stanford was likely operating 
a Ponzi scheme after conducting examination after examination 
for a period of 8 years, but merely watched the alleged fraud 
grow and failed to take any action to stop it.
    We provided our report to the Chairman of the SEC on March 
31, 2010, with the recommendations that the Chairman review its 
findings and share with Enforcement management the portions of 
the report that related to the performance failures by 
employees who still work at the SEC so that appropriate action 
would be taken.
    We also made the following specific recommendations to 
improve operations within the SEC. One, that Enforcement ensure 
that the potential harm to investors if no action is taken is 
considered as a factor when deciding whether to recommend an 
enforcement action.
    Two, that Enforcement emphasize the significance of 
bringing cases that are difficult but important to the 
protection of investors in evaluating the performance of an 
Enforcement staff member or a regional office.
    Three, that Enforcement consider the significance or the 
presence or absence of United States investors in determining 
whether to open an investigation or recommend an enforcement 
action that otherwise meets jurisdictional requirements.
    Four, that there be improved coordination between 
Enforcement and OCIE on investigations, particularly those 
initiated by an OCIE referral to Enforcement.
    Five, that Enforcement reevaluate the factors utilized to 
determine when referral of a matter to State securities 
regulators in lieu of an SEC investigation is appropriate.
    Six, that there be additional training of Enforcement staff 
to strengthen their understanding of the laws governing broker-
dealers and investment advisors.
    And seven, that Enforcement emphasize the need to 
coordinate with the Office of International Affairs and the 
Division of Risk, Strategy, and Financial Innovation as 
appropriate early in the course of the investigation.
    My office is committed to following up on all the 
recommendations made in our Stanford report to ensure that 
there are appropriate changes and improvements in the SEC's 
operations. We are aware that many improvements have already 
been undertaken under the direction of Chairman Schapiro and 
Enforcement Director Khuzami as a result of the findings and 
many recommendations arising from our Madoff investigation. We 
also understand that Enforcement has initiated actions on our 
Stanford recommendations and are confident that the SEC will 
take the appropriate steps to implement our recommendations and 
ensure that fundamental changes are made in the SEC's 
operations to remedy the errors and failings we found in our 
investigation.
    I appreciate the interest of the Chairman, the Ranking 
Member, and the Committee in the SEC and my office, and in 
particular in the facts and circumstances pertinent to our 
Stanford report. I believe that the Committee's and Congress's 
continued involvement with the SEC is helpful to strengthen the 
accountability and effectiveness of the Commission. Thank you.
    Chairman Dodd. Thank you very much, Mr. Kotz. I appreciate 
that very much.
    Let me ask the clerk, why don't you put on 7 minutes here? 
We do not have a full complement here. That will give people a 
chance at least to get a couple of questions in as we try and 
move along.
    Some of the questions I have you anticipated to some degree 
in your comments, but I want to pursue a couple of them in a 
little more detail, if I can, anyway. The SEC brought its 
action against Stanford 12 years--12 years--after the first 
reports from examiners that he was likely operating a Ponzi 
scheme, a conclusion that examiners reached on four separate 
occasions. Again, Senator Shelby emphasized this point. I think 
a good point he made, that unlike the Madoff issue, here you 
actually had examiners--Madoff, there were reports from 
individuals to the SEC that they thought something was wrong, 
but as I recall, it was nothing within the SEC itself--not to 
excuse that behavior but, nonetheless--but in this case, here 
you had four occasions of examiners over a 12-year period 
making those reports. And then, of course, immediately after--2 
months after Madoff confessed to law enforcement officials that 
he was running a $50 billion scheme, you ended up with the SEC 
acting.
    So my question obviously comes: Had Madoff not confessed, 
in your view, as you looked over these materials now and raised 
awareness about Ponzi schemes, would the Commission have 
brought this case against Stanford, in your view?
    Mr. Kotz. I certainly think that there was a connection. I 
mean, the SEC was investigating Stanford----
    Chairman Dodd. Please turn on your mic.
    Mr. Kotz. Yes, I certainly think there was a connection. I 
mean, the SEC was investigating Stanford prior to the Madoff 
confession. However, they were sort of at a standstill at that 
point. But I think the dynamic shifted in the SEC when Madoff 
confessed.
    As I talked about in my testimony, there was a feeling that 
you did not want to bring a novel or complex case. You wanted 
to bring the quick-hit, slam-dunk case. And you might be 
criticized if you came up with something that was difficult. 
And because Stanford had international issues, it was a more 
complicated case.
    But after Madoff confessed, at that point the dynamic 
shifted, and at that point, if you were holding onto a 
potential Ponzi scheme case that you did not bring, you would 
be criticized more for that than you would if you brought forth 
a complicated case. So I do think it had an impact in that way.
    Now, certainly they were investigating it. They started 
finally--after many years of the examiners pushing, they 
finally started investigating in late 2005. They were moving 
forward with the investigation. The Department of Justice asked 
them to hold off because the Department of Justice was 
conducting a criminal investigation. But when Madoff hit, they 
went to the Department of Justice and essentially said, ``We 
are not holding off anymore. We are going forward. We cannot 
have a case going on in our midst that relates to a Ponzi 
scheme that we are not bringing.''
    So there was certainly----
    Chairman Dodd. So let me just--in your opinion, then, in 
the absence of the Madoff confession, we might have then gone a 
longer time before the Stanford case went forward.
    Mr. Kotz. Right. I mean, I think it probably would have 
been eventually brought anyway, but there was a clear urgency 
at that point.
    Chairman Dodd. Let me ask you, if I can--obviously, we know 
about the troubles in the SEC's Fort Worth district office 
regarding suspicions about Stanford's operations, but let me 
ask you this: Do you believe that the Commissioner staff of the 
SEC's Washington office should or could have done more to bring 
an end to this fraud?
    Mr. Kotz. This was a matter that really was not raised with 
Washington. I mean, it is interesting because----
    Chairman Dodd. They were not aware of this at all?
    Mr. Kotz. Not really, no. I mean, the offices are, you 
know, relatively independent. They work on matters themselves. 
Certainly at a certain point in time in late 2005, when they 
finally decided to bring the action, they have to go the 
Commission and----
    Chairman Dodd. In 1997, 1998, nothing managed to make way 
up to the Washington office that something was going on down 
there?
    Mr. Kotz. No. There is no evidence that anyone in the 
Washington office knew about the examinations that occurred in 
1997, 1998, 2002, 2004, until the formal order was made.
    Chairman Dodd. Let me go back, if I can, on this point on 
stats and easy cases, as you point out. Your report--and I am 
quoting from it here--says, ``SEC-wide institutional influence 
within the enforcement did factor into repeated decisions not 
to undertake a full and thorough investigation of Stanford, 
notwithstanding staff awareness that the potential fraud was 
growing. We found''--speaking of your report--``that senior 
Fort Worth officials perceived that they were being judged on 
the numbers of cases they brought, so-called ``stats,'' and 
communicated to the enforcement staff that novel or complex 
cases were disfavored. As a result, cases like Stanford were 
not considered quick-hit or slam-dunk.''
    Have you looked beyond this matter? I mean, if that is the 
case, were there other matters that are now showing up 
nationwide that were ``novel or more complex cases,'' that 
recommendations made by enforcement officers that were not 
brought because they were novel or complex and did not fit into 
the--what did you call it?--the slam-dunk or quick-hit? It 
seems to me like this was not sort of a narrow path between 
enforcement and Fort Worth. It sounds like it was a nationwide 
issue. And to what extent have you looked at or has the IG's 
office looked at other offices around the country to determine 
whether or not matters are lingering out there such as this?
    Mr. Kotz. Well, we have not done sort of a broad audit of 
the matter, but, I mean, certainly it was--there was a 
competition between the regional offices to see who could get 
the best numbers, and the Fort Worth office was very proud of 
the fact that their numbers were very high, and so it was 
something that was not limited to just Fort Worth at that time.
    Now, I think that things have changed somewhat and there 
have been efforts by Director Khuzami to move away from that--
--
    Chairman Dodd. Some what have changed?
    Mr. Kotz. Well, I think that there have been efforts made--
and he can certainly talk about it more than me--to change that 
perception, for example, to change the evaluations of senior 
officials so they are not evaluated on the numbers of cases 
they brought. But I do think it takes time to change that 
culture. When you have such an embedded culture in an agency, 
you know, that you want to just bring--you want to show how 
many cases you brought--I mean, there was a conversation, a 
speech made by a former SEC person who said that, you know, 
Worldcom was one, Enron was one. You know, those were only 
counted as one case, and yet obviously they are very important, 
significant cases. And there are ways where you can bring a lot 
of little cases and get your numbers up. So it is a matter of 
great concern, and I do think that it went beyond the Fort 
Worth office.
    Chairman Dodd. Well, I will be anxious to hear from Mr. 
Khuzami what steps have been taken. You mentioned March 2010, 
the recommendations. But, clearly, I hope there is going to be 
some examination beyond this. I hate to think we are having 
these hearings repeatedly as matters surface later on and we 
find out these were not one-off, but this was more of a broader 
problem. That is what I am getting at.
    Mr. Kotz. Right.
    Chairman Dodd. You do not seem to have any indication, or 
at least you do not believe there is any broader problems that 
we ought to be paying attention to.
    Mr. Kotz. We are not aware of any specific cases. You know, 
it is sort of hard to know what cases were not brought. But, I 
mean, I think it is something to----
    Chairman Dodd. Examiners, have the examiners, has anyone 
been talking to examiners around the country to find out 
whether or not there were similar problems anyplace else?
    Mr. Kotz. Well, I do think that the examiners--we have had 
discussions with the new head of the examination----
    Chairman Dodd. What about the old ones? I know the new ones 
are OK, but tell me about the old ones. Has anyone brought them 
in and said, ``Did you have problems anywhere else in the 
country besides Fort Worth?''
    Mr. Kotz. Yes, I am not aware specifically that has been--
--
    Chairman Dodd. Why didn't we do that?
    Mr. Kotz. I do not know. I think that you could talk to the 
head----
    Chairman Dodd. Yes, but you are the IG. You are the guys 
who did the report. Did you ask them whether or not--were there 
any problems like this anywhere else in the country we ought to 
be aware of?
    Mr. Kotz. Yes, I mean, I think that generally there are 
some instances where there are frustrations on the part of 
examiners, but that is something that, you know, can be looked 
at certainly on a broader level. We could interview examiners 
all over the country.
    Chairman Dodd. Well, I would hope so. It seems to me that, 
otherwise, you are having a bunch of quick-hit stat kind of 
approach--and it was not just the Fort Worth office. This was 
sort of a systemwide approach. Then to what extent were 
examiners frustrated in other parts of the country on matters 
that were ``novel or more complex'' that may have involved a 
lot more damage than the small cases? I presume the quick-hit, 
stat numbers are that small insider trading piece or something. 
I do not want to minimize the problem, but it seems to me in 
the context of the damage done.
    Mr. Kotz. Right. I mean, our recommendation was that they 
should consider the amount of investors that was affected, 
because you can have a small matter that affected five 
investors, or you can have a complicated matter that affected 
millions.
    Chairman Dodd. Right. Others may have similar point, but I 
hope you might go back. I would like to know the answer to 
whether or not from examiners they had any other areas around 
the country where they felt frustrated about conclusions they 
were drawing and the reluctance either on the regional office 
or in the national office to respond to those requests.
    Mr. Kotz. Absolutely.
    Chairman Dodd. All right. I have gone over my time. I 
apologize. I have several more questions, but let me turn to 
Senator Shelby.
    Senator Shelby. Thank you, Senator Dodd.
    I want to pick up on the area Senator Dodd was in, Mr. 
Inspector General. Where was the SEC Enforcement Division? You 
talked about there were recommendations made in the Stanford 
case on, what, four or five occasions?
    Mr. Kotz. Yes.
    Senator Shelby. And they ignored it, basically. Was it the 
atmosphere there or the working conditions, as you indicated, 
for--in the metric area, how many cases we could have, we could 
get the easy ones, but the difficult ones, the big ones, gosh, 
they were tough, they were strong. But that is where the big 
frauds are.
    Mr. Kotz. Right.
    Senator Shelby. Where was the leadership of the Enforcement 
Division not just in Fort Worth but at the SEC here? Because it 
came from here. It had to. Where were the--and are those same 
people still in Enforcement?
    Mr. Kotz. Yes, well, I mean, certainly----
    Senator Shelby. And if so, why? Why are they still there?
    Mr. Kotz. Certainly in Fort Worth, the head of Enforcement 
and to some extent the head of the Fort Worth office very much 
believed in this metrics approach, and they certainly perceived 
that the Enforcement Division in Washington thought that 
approach was important because, as I said----
    Senator Shelby. Were they counting beans? In other words, 
they wanted to count how many cases they had, they had solved, 
but in the scheme of things, they were small cases compared to 
Madoff and the case in hand, Stanford, involving billions of 
dollars.
    Mr. Kotz. Right.
    Senator Shelby. Were they not competent enough or were they 
afraid of something this big? Or was it leadership from 
Washington? Leadership had to come from the SEC here to Fort 
Worth or to New York or to Los Angeles, or wherever else.
    Mr. Kotz. Right. I mean, certainly the fact that the Fort 
Worth office thought it was being sort of graded on how many 
cases it brought, that came from Washington, because that is 
the way they would look at the offices and determine how good a 
job they are doing.
    Senator Shelby. And when they were talking about how many 
cases, did they look into the substance? Just to use an analogy 
to criminal cases, were they speeding cases or reckless driving 
as opposed to fraud, murder, robbery, and so forth? In other 
words, were these statistically minor cases compared to 
complicated cases?
    Mr. Kotz. Right. I mean, I think probably many of them were 
more minor cases because, obviously, it is easier to do a minor 
case quicker. You know, they had decisions to make about 
resources, and they did not want to use the resources on 
Stanford because it would take a long time to get a case. And 
so they could have people working on it for a year and not have 
a stat to show for it in that whole year. Well, if they worked 
on other cases----
    Senator Shelby. But that is no way to do business, is it?
    Mr. Kotz. Absolutely.
    Senator Shelby. And what did you say in your report about 
doing this instead of substance, which they should have gone 
after, statistical stuff?
    Mr. Kotz. Right. I mean, you know, we----
    Senator Shelby. What did you say in your report, you, the 
Inspector General?
    Mr. Kotz. We said that it is inappropriate to act that way 
and that that is not the responsibility of the SEC. The SEC's 
responsibility is with respect to investors. There were 
investors out there who were getting hurt. The examiners knew 
that they were getting hurt. Even the enforcement folks knew 
that they were getting hurt. In fact, some of the enforcement 
folks we talked to said, ``Oh, we thought that it was a Ponzi 
scheme.'' So, I mean, they were sitting there watching a 
potential Ponzi scheme go on, but making decisions, you know, 
for their own betterment of stats and not looking into it and 
not taking appropriate action. It is outrageous.
    Senator Shelby. Well, any way you look at it, this is a 
colossal failure of the SEC. I mean, let us be honest. You are 
the Inspector General. This is a colossal failure to do their 
job. And why was the SEC set up? To protect the investor. Is 
that right?
    Mr. Kotz. Right.
    Senator Shelby. So they failed big time in protecting the 
investor in both the Madoff and in the current Stanford case. 
And in the Stanford case, as Senator Dodd says, they had all 
these warnings from their own staff.
    Mr. Kotz. Yes.
    Senator Shelby. Did the people in enforcement in Fort 
Worth--I mean, when the examiners recommended things, brought 
it to the attention of enforcement, did the people in 
enforcement in the regional area--when they did not do 
anything, did the examiners take it further up? Is there a 
chain of command they could have brought this right to somebody 
like you or somebody in Washington? What the heck is going on 
here? Is this a cover-up? It is obviously gross negligence if 
not a cover-up and a failure of leadership.
    Mr. Kotz. Right. I mean, they did not take it----
    Senator Shelby. Is it not?
    Mr. Kotz. Yes, absolutely. They did not take it to our 
office or Washington, but they did take it up the chain. And 
finally they were able to convince the enforcement group in 
Fort Worth to bring it because there was a new head of 
enforcement, and they went to that person and lobbied, and 
there were memos back and forth and great efforts by the 
examiners to convince this new leader, and this new leader 
finally agreed to open the investigation.
    Senator Shelby. These people that I mentioned, whoever they 
are, are they still working in enforcement after such a failure 
like this? And if so, why?
    Mr. Kotz. Well, many of the people are different. The head 
of the Fort Worth office has changed since then. The head of 
enforcement in the Fort Worth office has changed since then. 
Some of the line people are still there, and, you know, in our 
report, we recommended that the SEC look to see if disciplinary 
action has been taken.
    Senator Shelby. Well, why are they there? It dumfounds me 
as to why these people who failed on one of the biggest frauds 
in SEC history, where they had information, did not pursue it--
not once, not twice. How many times? Four times. You are the 
Inspector General, and I know you are sincere and you are doing 
your job, but this just looks like the SEC failed the investor, 
not once, not twice, but four times, big time.
    Mr. Kotz. Yes, no, I agree. And, you know, we recommended 
that action be taken as a result.
    Senator Shelby. So the SEC basically broke down in their 
job and responsibility, didn't they?
    Mr. Kotz. Yes.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Mr. Kotz, it seems impossible and outrageous that it took 8 
years from the time that possible fraud was identified before 
the SEC spent any energy on enforcing the law. Now, the SEC's 
job is to protect the investors. That is their only job. I 
mean, they have got a lot of other peripheral jobs, but they 
are basically paid to protect the investor.
    Now, if the investigations four times said, you know, here 
we have got a guy here or a company here who is running what we 
think is a Ponzi scheme--and I do not care what credits you get 
at the SEC in Washington. Your job is to protect the investor. 
And every day that they did not do that, the scandal got 
bigger. It went from hundreds of millions of dollars. It is 
approximately $8 billion. We drink more than that in a week up 
here. I mean, that is so outrageous that the investor has been 
bilked out of $8 billion because of incompetence, because that 
is exactly what it was. Or they were trying to make points with 
the SEC in Washington, DC, by this scheme of metric approach.
    Tell me what is going on. Tell me. Tell me how that 
happens.
    Mr. Kotz. Yes, I mean, I agree, you know, and our report 
discusses it. It is outrageous. And, in fact, you know, one of 
the issues initially that they looked at in deciding not to 
bring an investigation is that there were no U.S. investors. 
Ironically, had they brought an investigation at any of those 
stages, they would have been potentially able to stop the 
fraud, the alleged fraud, before----
    Senator Bunning. Yes, and stop the losing of the money.
    Mr. Kotz. Right, before any U.S. investors came in, because 
initially there were no U.S. investors, and then over time 
there were U.S. investors. So, you know----
    Senator Bunning. Ask the people in Texas and Louisiana.
    Mr. Kotz. Right. Right. And so, I mean, if they had been 
able to take action earlier, they could potentially have made 
it such that there would never have been U.S. investors. And, 
in fact, when they did their examinations and did not 
necessarily take investigative action, the investors' message 
that they got was everything is OK. And as in Madoff, Stanford 
used that--you know, when there would be questions about his 
returns, he would say or his financial advisers would say, 
``Well, we just got a clean bill of health from the SEC.'' And 
the SEC would come and do an examination. They would issue 
these deficiency letters, which are relatively minor, depending 
on the type of deficiency, and something that a lot of folks 
get in examinations. And so he would say, well, you know, we 
just came, and we talked to many investors who said that if 
there was any hint at all that there was a problem, they would 
have stopped, absolutely.
    Senator Bunning. One of the troubling parts of your report 
involves the former head of enforcement at the Fort Worth 
branch of the SEC. He made several important decisions over the 
years about not pursuing the Stanford case. Then he left the 
SEC. He represented Stanford briefly and tried to represent 
them over and over again, even after being told no on three 
separate occasions by the SEC Office of Ethics. He also told 
the Office of Ethics that he did not remember--he did not 
remember participating in decisions about the Stanford case 
while he was at the SEC. Are you kidding me?
    Mr. Kotz. It is stunning. It is absolutely stunning.
    Senator Bunning. I mean, that to me is criminal negligence, 
and the sooner they get him before a U.S. court, the better I 
will like it.
    Mr. Kotz. Absolutely.
    Senator Bunning. I mean, to allow that to happen--I almost 
fell out of my chair when I heard the reasons he gave you for 
trying to represent Stanford. This is a quote from your----
    Mr. Kotz. Right.
    Senator Bunning. ``Every lawyer in Texas and beyond is 
going to get rich over this case. OK? And I hate being on the 
sidelines.''
    That is the quote he gave you?
    Mr. Kotz. Yes.
    Senator Bunning. Well, does that look to you like a little 
bit of criminal negligence or something like that?
    Mr. Kotz. Yes, well, I mean, I do not want to go into the 
details, but we have had discussions with criminal authorities 
about whether there would be any criminal action arising out of 
that.
    Senator Bunning. But the SEC for 13 years has sat on their 
hands. So if you do not get the Justice Department involved in 
this, shame on you as the Inspector General.
    Mr. Kotz. Again, we have had those discussions. You know, 
to the extent that they are ongoing cases, I do not want to 
talk about them specifically.
    Senator Bunning. Fine. You do not have to talk about the 
case specifically.
    Mr. Kotz. But we have had those discussions, absolutely.
    Senator Bunning. You mentioned in your testimony that his 
behavior appears to violate State bar rules. Can you tell me 
first whether this issue was referred to the State bar for 
possible discipline; and, second, whether this was referred to 
the Justice Department for possible prosecution or false 
statements made to the SEC Office of Ethics?
    Mr. Kotz. Yes. On both counts, essentially yes. The Ethics 
Office in the SEC is the one that refers it to the bar. We 
recommended they do so, and my understanding is they either 
have or are in the process of doing so now. And, yes, we have 
had discussions with, as I said, the Department of Justice and/
or FBI.
    Senator Bunning. This is a stunning case, knowing that the 
SEC has changed hands and things, that they would not jump down 
this after the Madoff--Bernie--after his case hit the papers 
and then they released all the documents on the one in Fort 
Worth trying to say, oh, we got one but it is not as big.
    Mr. Kotz. Right.
    Senator Bunning. I have gone over my time, but it just is 
stunning to me.
    Thank you.
    Chairman Dodd. Thank you, Senator.
    Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman.
    How has the SEC responded to your report?
    Mr. Kotz. Well, we have, as I said, those specific 
recommendations. They have provided information to us 
explaining how they have attempted to resolve the 
recommendations. We go through a very rigorous process where we 
review exactly what they provide. We are in the process of 
looking at their responses. In most cases, we think they are 
sufficient. In a couple cases, we have gone back and asked for 
additional information. In a couple cases, we are going to ask 
for them to do more. But they have been responsive to the 
specific recommendations in the report.
    Senator Hutchison. Could you be more specific about the 
areas where you do not think they have provided enough 
information? Or are there areas that have not been addressed to 
your satisfaction to date?
    Mr. Kotz. Sure. I mean, the first issue we are looking at 
is to talk about the focus on potential harm to investors, that 
that be something that be a clear factor that outweighs other 
factors, such as litigation risk. And so where you have a 
situation where there is some litigation risk, but on the other 
side you have clear harm to investors, that you have to in some 
cases value the clear harm to investors over the potential 
litigation risk. That is one they have responded to us. They 
have made some changes. We would like a little more clarity. We 
would like it to be even clearer in their policies and 
procedures that harm to investors could outweigh litigation 
risk; that even if you have litigation risk, sometimes it is 
worth it to bring a case, even if you are going to lose, if 
there is significant investors involved.
    So, for example, if you brought a case and you believe 
legitimately that there was a fraud or a Ponzi scheme, the 
investing community would be aware of it. And so even if there 
was some possibility that you would lose, nevertheless, there 
would be a benefit. So that is one that we are asking for 
follow-up.
    There are certain clarifying procedures that they have 
showed us that we are asking for a little bit more information 
in. So I would not say that they are not being responsive to 
any particular one, but, you know, when we look at these 
responses to our recommendations, we are very careful and very 
tough, frankly, to make sure that they respond in all ways.
    But I am happy that they have come back with responses, and 
we do believe we are going to be able to close out all the 
recommendations in short order.
    Senator Hutchison. Well, let me ask you on the issues of 
the bottom information getting to the top. Both the State 
Securities Board in 2003, according to your report, and then 
the Fort Worth regional office starting in 1997 had raised 
flags. How did you feel the response was to the procedures at 
the SEC in Washington to address that both the State Securities 
Board and the regional office had given notice that had not 
gotten up--I mean, it closed at the Fort Worth regional office 
four examinations, according to your report, separate 
examinations that were started, and then the State Securities 
Board in 2003. So--1997. How do you feel about the response of 
the SEC in assuring that information gets from these lower-
level yellow flags, at least, if not red, to Washington.
    Mr. Kotz. Right, no, that was a concern, and that is 
something we tried to address in our recommendations. You know, 
the lower-level folks, or even some higher-level folks, in the 
examination group in Fort Worth appealed to the enforcement 
folks. But there was not that mechanism for them to go back to 
Washington and potentially have the head of the whole program 
go to the head of the enforcement program and say, ``We have 
got a big problem in Fort Worth. Your folks in Fort Worth are 
not taking appropriate action.''
    So they felt comfortable only within the independent 
office, but there needs to be better collaboration between the 
examiners and the enforcers so that the examiners can go all 
the way to the top, as far as they could go, to say, ``Look, 
here is what is happening in our office. Our office is too 
focused on stats, and so, therefore, if there is a fraud, it is 
growing.'' You know, they made great efforts in Fort Worth, but 
there needs to be a mechanism where they can go beyond Fort 
Worth and potentially get Washington's support for their 
concerns.
    Senator Hutchison. But you do not see that connecting yet? 
Or do you?
    Mr. Kotz. Right, I mean, they are putting in policies and 
procedures to reflect all this. And, you know, our view is that 
is a very good thing for policies and procedures to be put in. 
But we need to make sure that they work appropriately. And so, 
you know, it is all well and good to put in new procedures, and 
that is really all you can do now. But we need to make sure 
that it works well, you know, in the actual case. And so as 
these procedures are put in, we are going to then test them and 
audit them to make sure that they are actually doing the job 
that they are supposed to be doing.
    Senator Hutchison. What about in the area of respect for, 
coordination, credibility of State boards? Now, in this case 
the State Securities Board was the first one to bring it up, 
but in general, in your investigation did you see that there 
was a respect for State Securities Boards--or what other States 
call them, I do not know. But is that something that needs to 
be addressed more carefully as well?
    Mr. Kotz. Yes. That was one of our recommendations. You 
know, first of all, there were referrals from the State 
Securities Board to the SEC which they essentially ignored. At 
the same time, in one case a complaint came into the SEC which 
involved this Stanford matter, so it was obviously a 
complicated matter involving jurisdiction overseas. They 
referred it to the State Securities Board. Well, I mean, if the 
SEC with its resources was not going to be able to take a case 
that involved overseas issues, the small Texas State Securities 
Board would not.
    So one of our recommendations is to promulgate specific 
procedures on that, because in some ways I believe that they 
sent it to the Texas State Securities Board as a way to do 
something. Well, they had to do something. A complaint came in. 
And they did not want to take the case because, of course, it 
was a complicated case. Well, if the SEC is not going to take a 
complicated case, the Texas State Securities Board is not going 
to be able to do it. And then when the Texas State Securities 
Board comes back, they need to take those things seriously. So 
that is one of the specific issues that we addressed in our 
recommendations.
    Senator Hutchison. And what about the response on that 
point?
    Mr. Kotz. Yes, and so, again, they have told us that they 
are going to promulgate these procedures to deal with this 
issue. We have not seen the procedures yet, and so until we see 
them, we are not going to close them out. Obviously, we will 
give them some time to put them together. So we are on the 
right track. But that is another one that we have not finally 
closed.
    Senator Hutchison. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. Thank you, Mr. 
Kotz, for your work.
    I want to go to this SEC official who later worked for 
Stanford and tried to do a lot more work for Stanford.
    Mr. Kotz. Right.
    Senator Vitter. What was his name and title at the SEC?
    Mr. Kotz. His name was Spence Barasch, and he was the 
Director of Enforcement for the Fort Worth office.
    Senator Vitter. And specific, Director for Enforcement for 
Fort Worth?
    Mr. Kotz. Right.
    Senator Vitter. And what involvement did he have in the 
Stanford matter as it was passed over for enforcement over and 
over and over again?
    Mr. Kotz. Well, as I said, initially they opened this 
matter under inquiry, which is kind of a prelude to an 
investigation, in 1998. He made the decision to close it. There 
were also complaints that he reviewed. He participated in 
decisions to refer the complaint to the Texas State Securities 
Board as opposed to taking the action by the SEC.
    Senator Vitter. So it is clear from your investigation that 
he affirmatively made the decision to close the matter at that 
time, in 1998?
    Mr. Kotz. That is what we found, yes.
    Senator Vitter. And he claims he does not remember any 
involvement?
    Mr. Kotz. Well, I mean at the time that he went back to the 
SEC's Ethics Office to try to represent Stanford he claimed 
that he did not remember any involvement. When we interviewed 
him, it came back, and he certainly did remember some 
involvement, and we discussed the fact that he was involved in 
those decisions. And, in fact, he was the one who told us a lot 
about this issue with stats. He explained that this is what he 
was looking at, and so a lot of that information did come from 
him. So when we interviewed him, he did recollect that he had 
some involvement.
    Senator Vitter. And have you, or any others, investigated 
whether he had conversations while he was at the SEC with 
Stanford about future employment?
    Mr. Kotz. Yes. Well, there was no evidence of that that we 
found. However, as I indicated, there are follow-up efforts 
that we are doing in conjunction with other authorities, and 
they are going to be looking at those issues as well.
    Senator Vitter. OK. I also want to go to Senator 
Hutchison's questions about the SEC's reaction to your report. 
Specifically, how would you grade their reaction so far about 
becoming much less of a statistics-driven culture?
    Mr. Kotz. As I said, I think that the intention is there. I 
think Chairman Schapiro has proven some leadership on this 
issue. I think Director Khuzami has proven some leadership on 
this issue. But I do not know that it has necessarily taken.
    I mean I think it takes time for a culture to be changed. I 
think that the clear message from the top is we are no longer 
focused on stats; we are focused on important cases. I think 
there have been some examples of that, but what we need to make 
sure is that trickles down, all the way down the line.
    Senator Vitter. OK. And about when could we expect your 
written analysis about how adequate or inadequate the SEC's 
reaction to your specific recommendations are?
    Mr. Kotz. Yes. So I think we would have to give them, say, 
a year or two potentially after the procedures are in place to 
figure out whether they are actually working. But yes, I would 
say in that timeframe, shortly thereafter, we need to figure 
out whether it is just paper procedures or whether it is 
actually having an impact.
    Senator Vitter. Well before that, could we get a report 
about what paper procedures they are at least saying they are 
going to implement to address this?
    Mr. Kotz. Absolutely.
    Senator Vitter. OK. Now Mr. Kotz, you issued your report to 
Chairwoman Schapiro and the rest of the SEC on March 31st. As 
you know, the report was not released to the public until 3 
weeks later, the day, the specific day the SEC charged Goldman 
Sachs with fraud which was a bit of a news story. Do you 
personally consider that timing coincidental?
    Mr. Kotz. Well, I mean that is actually a matter that we 
are, in some measure, looking into now. I mean we have been 
requested to look at specifically the timing of the Goldman 
case because there were allegations made that the timing of the 
Goldman case was related to financial regulatory reform, other 
allegations about that timing. So that is a matter that 
actually we are looking at and we are investigating right now.
    We have not concluded the investigation. So it is a little 
hard for me to give a full answer, but I will tell you that we 
are almost finished with that investigation. That investigation 
should be completed within a couple weeks, and it will outline 
the more broader issue of what led the SEC to file the Goldman 
case the day it did and whether it was related to any other 
factors, such as financial regulatory reform, such as to mask 
the Stanford case, et cetera.
    Senator Vitter. Well, that is certainly important, but I am 
not asking about the timing of the Goldman case. I am asking 
about the timing of the release of your report the day the 
Goldman case was made public in terms of the fraud charges. 
Based on what you know, do you think that timing of the release 
of your report was coincidental?
    Mr. Kotz. I guess certainly one would, it would strain 
credulity to think it was coincidental. I cannot say that I 
have concluded that for sure because we have a process we go 
through when we look at these matters, but certainly it was 
suspicious that the day that our report was finally issued was 
on the same day as the Goldman action.
    However, I would say that there was a process where our 
report was redacted. There was a process that actually we were 
involved in, and it took some time. So it was not suspicious 
per se that it took a few weeks after we issued the report to 
have the report issued.
    The particular timing with the Goldman case is certainly 
something worth looking into. I cannot give you a conclusion 
right now because we are still looking at it, but I would 
certainly say it is suspicious.
    Senator Vitter. Final question about the SEC's reaction to 
all this: Who at the SEC has been fired or demoted because of 
this gross mismanagement of the Stanford case?
    Mr. Kotz. I have not been informed that anyone has.
    Senator Vitter. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you. Before turning to my colleague 
from Tennessee, I want to make a point. In the Madoff hearings, 
stats, I asked for there to be reports every 3 months from the 
SEC. We have received one, on the progress being made on these 
matters.
    Again, I am not going to be here, but others will be. This 
Committee is going to want to follow this, and you are hearing 
it from Members up here. So I will raise the same with the 
people who follow you at the table, but it is very important 
the Committee be kept abreast of exactly what is happening with 
recommendations on these matters, so if you could.
    Mr. Kotz. Absolutely, I agree. As I said, I think that this 
Committee's involvement is crucial to ensuring that there be 
improvements.
    Chairman Dodd. Yes. Well again, the promise, the commitment 
was made. The question I specifically raised at that hearing 
was every 3 months. We have had one.
    Mr. Kotz. Yes.
    Chairman Dodd. Senator Corker.
    Senator Corker. I actually really came to question the 
second panel. I think my colleagues have done a very good job, 
and I think our witness has too. But since you did mention the 
Goldman report, that will be made public in 2 weeks, is that 
correct?
    Mr. Kotz. Well, the process that we have, and this is not 
something within our office's control. Investigative reports 
are internal, and then there can be request made for them to be 
made public. And then there is a process where the SEC, not our 
office, reviews it and redacts it and issues it. That is what 
happened in the Stanford case.
    So we will, we plan to, issue our report internally within 
the next couple of weeks, likely by the end of next week. As 
far as how long it will take for the SEC to release, that is 
not something that I have any control over.
    Senator Carper. OK. I will just wait for the second panel.
    Chairman Dodd. Well, fine. Let me just emphasize I want get 
to the second panel as well too, but I want to underscore the 
point raised by Senator Bunning. I was going to raise the 
question myself, regarding--Senator Vitter raised it as well, I 
believe--and that is with this head of the Enforcement 
Division. I mean this whole issue of then going off and trying 
to represent the matter here. I mean obviously, you could spend 
a whole day just on that issue alone, but it is stunning to me 
in many ways and looks like it was very much a part of the 
problem that went on here.
    But second, I would really like to request, if I may, this 
issue because I have a tendency to believe these are not sort 
of one-off matters.
    Mr. Kotz. Yes.
    Chairman Dodd. It is a national policy or, excuse me, it is 
a Commission policy, or it was anyway, to get the sort of quick 
hits, the stats up. That was not just focused on the Fort Worth 
office. To what extent are you looking at other offices around 
the Country as to whether or not a similar conflict emerged?
    Now there was a report in the Washington Post back a few, I 
do not know whether days or weeks ago now. I had the question 
here, that the problems still persist. The Washington Post, in 
June, reported that a few years ago the SEC Fort Worth office 
changed how it performed inspections, and this ``opened up a 
rift between Fort Worth managers and staff that continues 
today, undercutting the efforts by SEC leaders in Washington to 
build the agency and promote coordination after years of 
setbacks, according to current and former SEC officials and 
internal agency documents including three separate reports by 
the SEC's Inspector General.''
    ``SEC's regional offices present managerial problems, 
become an obstacle to reform'' is the title of the Washington 
Post article.
    Can you comment on this assertion, the June report in the 
Washington Post? Is this still a problem in this office?
    Mr. Kotz. We have issued other investigative reports about 
the Fort Worth office where we found concerns. So I do not know 
if I would go as far as that article, but certainly in other 
cases we have found situations there where folks had spoken 
out, and when they spoke out they were disciplined. And we 
issued reports recommending that action be taken against those 
who engaged in that. So we have issued more than our fair share 
of investigative reports regarding the Fort Worth office.
    Chairman Dodd. Is it ongoing?
    Mr. Kotz. Well, we look at particular issues, and those 
issues are resolved by our investigation, but it is hard to 
know what else is going on. We have information. We look into 
it. But these other investigations were involving matters that 
were relatively recent. Unlike the Stanford where most of the 
time was many years ago, these were relatively recent. So they 
may very well be ongoing.
    Chairman Dodd. Let me just do this then with you. First of 
all, I would like to get as soon as you can, and you can maybe 
do it in a written form to the Committee. We do not have to 
bring you all the way back here. But I would like to know 
whether or not there are ongoing problems within that office 
regarding conflicts between the Enforcement Division as well as 
the Examination Division. If this is an ongoing problem in that 
office, I want to know why and what is being done at the 
national level to correct it.
    And two, whether or not we are looking at other offices 
regionally to determine during this period of time, when the 
quick hits and the stat approach was being taken, were other 
matters being reported by examiners to enforcement people where 
actions were not being taken that we ought to be aware of?
    Mr. Kotz. OK. Absolutely. Certainly.
    Senator Bunning. May I have one?
    Chairman Dodd. Senator Bunning, yes.
    Senator Bunning. Let me get one thing straight. You are the 
Inspector General for the SEC, correct?
    Mr. Kotz. Yes.
    Senator Bunning. Are you independent?
    Mr. Kotz. Yes.
    Senator Bunning. Then why do you submit your reports to the 
SEC so they can redact anything, to prevent the public and our 
Committee from knowing exactly what you said in the report?
    Mr. Kotz. Again, this is not my decision, but I will tell 
you that----
    Senator Bunning. No, no, no. Why is it your decision to 
report to the SEC and not to the public which you have an 
obligation to do?
    Mr. Kotz. The concern is that there may be nonpublic 
information in the reports that I write, and so the----
    Senator Bunning. That is up to you.
    Mr. Kotz. Well----
    Senator Bunning. Listen, I mean I have had inspectors 
general before this Committee before, and they did not report 
to their specific agency. They reported to us, what you found 
out. Now are you telling us that you report to the SEC and they 
can redact specific things out of your report so that we never 
get to see them?
    Mr. Kotz. Our office does not have the authority to make 
decisions on nonpublic information by itself. That is something 
we have asked for. We do not have that authority, and so 
therefore if there is a concern about nonpublic information it 
goes through the entire Commission.
    Now we are involved in the process to try to ensure that 
the information that is redacted is limited, that is only----
    Senator Bunning. You need a change in the law then.
    Mr. Kotz. All right. I mean we would be happy to issue the 
report directly.
    Senator Bunning. You have the authority to issue your 
reports as you see fit. I thought that is what all inspectors 
general had the authority to do. You do not have that 
authority.
    Mr. Kotz. Right. I would welcome that.
    Senator Bunning. Thank you.
    Chairman Dodd. Thank you, Senator.
    Mr. Kotz, thank you.
    Unless there are some other questions here, we will move to 
our second panel. But I am going to leave the record open. 
Obviously you may have, one, some additional questions from 
Members who are here, but certainly those who could not be here 
this morning I presume may want to raise some questions with 
you as well. So we will leave the record open.
    I appreciate very much your coming before us, and I 
appreciate the work you are trying to do. I do not want you to 
think our lines of questioning here are necessarily targeted 
specifically at you, but clearly some of the issues I raised 
about a broader look at all of this, it seems to me, are worth 
the Inspector General spending a little time. Obviously, you 
had to focus on Fort Worth. But, because I am getting nervous 
that if you had a policy like this nationally, I do not want to 
find out later as I am sitting in a different place somewhere, 
reading about hearings up here because there were problems in 
other offices around the Country. You get my point.
    Mr. Kotz. Absolutely.
    Chairman Dodd. OK. Thanks.
    Mr. Khuzami, I appreciate your joining us here, and Carlo 
di Florio and Ms. Rose Romero. Come on up and join us here, and 
thank you all very much for your work and your efforts.
    I am going to ask, if you would, we have got you, Mr. di 
Florio in the middle. Mr. Khuzami, you are right there, very 
good. And Ms. Romero, thank you. I will begin in the order I 
have introduced you, and if you could try and keep your remarks 
down to about 5 minutes or so if you can, so we can jump right 
in with you on the questions. And your full statements and any 
data and material that you think would be worthwhile for the 
Committee to be looking at, we will include certainly in the 
record as well. OK? Thank you.

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF ENFORCEMENT, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Khuzami. Certainly, Mr. Chairman, thank you. I thank 
Members of the Committee for the opportunity to testify before 
you today.
    The Commission commends the work of the Inspector General 
with respect to the Stanford matter, and the depth and analysis 
of the report. They have conducted an extensive investigation, 
clearly identifies missed opportunities at the SEC. We cannot 
evade responsibility for the handling of the Stanford matter 
and deeply regret our failure to act more quickly to limit the 
tragic investor losses suffered in the case.
    We are doing three things that respond directly to the 
Stanford case and the IG's recommendations: first, vigorously 
pursuing Stanford and others who were involved in the 
misconduct, and trying to reclaim as much money as possible for 
investors; two, embracing all the recommendations that the 
Inspector General proposed; and three, continuing what started 
prior to the report by both Mr. di Florio and I of a top to 
bottom review of our respective division and offices, and to 
implement new structures and processes to make sure that this 
does not happen again.
    You know about the details of the filing of the Stanford 
case.
    With respect to the recommendations, we are doing a number 
of things including revising the metrics used to manage and 
evaluate the performance of the division, and clarifying the 
procedures with respect to coordination between the exam 
program and the Enforcement Division that underlie some of the 
matters in the Stanford case, and third, we have both conducted 
this review over the last 18 months.
    With respect to the Division of Enforcement, what has been 
described as the most significant restructuring of the division 
in over 30 years. That includes new training, hiring new 
outside staff with market and private sector expertise, 
streamlining management, putting more attorneys back on the 
front lines of conducting investigations, improving risk 
assessment techniques, leveraging the knowledge of third 
parties, new initiatives and, most importantly perhaps, totally 
revamping the way we handle our tips, complaints and referrals 
of which we get tens of thousands per year.
    We are also doing new initiatives, launching specialized 
units focused on particular areas of the law or conduct or 
transactions that are particularly relative to Stanford, 
including a specialized unit focusing on investment advisors.
    We are also doing risk-based investigative techniques, so 
that we look at problems early on, identify red flags and move 
more quickly.
    Much more needs to be done. As was mentioned earlier, our 
mission of investor protection demands nothing short of a full 
commitment to do all that we can to minimize the chance that 
another Stanford happens and we do not act as quickly, as 
promptly as possible.
    Now I will turn it over to Mr. di Florio.

STATEMENT OF CARLO V. DI FLORIO, DIRECTOR, OFFICE OF COMPLIANCE 
     INSPECTIONS AND EXAMINATIONS, SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. di Florio. Mr. Chairman, Ranking Member Shelby, and 
Members of the Committee, the Inspector General's 
recommendations identify the need for better coordination 
between the enforcement program and the exam program. We are 
committed to doing just that.
    OCIE and Enforcement are working together on multiple 
fronts to identify misconduct earlier and move to shut it down 
more rapidly. We have introduced joint committees to 
proactively evaluate potential referrals and new governance 
processes to ensure early escalation of any concerns. Finally, 
OCIE has undertaken a top to bottom review of our strategy, our 
structure, our people, our processes and our technology. In 
each of these critical areas, we are breaking down silos and 
implementing significant new reforms to better protect 
investors and ensure market integrity.
    In conclusion, both OCIE and Enforcement are committed to 
reforms that address the kind of issues that led to the 
Stanford case. We would be happy to respond to any questions 
you might have. Thank you.
    Chairman Dodd. Ms. Romero.

  STATEMENT OF ROSE L. ROMERO, REGIONAL DIRECTOR, FORT WORTH 
      REGIONAL OFFICE, SECURITIES AND EXCHANGE COMMISSION

    Ms. Romero. Chairman Dodd and Members of the Committee, 
thank you for the opportunity to testify today about the 
reforms the Fort Worth Regional Office is making in response to 
the issues raised in the Inspector General's report on the 
office's performance in the Stanford matter.
    Like Mr. Khuzami and Mr. di Florio, I regret that the SEC 
failed to act more quickly to limit investor losses suffered by 
the Stanford victims. All of us at the SEC share responsibility 
for the handling of the Stanford matter, and we are taking 
significant steps to ensure that we implement the needed 
reforms.
    Mr. Khuzami has summarized the status of the current 
litigation, but I wanted to highlight a few additional points.
    Immediately after filing the civil action, my staff worked 
closely with the Justice Department to ensure that responsible 
executives of the Stanford Company were brought to justice. We 
aggressively continued our investigation, aided by access to 
Stanford financial records and other key documents obtained by 
the receiver, and access to key employees. In particular, my 
staff played a significant role in securing the cooperation of 
James Davis, Stanford Financial Group's Chief Financial 
Officer. We also developed critical evidence in support of the 
allegation that Leroy King, Antigua's head of the Financial 
Services Regulatory Commission, conspired with Stanford and 
obstructed the Commission's efforts to investigate Stanford 
over many years.
    We have recently notified several former Stanford 
executives that we intend to recommend fraud charges against 
them. These persons include former high level executives and 
financial advisors. Our investigation of these matters is 
continuing, and I have directed my staff to determine if others 
at Stanford were involved in fraudulent conduct.
    Over the course of the past 12 months, we have collected 
and reviewed tens of thousands of documents, reviewed e-mail 
communications of more than 150 former employees, interviewed 
and taken sworn statements of more than 60 former employees and 
other witnesses, and interviewed approximately 200 victims of 
the Stanford fraud. We have worked with the Stanford Victims 
Coalition, State regulators and FINRA to gather relevant 
information and evidence to further this important 
investigation.
    Since filing the Stanford case, we have worked to minimize 
receivership expenses and ensure that the receiver's efforts 
are focused properly on investor recovery. As a result of our 
efforts, the receiver agreed to reduce his rates by 20 percent, 
and the court, at our request, has held back an additional 20 
percent of the receiver's fees and expenses. We continue to 
monitor the receiver's work closely.
    The initiatives outlined in the remarks of Mr. Khuzami and 
Mr. di Florio are, from a regional perspective, making a 
significant impact upon the Commission and its staff. For 
example, this fiscal year alone investigations by the Fort 
Worth Regional Office have resulted in criminal charges against 
14 individuals, and many members of our staff now serve as 
special Federal prosecutors assisting in the prosecution of 
important criminal cases in the securities area.
    Since last year, the Fort Worth staff has filed 19 
emergency actions in Federal court, preserving millions of 
dollars for investors.
    During the past 4 years, the Fort Worth Regional Office has 
worked to bridge the gap between broker-dealer and investment 
advisor examination staff and programs. In late 2006, it was 
clear to me that we could not adequately oversee an increasing 
integrated registration population unless we brought to each 
examination the skills and expertise to effectively review a 
firm's business activities, whether advisory, brokerage or 
both. Another top priority has been to enhance collaboration 
and teamwork among examination and enforcement programs. The 
success of this initiative over the past 4 years is 
demonstrated by the fact that the percentage of enforcement 
cases stemming from examination referrals and information has 
increased from 12 percent in fiscal year 2005 to 39 percent in 
fiscal year 2009.
    In conclusion, while I certainly believe that our efforts 
have enhanced the Commission's ability to protect investors, we 
will not forget the painful lessons taught to us by past 
mistakes. The Fort Worth Regional Office is dedicated to 
protecting investors and aggressively pursuing those who 
defraud them.
    I thank you for the opportunity to appear before you today, 
and I would be pleased to answer your questions. Thank you.
    Chairman Dodd. Well, thank you all very, very much, and let 
me begin by thanking you all for the work you are trying to do. 
I realize in addition to staying on top of all the other 
matters that are occurring, getting into this is obviously 
important as well. So at least from my standpoint I want you to 
know that my line of questioning here is not to reflect 
obviously the work that you are trying to do. You were not part 
of all of this obviously. You are all new hires in these 
matters. So again, I appreciate your efforts going back over 
the time.
    One is, just quickly as I say, I raised this with Mr. Kotz 
earlier, and that is that we have asked for these progress 
reports in the Committee in the past. We asked for it on the 
Madoff matter. As I pointed out, staff informs me we have had 
one report in the last 5 months. I made the request back then 
on behalf of the Committee. I make it again in this matter 
here. This Committee is going to want to be kept informed, and 
I guarantee you in my absence Senator Shelby will want to be 
informed, Senator Johnson will be, and other Members of this 
Committee. So I will make that request of you.
    Second, I think we would like to have you keep us posted 
regarding personnel actions being taken as a result of the 
performance of SEC staff. I think Senator Vitter may have 
raised the question whether anyone has lost their job in any of 
this, and the Inspector General indicated that he did not know 
of any at this point.
    But again, there are some serious questions being raised, 
Ms. Romero, in that office. And it seems to me again it is not 
our business here to hire and fire people at the SEC, but in 
light of what went on it seems to me that people may have left 
and again a little hard to understand why people have not been 
fired in light of what occurred--billions being lost, lives 
ruined as a result of actions and inactions taken. So I would 
like to be kept informed on that if I can.
    Now again I raised issues, Mr. Khuzami, before. I thought 
Senator Shelby made a very good point in his opening statement, 
in drawing a distinction between the Madoff case and this case, 
in that in the Madoff case there were reports coming--the 
gentlemen in Massachusetts who, on numerous occasions, raised 
what he thought were very important matters, that the Madoff 
matter was clearly a Ponzi scheme, but that was an outsider in 
a sense, a knowledgeable one.
    But in this case here you have had an Examination Office 
bellowing fire, fire, fire in one office and an Enforcement 
Division saying no fire or the fire is too complex or we have 
to respond to other matters here. So this is a different set of 
matters.
    You talked about the perfect storm in response to a 
question by Senator Schumer on the Madoff matter, describing 
the perfect storm on Madoff. How do you describe this one? What 
happens here? What is your quick analysis of what went wrong 
here?
    Mr. Khuzami. Well, Senator, I think in this case the people 
in Fort Worth were focused on the issue as to whether or not 
this was Ponzi scheme. It was not like Madoff when they were 
trying to figure out whether or not the split strike conversion 
strategy that Mr. Madoff was operating was really a Ponzi 
scheme or not.
    The discussion and the debate within the office was going 
on. The shortcoming occurred because there was not, in my view, 
sufficient follow-up to get as much evidence as we could and 
then once we did that, to do, to try and proceed with perhaps a 
more narrowly tailored case, not prove the full-blown Ponzi 
scheme, but not proceed with the full-blown case, so that we 
may have been able to start the process of alerting the world 
that Mr. Stanford may have been involved in wrongdoing and 
there was a problem with this product.
    Now sometimes that is easier said than done because 
obviously we have to go into court and have admissible evidence 
to show that this was a Ponzi scheme or there was some other 
violation of law. My sense is that we did not do as good a job. 
We were not as creative as we should be under these kinds of 
circumstances, with these red flags, to figure out what that 
narrowly tailored case was and go in and try and do it even if 
we had a significant risk of loss.
    Now I think going in and losing a case is not a great thing 
because obviously if you do that one thing that can happen is 
the perpetrators of the fraud can use that as the Good 
Housekeeping Seal of Approval and say the SEC has tried to stop 
this, the judge rejected their claim, the investment is safe. 
So you always have to be a little concerned about that.
    But under circumstances where you have got high returns and 
a lack of volatility, like we did here, as I sit here I wish we 
had gone in with a narrower theory, a sales practice theory or 
a failure to disclose commissions, or some other theory that 
might have been able to do.
    Chairman Dodd. Is this fairly commonplace, where you have 
this kind of a debate?
    I mean this were four instances over a period of years, 12 
years, where your examiners, unless there was some huge debate 
among the examiners which no one has indicated yet. That may 
have been the case. But let's assume for a second you had a 
pretty united view. They came back four different times to the 
Enforcement Section. Is this commonplace, where you have had 
that happen?
    I could understand one time. But on four occasions over a 
period of 12 years?
    Mr. Khuzami. Well, it would not happen today. I can assure 
you that, Senator. There is much more collaboration and 
coordination and more immediate decision making on these 
issues.
    I will say that again the focus, as I read the report, was 
whether or not they had the admissible proof--not that they did 
not understand the exam team was not saying this is a Ponzi 
scheme, but that they needed and wanted a level of proof in 
order to go into court and make their case that perhaps was 
higher than we should have. We should have been more creative 
and tried to go in quicker and stop it.
    Chairman Dodd. Well, that is a different answer than we got 
from Mr. Kotz because he said it was more like the question of 
this is the quick fix, the stats approach, rather than the 
novel, more complicated case.
    Then second, had the Madoff matter not come forward as it 
was, he is not sure, frankly, that any action would have been 
taken, even as late as it was.
    You have a different point of view.
    Mr. Khuzami. Look, well, certainly in light of Madoff, we 
took a hard look at everything that was in the pipeline to make 
sure that we were operating appropriately.
    I think the other factor that happened here, of course, 
that happens in many Ponzi schemes is that the economy soured. 
It became more difficult to keep Ponzi schemes afloat. Fewer 
investors willing to invest and more people demanding 
redemptions, that puts pressure on the scheme.
    Chairman Dodd. Yes.
    Mr. Khuzami. We also were able to get some evidence from 
insiders that we did not have before in the 2006, 2007, 2008 
timeframe.
    Chairman Dodd. Yes. Last, would you answer the question I 
asked the Inspector General? Are you looking at other offices 
where that approach of the quick fix stats number and that 
other matters might have missed, whether Ponzi schemes or 
others, that could have put investors at greater risk?
    Mr. Khuzami. Yes. Senator, I do not see--more importantly, 
I am not telling the rank and file that quick hits and numbers 
are what drive the division. If you look at the course of cases 
that we have brought in the last 18 months, particularly across 
the credit crisis--New Century, Countrywide, Goldman, Dell, 
State Street, Evergreen, ICP, CitiGroup, Bank of America--these 
are hugely complicated accounting frauds, structured product 
cases. We are not getting quick stats on those cases, I assure 
you.
    In addition, even during the 2000s, if you look at the 
history of the cases--auction rate securities, market timing, 
research analysts, options backdating, Enron, WorldCom there 
are plenty of examples of complicated, difficult cases.
    Now I am not going to say that one or more individual 
offices were not focused on stats, and maybe they even came 
from Washington. I just do not know. But it is not the standard 
today, I assure you.
    Chairman Dodd. I appreciate that.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Mr. Khuzami, what kind of actions were taken by the SEC to 
discipline SEC enforcement employees who were responsible for 
mishandling this case?
    Mr. Khuzami. Senator, that process is underway. We have to 
follow certain procedures by regulation and otherwise. The 
process is fully underway.
    Senator Bunning. 1997 through the present time, that is 13 
years. You have not had enough chance to accumulate evidence?
    Mr. Khuzami. Well, the process commenced upon the release 
of the IG's report, which has been approximately 5 months, and 
that is the process that we are following, to review the 
information gathered by the Inspector General and to make the 
appropriate decision.
    Senator Bunning. OK. Now, aside from that, the Inspector 
General reported to you 5 weeks ago about insider trading with 
Tyco. What has happened to that report?
    Mr. Khuzami. Senator, I am not familiar with that matter, 
but I would be happy to get back to you and provide you 
information in response to your question.
    Senator Bunning. You do not know anything about the report?
    Mr. Khuzami. The report----
    Senator Bunning. By the Inspector General, the gentleman 
who was just here, on insider trading with Tyco. He submitted a 
report 5 weeks ago.
    Mr. Khuzami. I am not familiar with that matter, Senator.
    Senator Bunning. Well, who at the SEC would be?
    Mr. Khuzami. I will find out as soon as I return to the 
office and will respond to your question.
    Senator Bunning. OK.
    Senator Bunning. Five weeks is a pretty good time to be 
able to read the report and, according to the Inspector 
General, redact those things that should not be made public. 
And we would like to know about that because that is--insider 
trading, that also affects a lot of investors. If you bought 
Tyco Industries in that time or in the past years and you had 
somebody that was doing insider trading in that stock, it 
surely affected your holding.
    Mr. di Florio, in your opinion, does the Office of 
Compliance Inspections and Examination bear any responsibility 
for the spectacular failure in this case? Or should the 
majority of the blame fall on the Enforcement Division?
    Mr. di Florio. Senator, I think the IG's report laid out 
the facts effectively. Going forward, I see that we both have 
responsibility to make sure that we address the Inspector 
General's recommendations, and one of those key recommendations 
was that Enforcement and Exam work more collaboratively 
together to ensure it does not----
    Senator Bunning. How about Washington and Fort Worth?
    Mr. di Florio. Correct, likewise. So we look at those 
programs on a national basis and on a regional basis, and we 
now have governance mechanisms, escalation protocols, and joint 
initiatives across divisions and with our regions to make sure 
matters like this do not happen in the future.
    Senator Bunning. Do you know how much money just the two 
cases have cost the--just two cases have cost our investment 
public? If you take the one in the east and the one in Texas.
    Mr. di Florio. Yes, Senator, and it is with that in mind 
and the----
    Senator Bunning. $58 billion.
    Mr. di Florio. Correct.
    Senator Bunning. Or right around that, give or take a few 
billion here or a billion there. Do you know how long it takes 
for people to save $58 billion? I mean, we can print it up 
here. It is a little different for the Government. But 
individual investors trying to preserve their capital and 
getting taken by crooks. I think the SEC better be capable of 
better things.
    Mr. di Florio. Senator, we have implemented a number of 
reforms.
    Senator Bunning. The Chairman of this Committee has tried 
to convince others how important it is to protect the investor, 
and that is the SEC's job. I worked in that business for 30 
years, and if I messed up, the SEC was there to tell me. They 
should be there to do it and do it better than they are doing 
it right now.
    Mr. di Florio. Absolutely, Senator.
    Senator Bunning. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman.
    Many of the victims of this Ponzi scheme and the 
misappropriation of people's funds have come to our office. 
They are seeking some kind of help, and they really have fallen 
through a crack in a way because there is really nothing there 
for them.
    One of the things that they have raised is that the SEC has 
refused--I guess in 2009 they filed civil suits, but not 
criminal--I am sorry, civil suits, but they did not go further 
and seek bankruptcy of the Stanford companies, which many of 
the victims believe would give the bankruptcy judge more 
authority to go after assets. And, of course, they are trying 
to go after assets.
    Why did the SEC never initiate bankruptcy proceedings in an 
effort to try to give all opportunities to the bankruptcy judge 
for asset availability for the victims? Mr. Khuzami.
    Mr. Khuzami. Senator, if you do not mind, I think I will 
defer to Ms. Romero on that, who I think has been more 
integrally involved in some of the details of the proceeding.
    Ms. Romero. Thank you. Senator Hutchison, the court was 
approached with that idea of whether or not the Stanford 
receivership should be converted into a bankruptcy. At that 
stage, the SEC--we came in and we disagreed with the investors 
who were wanting to take it to a bankruptcy because, in our 
view, in our analysis, it would have cost the estate a lot more 
money. So the court had a different view, and he wanted to take 
it to--what he did was he appointed an investor committee that 
would serve much like a bankruptcy committee or a creditor's 
committee, but it would not cost the estate any money. In other 
words, they are not going to be able to charge the estate any 
money where you would in a bankruptcy setting.
    This committee, this investors committee was announced a 
couple of weeks ago. We supported that effort. It is going to 
give investors a more--they are going to have a closer working 
relationship and more say in the receivership than they had 
previously.
    The examiner that the court appointed to protect investor 
interests is also part of that committee, and we expect that 
that is going to help return more monies back to investors.
    Senator Hutchison. I did not understand what you meant by 
``cost the estate more money'' if they did not go through 
bankruptcy than if they are where they are now, in 
receivership.
    Ms. Romero. Right. At the stage that we were when the 
bankruptcy issue came forward, there would have been costs in 
terms of creditors that would have had claims perhaps in a 
bankruptcy setting that they do not have in a receivership 
setting, and that meant that that pot of money that we had 
would have been even thinner or----
    Senator Hutchison. Would have gone to creditors rather than 
victims.
    Ms. Romero. Exactly. And so given that, it was our view 
that perhaps this investor committee, which serves like a 
creditors committee, would give the investors the same type of 
control, if you will, or access to the receivership as they 
would if it were in bankruptcy, but without the cost.
    Senator Hutchison. So is it your view--and I assume as 
regional director you are being given the SEC's authority here. 
And your view is that the assets are being protected to the 
maximum for the victims at this time?
    Ms. Romero. Senator Hutchison, we have worked very hard 
over the past 18 months to make sure that the assets--that we 
protect the assets, every dollar, for investors. We have taken 
a number of steps to do that. We continue to oversee the 
receiver's activities. We continue to work with the Justice 
Department, the Office of International Affairs, and regulators 
throughout the world, quite frankly, to make sure that the 
assets that we have had frozen in these different foreign 
jurisdictions remain there until they are repatriated here to 
the U.S. for investor benefits, yes.
    Senator Hutchison. One of the complaints of the victims has 
been the time that it has taken, that frozen assets--that even 
assets that were owned by the victims, not owned by the company 
were frozen for so long and people could not get access. Let me 
ask you two things.
    One, how much longer will it be before frozen assets will 
be able to be distributed that have not already been? And I 
know some have, but--and number two--and I realize that there 
are different types of investments and you cannot make a 
blanket estimate, probably. But in the area that you can, how 
much can victims count on or at least have some expectation of 
being returned, not the assets that are already actually the 
victims', but in the assets that were under management that 
will be distributed, with the foreign assets as well? What 
would be the timetable? And what could be the expectation?
    Ms. Romero. As to your question on the timetable, there 
are, like I said, assets, Stanford assets all over the world 
that have been secured and hopefully will be repatriated soon. 
In order to secure those, particularly those in Europe, the 
Department of Justice took the lead there so that the 
determination of when we get them back and when we can get them 
in investors' hands is going to be made in that criminal case, 
when there is a conviction in that criminal case. As you know, 
that is set right now for January of this coming year, so 
hopefully once there is a conviction in that case--that is why 
getting a conviction in that case is so important, because a 
lot of this money is tied to that.
    So we expect that some time after that we would hopefully 
begin the process of distribution of these monies to investors.
    Senator Hutchison. I am sorry. I know I am over my time, 
but just last, any type of percentage that people could expect?
    Ms. Romero. It is hard for me to predict that at this point 
in time. The receiver is working hard to continue to gather 
assets. Like I said, there are ongoing efforts in, for example, 
South America, where we cannot predict how much money there is 
going to be--that we are going to be able to recover there. So 
it is hard for me to say.
    After we go through a claims process, we can better 
determine how many victims are going to make claims, you know, 
how much money they may have received during the course of the 
Stanford Ponzi scheme, and then, you know, do those 
calculations. It is a long and arduous process. So I am sorry I 
do not have any specific numbers for you at this time.
    Senator Hutchison. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. I am going to 
continue with Ms. Romero.
    Ms. Romero, just remind us, what is your full title and 
general responsibility?
    Ms. Romero. Yes, sir. I am the regional director for the 
Fort Worth regional office, and I am charged with overseeing 
the examination program and the enforcement program in the Fort 
Worth office for the SEC.
    Senator Vitter. OK. And how long have you been in that 
particular position?
    Ms. Romero. I started there in March of 2006.
    Senator Vitter. In that position?
    Ms. Romero. Yes, sir.
    Senator Vitter. And were you at the SEC previously?
    Ms. Romero. I was not. I was a Federal prosecutor for 16 
years prior to coming to the SEC.
    Senator Vitter. OK. You testified at our field hearing in 
August 2009 in Baton Rouge, and I appreciate that, so obviously 
you were in the same role then.
    OK. When did the SEC first look into and investigate, 
either formally or informally, Stanford?
    Ms. Romero. Well, the formal investigation began October 
26, 2006.
    Senator Vitter. And what about anything informal?
    Ms. Romero. There was an informal inquiry, which is really 
a term of art at the SEC, that was opened in 2005. I believe it 
was late 2005.
    Senator Vitter. And that is the first time the SEC looked 
into and investigated Stanford?
    Ms. Romero. No, but the answer to the question whether it 
was an informal or a formal investigation, given that they are 
terms of art at the SEC, the formal investigation began October 
26, 2006, and the informal in late 2005. I do not know the 
exact date.
    Senator Vitter. And when was the first look-see at 
Stanford--that is my term of art--at the SEC?
    Ms. Romero. OK. As you know, I came into the SEC in 2006. 
From what I have reviewed, they looked at the--the SEC was 
looking at Stanford back in 1997.
    Senator Vitter. 1997.
    Ms. Romero. Yes.
    Senator Vitter. And what would you describe that activity 
as?
    Ms. Romero. It was my understanding that there were--the 
examination program does periodic exams of various firms in the 
region, and Stanford, they did four examinations between 1997 
and 2006.
    Senator Vitter. And that is not an investigation in any 
way, even informal?
    Ms. Romero. No, sir.
    Senator Vitter. OK. And the name of that division is what?
    Ms. Romero. The name of the examination? They are called 
OCIE.
    Senator Vitter. Which stands for what?
    Ms. Romero. Office of Compliance and Examinations.
    Senator Vitter. It is Office of Compliance Inspections and 
Examinations, but they do not investigate in any way?
    Ms. Romero. No, sir. I mean, they inspect and they examine 
books and records of different firms. You know, so, yes--no, 
they do not investigate like the Enforcement----
    Chairman Dodd. They make recommendations.
    Ms. Romero. Yes.
    Senator Vitter. The reason I am asking--and I know you are 
aware of this--is I asked you about this in Baton Rouge in 
August 2009.
    Ms. Romero. Yes, you did.
    Senator Vitter. But apparently I did not lawyer up enough 
when I asked the question. I asked, ``When did the SEC formally 
begin an investigation of Stanford and exactly what provoked 
that?'' You responded, ``We began the formal investigation in--
well, there was an informal investigation that began in 2004, 
then the formal investigation. That is where we asked for 
authority to issue a subpoena, was in 2000--end of 2005, early 
2006.''
    Were you aware at the time that significant activity, 
inspection activity, happened well prior to that?
    Ms. Romero. Yes, I was aware at the time that significant 
inspection activity had happened. I was truthfully and candidly 
answering your question as to when the informal and then formal 
investigation began and what provoked it. I noted in my answer 
that several things provoked the formal investigation, 
including the tips and complaints.
    That said, sir, if my answer created any confusion for you 
or your staff, I sincerely apologize.
    Senator Vitter. Well, in your testimony you also said, ``I 
think in total we had about four tips or complaints, some were 
anonymous, that were questioning the legality of Stanford 
International Bank. We followed up on all of those tips, and 
then that led to our informal and then our formal 
investigation.''
    That summary seems to leave out something pretty 
significant, because you just did not have tips and complaints 
from the outside. You had instance after instance after 
instance of your own enforcement--excuse me. What is the name 
of the Division?
    Ms. Romero. Examination.
    Senator Vitter. Examination Division saying this is a big 
problem. Is there any particular reason you did not put that in 
the summary? That is a lot different than an outside, 
uncertain, anonymous tip.
    Ms. Romero. As I told you, Senator, in 2009, there were 
several things that provoked the investigation, the informal 
and formal investigation of Stanford in 2006. Some of those 
things were the tips and complaints that were received by our 
office. But I also noted in my answer that there were other 
factors, and I was fully prepared to describe those factors to 
you during the hearing. Again, if my answer created----
    Senator Vitter. Did you describe those pleas from that 
division?
    Ms. Romero. I am sorry, sir?
    Senator Vitter. Did you, in fact, go into all of that 
activity within the SEC itself starting in 1997?
    Ms. Romero. No, sir, I did not.
    Senator Vitter. You did not. So you were open to that, but 
you did not go into it.
    Ms. Romero. Well, I was prepared to. I was answering your 
specific question, and if I created confusion, I again 
apologize. But I was answering your specific question, yes.
    Senator Vitter. OK. What was the preparation you undertook 
before that testimony? Did you prepare your testimony in 
consultation with other folks at the SEC?
    Ms. Romero. Yes, sir, I did.
    Senator Vitter. And who were they?
    Ms. Romero. Members of the Stanford team, obviously, to get 
facts down about the Stanford case, numbers, you know, where we 
were, getting updates on the investigation.
    Senator Vitter. Who in the Washington office did that 
preparation include?
    Ms. Romero. In Washington, there was preparation regarding 
the opening--or the written submission.
    Senator Vitter. Who was involved----
    Ms. Romero. I am trying to think. I am sorry. There were a 
number of people involved. There were lawyers from the General 
Counsel involved; there were lawyers from the Chairman's office 
involved; there were lawyers from the Division of Enforcement 
involved. As I sit here, I cannot think of everybody's name, 
but I would be happy to send that to you.
    Senator Vitter. OK.
    Senator Vitter. Do you remember as part of that preparation 
written timelines being put together?
    Ms. Romero. I am sorry. I do not understand your question.
    Senator Vitter. As part of that preparation for your 
testimony, do you remember putting together with the help of 
others written timelines regarding SEC activity about Stanford?
    Ms. Romero. Actually, Senator, the day that we filed the 
Stanford case, on February 16, 2009, we began to put together a 
detailed chronology of the Stanford events, beginning in 1997 
through 2009.
    Senator Vitter. Do you remember putting together a 
chronology specifically in preparation for your testimony?
    Ms. Romero. No, sir.
    Senator Vitter. OK. You do not remember that being 
distributed and discussed by e-mail?
    Ms. Romero. No, I do not.
    Senator Vitter. OK. You do not remember the original 
chronology that was put together to help you prepare for your 
testimony starting in 1997?
    Ms. Romero. I remember that there was a--we did a 
chronology the day--we started a chronology the day that we 
filed the Stanford case.
    Senator Vitter. Again, I am talking about specifically in 
preparation for your testimony.
    Ms. Romero. I do not remember that. I do not recall.
    Senator Vitter. And you do not remember, as that was looked 
at and discussed in preparation for your testimony, that 
chronology was changed to start around 2004?
    Ms. Romero. No, sir, I do not remember that. I do not.
    Senator Vitter. And you do not remember the fact that that 
new revised chronology is what basically you testified about?
    Ms. Romero. No, sir. No, sir.
    Senator Vitter. OK. In the same vein, do you remember an 
SEC Commission meeting with you prior to your testimony where 
Chairman Schapiro said, ``Any disclosure that is made now is 
meant to be quite narrow and was not meant to expose the 
agency''?
    Ms. Romero. No, sir. I did not participate in any such 
closed Commission meeting.
    Senator Vitter. I do not know it was closed or not. Do you 
remember a Commission meeting before the testimony?
    Ms. Romero. No, sir.
    Senator Vitter. You do not remember any such comment by 
Chairman Schapiro?
    Ms. Romero. No, sir, I do not, not in relation to Stanford 
or any other case.
    Senator Vitter. OK. Well, there is a lot of background to 
this. The bottom line, which I am obviously going to, is I 
think you actively misled me and the Committee. I am not 
saying--I am not saying--I could have been more careful in 
devising my question. Shame on me. I am a recovering lawyer. I 
am saying you actively misled me and the Committee. Do you have 
any response to that?
    Ms. Romero. I do, sir. I have dedicated--I did not actively 
mislead you, Senator. I have dedicated my life to the public 
good. I am a 4-year veteran of the Armed Services. I served as 
a police officer in the city of Fort Worth for 4 years. Three 
of those years I worked undercover. I served as an assistant 
district attorney with the Tarrant County DA's office. I went 
to the Fort Worth--to the Dallas--I am sorry, to the U.S. 
Attorney's Office in the Northern District, where I served for 
16 years. I have earned and I enjoy the deepest respect and 
reputation of excellence with the judiciary in the Northern 
District, with county judges, State judges, with members of the 
Fifth Circuit, and my integrity has never been--ever been 
questioned. I make mistakes. I am human, and I am getting old, 
quite frankly, so if that happened, I apologize. I am prepared 
in this forum, Senator Vitter, or any other, briefing you or 
your staff, to go into full detail about the Stanford matter as 
I know it. But I did not then and I am not now in any way 
misleading you, or have any reason to. The events that happened 
before 2006 I was not a part of. I was not there.
    Senator Vitter. OK. Well, again, you laid out a timeline in 
our field hearing in August 2009 that started in 2004. The 
SEC's direct knowledge of all these problems started 7 years 
before that. Would you disagree with any of that?
    Ms. Romero. No. No, I would not. You are right. They 
started in 1997.
    Senator Vitter. Do you think that is sort of a big 
omission, those 7 years?
    Ms. Romero. I was answering a specific question, and I am 
sorry. I was prepared to go into all of that. We moved on to 
other questions, and as I read the transcript, I saw that. For 
my part in that, sir, again, I sincerely apologize, and I am 
prepared to fully brief you in any forum that you would like 
and go through the Stanford matter detail by detail.
    Senator Vitter. Well, as the whole Committee and others 
look at this, I think it is going to be very important and 
instructive to look at the preparation that went on at the SEC 
Washington office with you and others directly preparing your 
testimony and specific discussion about the timeline and 
specific discussion about answering everything absolutely as 
narrowly as possible and using every opportunity to shorten the 
timeline as much as possible.
    Ms. Romero. I would be happy----
    Senator Vitter. That is going to be a continuing focus of 
mine. That is there. That is in e-mails. That is in writing. 
That is part of the record. And that is part of the travesty of 
this entire case.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much. Let me thank our 
witnesses here. I am going to leave the record open for a 
number of days here so that Members can have an opportunity to 
submit some additional questions. But I want to end where I 
began. I have great respect for the work that people do at the 
SEC, and I would not want this hearing to conclude without 
emphasizing that point again. This is hard work.
    I note that in our financial reform bill we call for the 
doubling of the budget of the SEC. I think we go from $1.1 
billion in this fiscal year to $2.25 billion by 2015. And my 
hope is that additional resource capacity will provide 
additional staff as necessary as we go forward. We have a lot 
more we are going to be asking you to do as a result of the 
financial reform bill itself, and I will acknowledge that the 
heads are nodding. I am not sure you are nodding necessarily 
you agree with that number. You probably want more. But I 
wanted to make the record at least clear that we are 
acknowledging the problems and the necessity of having a 
resource capacity to do the job. And you are all new to this in 
many ways, and so it falls in your lap to try and help weave 
our way through this to get some right answers so we see that--
there will invariably be crises again. There will be problems 
that get missed somehow. It is a human endeavor as well. But we 
ought to be able to set up procedurally the ability so that 
when you have a conflict such as existed in that office, there 
has got to be a manner by which that can be resolved in a way 
that does not leave the gaping hole and, of course, the 
tremendous damage done to so many people.
    So, with that, I thank you again for coming. The Committee 
will stand adjourned.
    [Whereupon, at 12:12 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

           PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    The Banking Committee today is holding a hearing on ``Oversight of 
the SEC Inspector General's Report on the `Investigation of the SEC's 
Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi 
Scheme' and Improving SEC Performance.'' Regulatory oversight is a 
prime responsibility that this Committee takes seriously. The Committee 
will review the Inspector General's Report on the Commission's failure 
to stop the Stanford financial fraud in a timely manner and will hear 
about the steps it is taking to fix the problems and to restore 
investor confidence.
    Last August, the Banking Committee held a field hearing on the 
``Alleged Stanford Financial Group Fraud: Regulatory and Oversight 
Concerns and the Need for Reform'' at the request of my colleague 
Senator Vitter. And last year, we held two hearings surrounding the 
SEC's failures in regard to the Bernard Madoff fraud. Those three 
hearings contributed to reforms we included in the Dodd-Frank Wall 
Street Reform and Consumer Protection Act to better empower and equip 
the SEC to do its job. Today's hearing builds on those, and reflects my 
work with Ranking Member Shelby. The hearing looks not only to the past 
Commission performance, but also to the future Commission actions for 
improvement.
    Let me review this situation. In February of 2009, the SEC charged 
Robert Allen Stanford and several associates with orchestrating an 
eight billion dollar Ponzi scheme. According to the SEC's complaint, 
the defendants for almost 15 years promised improbably high interest 
rates and misrepresented to purchasers of certificates of deposit that 
their deposits were safe, falsely claiming that the bank reinvested 
clients' funds primarily in ``liquid'' financial instruments.
    Although the Commission examination staff found strong evidence 
that Stanford was likely operating a Ponzi scheme as early as 1997, the 
Commission did not bring charges against Mr. Stanford until 2009, only 
months after Bernard Madoff's own Ponzi scheme was exposed; both cases 
revealed deeply troubling failures by the SEC.
    In March of this year, the SEC Office of the Inspector General 
released its report on the Commission's response to Stanford's scheme. 
The report found that a central problem was the failure of the SEC Fort 
Worth District Office Enforcement staff to heed the warning of the 
Examination staff.
    The IG report shows that the examiners at the Fort Worth District 
Office raised red flags about Mr. Stanford's operation in four exams 
conducted over 8 years, beginning in 1997, concluding in each 
examination that Stanford's CDs were likely a Ponzi scheme or a similar 
fraudulent scheme. However, the enforcement staff disregarded the 
examiners' repeated warnings, continually turning a blind eye for 
nearly a decade. We seem to have an instance in which one side of the 
agency was screaming that there was a fire, and the other side said 
that the fire was too hard to put out.
    The Inspector General report found that one reason that the 
Enforcement Division did not want to investigate Mr. Stanford was the 
perception that the case was difficult, novel and not the type favored 
by the Commission.
    The Report also raised a number of troubling facts about the former 
enforcement head of the Fort Worth office, who played a significant 
role in multiple decisions over the years to quash investigations of 
Mr. Stanford.
    All these pieces paint a picture of regulatory disconnects and 
mistakes that allowed this fraud to harm families and communities 
across our country. We look forward to learning to what the Commission 
attributes this regulatory shortcoming. Investors in Stanford's Ponzi 
scheme may have lost as much as $8 billion, and the damage to investor 
confidence may be greater still.
    I look forward to Inspector General Kotz's insights and discussion 
of his report's findings, and I appreciate the SEC being here with us 
to let us know what the Commission is doing to correct what went wrong. 
I hope that this hearing will provide the Committee, the Senate, and 
the American public with a clear view of how such a large and audacious 
fraud was allowed to perpetuate and grow, and what is being done to fix 
the system and prevent similar frauds in the future.
    The Dodd-Frank bill was one step in a long journey to righting this 
ship--giving the SEC more power, doubling its funding over 5 years, and 
having periodic GAO reviews--but our work is not done. The Inspector 
General's report also makes several thoughtful recommendations 
regarding bringing enforcement actions in complex cases, evaluating the 
performance of enforcement staff, coordination among SEC offices and 
divisions, staff training, and other matters.
    Investors deserve to know that there is a cop on the beat, working 
hard to protect them from scam artists like R. Allen Stanford and 
Bernard Madoff. Restoring investor confidence and certainty in the 
fairness of our financial system is vitally important as we recover 
from the economic crisis. The SEC should use all the resources at its 
disposal to work toward that end.

                                 ______
                                 
               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Mr. Chairman, thank you for holding today's hearing. Following the 
release of the SEC's Inspector General's Report, ``Investigation of the 
SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged 
Ponzi Scheme,'' I think it is crucial that this Committee continues its 
oversight role of the SEC, especially the agency's responsibility to 
protect investors. I also think it is important that we delve deeper 
into the ``alleged'' Stanford Ponzi Scheme and the SEC response, as 
there are constituents in my State who were victims.
    The report highlights grave errors made by the SEC, particularly 
when the examinations conducted since 1997 at SGC (Stanford Company 
Group) indicated fraud, but no enforcement action was taken. The 
inaction by the Enforcement Division elicits grave concern about the 
priorities of the SEC in this case, especially when Americans' life 
savings were lost.
    While massive cases like the Madoff Ponzi scheme rightfully grab 
headlines, I am pleased that we are taking a closer look at the fraud 
perpetrated by Stanford, the impact on investors, the response of the 
SEC, and the IG's investigation into the SEC's response to concerns 
about Robert Allen Stanford.
    I applaud Chairman Schapiro for the efforts she has made to reform 
how the SEC regulates markets and protects investors. I also think the 
Dodd-Frank bill makes some important changes at the SEC to better 
protect investors. That said, it is the role of this Committee to help 
determine if these are the right changes to prevent fraud, like that 
which was perpetrated by Allen Stanford, from happening again, and to 
ensure that these changes are working.
    It is my goal to ensure that the SEC has the right tools and 
appropriate resources; that investors have access, information, and 
protection, and that industry participants follow the rules, while also 
having certainty. I look forward to hearing more from today's 
witnesses, and I look forward to working with Members of this Committee 
to ensure that investors are protected from fraud before it happens.

                                 ______
                                 
                  PREPARED STATEMENT OF H. DAVID KOTZ
         Inspector General, Securities and Exchange Commission
                           September 22, 2010

Introduction
    Thank you for the opportunity to testify before this Committee on 
the subject of ``Oversight of the SEC's Inspector General's Report on 
the `Investigation of the SEC's Response to Concerns Regarding Robert 
Allen Stanford's Alleged Ponzi Scheme' and Improving SEC Performance.'' 
I appreciate the interest of the Chairman, the Ranking Member, as well 
as the other Members of the Committee, in the Securities and Exchange 
Commission (SEC or Commission) and the Office of Inspector General 
(OIG). In my testimony, I am representing the OIG, and the views that I 
express are those of my Office, and do not necessarily reflect the 
views of the Commission or any Commissioners.
    I would like to begin my remarks by briefly discussing the role of 
my Office and the oversight efforts we have undertaken during the past 
few years. The mission of the Office of Inspector General is to promote 
the integrity, efficiency and effectiveness of the critical programs 
and operations of the SEC. The SEC Office of Inspector General includes 
the positions of the Inspector General, Deputy Inspector General, 
Counsel to the Inspector General, and has staff in two major areas: 
Audits and Investigations.
    Our audit unit conducts, coordinates and supervises independent 
audits and evaluations related to the Commission's internal programs 
and operations. The primary purpose of conducting an audit is to review 
past events with a view toward ensuring compliance with applicable 
laws, rules and regulations and improving future performance. Upon 
completion of an audit or evaluation, the OIG issues an independent 
report that identifies any deficiencies in Commission operations, 
programs, activities or functions and makes recommendations for 
improvements in existing controls and procedures.
    The Office's investigations unit responds to allegations of 
violations of statutes, rules and regulations, and other misconduct by 
Commission staff and contractors. We carefully review and analyze the 
complaints we receive and, if warranted, conduct a preliminary inquiry 
or full investigation into a matter. The misconduct investigated ranges 
from fraud and other types of criminal conduct to violations of 
Commission rules and policies and the Government-wide conduct 
standards. The investigations unit conducts thorough and independent 
investigations into allegations received in accordance with the 
applicable Quality Standards for Investigations. Where allegations of 
criminal conduct are involved, we notify and work with the Department 
of Justice and the Federal Bureau of Investigation as appropriate.

Audit Reports
    Over the past 2\1/2\ years since I became the Inspector General of 
the SEC, our audit unit has issued numerous reports involving matters 
critical to SEC programs and operations and the investing public. These 
have included an examination of the Commission's oversight of Bear 
Stearns and the factors that led to its collapse, an audit of the SEC 
Division of Enforcement's (Enforcement's) practices related to naked 
short selling complaints and referrals, a review of the SEC's bounty 
program for whistleblowers, and an analysis of the SEC's oversight of 
credit rating agencies. In addition, following a comprehensive 
investigative report related to the Madoff Ponzi scheme in which our 
Office identified systematic breakdowns in the manner in which the SEC 
conducted its examinations and investigations (discussed in more detail 
below), we performed three comprehensive reviews providing the SEC with 
69 specific and concrete recommendations to improve the operations of 
both Enforcement and the Office of Compliance Inspections and 
Examinations (OCIE).

Investigative Reports
    The Office's investigations unit has also conducted numerous 
comprehensive investigations into significant failures by the SEC in 
accomplishing its regulatory mission, as well as investigations of 
allegations of violations of statutes, rules and regulations, and other 
misconduct by Commission staff members and contractors. Several of 
these investigations involved senior-level Commission staff and 
represent matters of great concern to the Commission, Congressional 
officials and the general public. Where appropriate, we have reported 
evidence of improper conduct and made recommendations for disciplinary 
actions, including removal of employees from the Federal service, as 
well as recommendations for improvements in agency policies, procedures 
and practices.
    Specifically, we have issued investigative reports regarding a 
myriad of allegations, including claims of failures by Enforcement to 
pursue investigations vigorously or in a timely manner, improper 
securities trading by Commission employees, conflicts of interest by 
Commission staff members, unauthorized disclosure of nonpublic 
information, whistleblower allegations of contract fraud, preferential 
treatment given to prominent persons, retaliatory termination, perjury 
by supervisory Commission attorneys, failure of SEC attorneys to 
maintain active bar status, falsification of Federal documents, and the 
misuse of official position, Government resources and official time. In 
August 2009, we issued a 457-page report of investigation analyzing the 
reasons why the SEC failed to uncover Bernard Madoff's $50 billion 
Ponzi scheme. More recently, we issued a thorough and comprehensive 
report of investigation regarding the history of the SEC's examinations 
and investigations of Robert Allen Stanford's (Stanford's) $8 billion 
alleged Ponzi scheme. The report is discussed in detail below and is 
the subject of this hearing.

Commencement of Stanford Investigation
    On October 9, 2009, I received a letter from the Ranking Member of 
this Committee, the Honorable Richard Shelby, and the Honorable David 
Vitter requesting a comprehensive investigation of the handling of the 
SEC's investigation into Robert Allen Stanford and his various 
companies, including the history of all the SEC's investigations and 
examinations regarding Stanford. On October 13, 2009, the OIG opened 
our investigation into the Stanford matter.

Document and E-mail Review
    Between October 13, 2009 and February 16, 2010, the OIG 
investigative team made numerous requests to the SEC's Office of 
Information Technology (OIT) for the e-mails of current and former SEC 
employees for various periods of time pertinent to the investigation. 
The e-mails were received, loaded onto computers with specialized 
search tools and searched on a continuous basis throughout the course 
of our investigation.
    In all, OIT provided e-mails for a total of 42 current and former 
SEC employees for various time periods pertinent to the investigation, 
ranging from 1997 to 2009. We estimate that we obtained and searched 
over 2.7 million e-mails during the course of the investigation.
    On October 27, 2009, we sent comprehensive document requests to 
both Enforcement and OCIE specifying the documents and records we 
required to be produced for the investigation. We carefully reviewed 
and analyzed the information we received as a result of our document 
production requests. These documents included all records relating to 
the SEC's Fort Worth office's examinations in 1997 of Stanford Group 
Company's Broker-Dealer, in 1998 of Stanford Group Company's Investment 
Advisor, in 2002 of Stanford Group Company's Investment Advisor, and in 
2004 of Stanford Group Company's Broker-Dealer. These also included 
investigative records relating to the Fort Worth office's 1998 inquiry 
regarding Stanford Group Company and its investigation of Stanford 
Group Company, which was opened in 2006.
    We also sought and reviewed documents from the Financial Industry 
Regulatory Authority (FINRA), including documents concerning 
communications between FINRA or its predecessor, the National 
Association of Securities Dealers (NASD), and the SEC concerning 
Stanford, and FINRA documents pertaining to the SEC's examinations and 
inquiries regarding Stanford.

Testimony and Interviews
    The OIG conducted 51 testimonies and interviews of 48 individuals 
with knowledge of facts or circumstances surrounding the SEC's 
examinations and/or investigations of Stanford and his firms. I 
personally led the questioning in the testimony and interviews of the 
witnesses in this investigation.
    Specifically, we conducted on-the-record and under oath testimony 
of 28 individuals, including all of the relevant examiners and 
investigators who worked on SEC matters relating to Stanford. We also 
conducted interviews of 20 other witnesses, including former SEC 
employees, whistleblowers, victims of the alleged Ponzi scheme, and 
officials from the Texas State Securities Board.

Issuance of Comprehensive Report of Investigation
    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 of 
investigation detailed all of the SEC's examinations and investigations 
of Stanford from 1997 through 2009 and the agency's response to all 
complaints it received regarding the activities of Stanford's 
companies, tracing the path of these complaints through the Commission 
from their inception and reviewing what, if any, investigative or 
examination work was conducted with respect to the allegations in the 
complaints.

Results of the OIG's Stanford Investigation
    The OIG's investigation determined that the SEC's Fort Worth office 
was aware since 1997 that Robert Allen Stanford was likely operating a 
Ponzi scheme, having come to that conclusion a mere 2 years after 
Stanford Group Company, Stanford's investment adviser, registered with 
the SEC in 1995. We found that over the next 8 years, the SEC's Fort 
Worth Examination group conducted four examinations of Stanford's 
operations, finding in each examination that the certificates of 
deposit (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 the 
purported conservative investment approach utilized. The SEC's Fort 
Worth examiners conducted examinations of Stanford in 1997, 1998, 2002 
and 2004, concluding in each instance that Stanford's CDs were likely a 
Ponzi scheme or similar fraudulent scheme. The only significant 
difference in the examination group's findings over the years was that 
the potential fraud was growing exponentially, from $250 million to 
$1.5 billion.
    The first SEC examination occurred in 1997, just 2 years after 
Stanford Group Company began operations. After reviewing Stanford Group 
Company's annual audited financial statements in 1997, a former branch 
chief in the Fort Worth Broker-Dealer Examination group stated that, 
based simply on her review of the financial statements, she ``became 
very concerned'' about the ``extraordinary revenue'' from the CDs and 
immediately suspected the CD sales were fraudulent. In August 1997, 
after just six days of field work in an examination of Stanford, the 
examiners concluded that Stanford International Bank's statements 
promoting the CDs appeared to be misrepresentations. The examiners 
noted that while the CD products were promoted as being safe and 
secure, with investments in ``investment-grade bonds,'' the interest 
rate, combined with referral fees of between 11 percent and 13.75 
percent annually, was simply too high to be achieved through the 
purported low-risk investments.
    The branch chief concluded after the 1997 examination was finished 
that the CDs declared above-market returns were ``absolutely 
ludicrous'' and that the high referral fees paid for selling the CDs 
indicated that they were not ``legitimate CDs.'' The Assistant District 
Administrator for the Fort Worth Examination program concurred, noting 
that there were ``red flags'' about Stanford's operations that caused 
her to believe Stanford Group Company was operating a Ponzi scheme, 
specifically noting the fact that the interest being paid on these CDs 
``was significantly higher than what you could get on a CD in the 
United States.'' She further concluded that it was ``highly unlikely'' 
that the returns Stanford claimed to generate could be achieved with 
the conservative investment approach Stanford claimed to be using.
    In the SEC's internal tracking database, where it recorded 
information about its examinations, the Broker-Dealer Examination group 
characterized its conclusion from the 1997 examination of Stanford 
Group Company as ``Possible misrepresentations. Possible Ponzi 
scheme.'' Our investigation found that in 1997, the examination staff 
determined, as a result of their findings, that an investigation of 
Stanford by the Fort Worth Enforcement group was warranted, and 
referred a copy of their examination report to the Enforcement group 
for review and disposition. In fact, when the former Assistant District 
Administrator for the Fort Worth Examination program retired in 1997, 
her ``parting words'' to the aforementioned branch chief were to ``keep 
your eye on these people [referring to Stanford] because this looks 
like a Ponzi scheme to me and some day it's going to blow up.''
    We also found that in June 1998, the Investment Adviser Examination 
group in Fort Worth began another examination of Stanford Group 
Company. This Investment Adviser examination arrived at the same 
conclusions that the broker-dealer examination had reached. The 
Investment Adviser examiners found very suspicious Stanford's 
``extremely high interest rates and extremely generous compensation'' 
in the form of annual recurring referral fees, as well as the fact that 
Stanford Group Company was so ``extremely dependent upon that 
compensation to conduct its day-to-day operations.''
    In November 2002, the SEC's Investment Adviser Examination group 
conducted yet another examination of Stanford Group Company. In this 
examination, the staff identified the same red flags that had been 
noted in the previous two examinations, including the fact that ``the 
consistent, above-market reported returns'' were ``very unlikely'' to 
be able to be achieved with Stanford's investments.
    The Investment Adviser examiners also found that the list of 
investors provided by Stanford Group Company was inaccurate, as the 
list they received of the CD holders was inconsistent with the total 
CDs outstanding based upon referral fees. The examiners noted that 
although they did follow up with Stanford Group Company about this 
discrepancy, they never obtained ``a satisfactory response, and a full 
list of investors.''
    After the examiners began this third examination of Stanford, the 
SEC received multiple complaints from outside entities reinforcing and 
bolstering the examiners' suspicions about Stanford's operations. 
However, the SEC failed to follow up on these complaints or take any 
action to investigate them. On December 5, 2002, the SEC received a 
complaint from a citizen of Mexico, who raised the same concerns the 
examination staff had raised. While the examiners characterized the 
concerns expressed in this complaint as ``legitimate,'' we found that 
the SEC did not respond to the complaint and did not take any action to 
investigate the claims made therein.
    In 2003, the SEC Enforcement staff received two new complaints that 
Stanford was a Ponzi scheme, but we found that nothing was done to 
pursue either of them. On August 4, 2003, the SEC was forwarded a 
letter that discussed several similarities between a known Ponzi scheme 
and Stanford's operations. Then, on October 10, 2003, the NASD 
forwarded a letter dated September 1, 2003, from an anonymous Stanford 
insider to the SEC's Office of Investor Education and Advocacy, which 
stated, in pertinent part:

        Stanford Financial is the subject of a lingering corporate 
        fraud scandal perpetuated as a ``massive Ponzi scheme'' that 
        will destroy the life savings of many; damage the reputation of 
        all associated parties, ridicule securities and banking 
        authorities, and shame the United States of America.

    Our investigation found that while this letter was minimally 
reviewed by various Enforcement staff, the Enforcement group decided 
not to open an investigation or even an inquiry into the complaint. The 
Enforcement branch chief responsible for the decision explained his 
rationale as follows:

        [R]ather than spend a lot of resources on something that could 
        end up being something that we could not bring, the decision 
        was made to--to not go forward at that time, or at least to--to 
        not spend the significant resources and--and wait and see if 
        something else would come up.

    In October 2004, the Fort Worth Examination staff conducted a 
fourth examination of Stanford Group Company. The examiners once again 
analyzed the CD returns using data about the past performance of the 
equity markets and concluded that Stanford Group Company's sales of the 
CDs violated numerous Federal securities laws.
    While the Fort Worth Examination group made multiple efforts after 
each examination of Stanford Group Company to convince the Enforcement 
group to open and conduct an investigation of Stanford, we found that 
the Enforcement group made no meaningful effort to investigate the 
potential fraud or to consider an action to attempt to stop it until 
late 2005. In 1998, the Enforcement group opened a brief inquiry, but 
then closed it after only three months, when Stanford failed to produce 
documents evidencing fraud in response to a voluntary document request. 
In 2002, no investigation was opened even after the examiners 
specifically identified in an examination report multiple violations of 
securities laws by Stanford. In 2003, after receiving the three 
separate complaints about Stanford's operations, the Enforcement group 
decided not to open up an investigation or even an inquiry, and did not 
follow up to obtain more information about the complaints.
    In late 2005, after a change in leadership in the Enforcement group 
and in response to the continuing pleas by the Fort Worth examiners, 
who had been watching the potential fraud grow in examination after 
examination, the Enforcement group finally agreed to seek a formal 
order from the Commission to investigate Stanford. However, even at 
that time, the Enforcement group missed an opportunity to have the SEC 
bring an action against Stanford Group Company for its admitted failure 
to conduct any due diligence regarding Stanford's investment portfolio. 
Such an action could have potentially halted the sales of the Stanford 
International Bank CDs though the Stanford Group Company investment 
adviser, and would have provided investors and prospective investors 
with notice that the SEC considered Stanford Group Company's sales of 
the CDs to be fraudulent. We found that this particular action was not 
considered, partially because the new head of the Enforcement group in 
Fort Worth was not aware of the findings of the Investment Adviser 
group's examinations in 1998 and 2002, or even that Stanford Group 
Company had registered as an investment adviser, a fact she learned for 
the first time in the course of our investigation in January 2010.
    We did not find that the reluctance of the SEC's Fort Worth 
Enforcement group to investigate Stanford was related to any improper 
professional, social or financial relationship on the part of any 
current or former SEC employee. We found evidence, however, that SEC-
wide institutional influence did factor into the Enforcement group's 
repeated decisions not to undertake a full and thorough investigation 
of Stanford, notwithstanding staff awareness that the potential fraud 
was growing. We found that senior Fort Worth officials perceived that 
they were being judged on the numbers of cases they brought, so-called 
``stats,'' and communicated to the Enforcement staff that novel or 
complex cases were disfavored. As a result, cases like Stanford, which 
were not considered ``quick-hit'' or ``slam-dunk'' cases, were not 
encouraged.
    We also found that a 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 
Ethics Office that it was improper for him to do so.
    Our investigation revealed that this individual while working at 
the SEC was responsible for decisions: (1) in 1998 to close an inquiry 
opened regarding Stanford after the 1997 examination; (2) in 2002, in 
lieu of responding to a complaint or investigating the issues it 
raised, to forward it to the Texas State Securities Board; (3) also in 
2002, not to act on the Examination staff's referral of Stanford for 
investigation after its Investment Adviser examination; (4) in 2003, 
not to investigate Stanford after a complaint was received comparing 
Stanford's operations to a known fraud; (5) also in 2003, not to 
investigate Stanford after receiving a complaint from an anonymous 
insider alleging that Stanford was engaged in a ``massive Ponzi 
scheme;'' and (6) in 2005, to summarily inform senior Examination staff 
after a presentation was made on Stanford at a quarterly summit meeting 
that Stanford was not a matter they planned to investigate.
    Yet, in June 2005, a mere two months after leaving the SEC, this 
former head of the Enforcement group in Fort Worth e-mailed the SEC 
Ethics Office that he had been ``approached about representing 
[Stanford] . . . in connection with (what appears to be) a preliminary 
inquiry by the Fort Worth office.'' He further stated, ``I am not aware 
of any conflicts and I do not remember any matters pending on Stanford 
while I was at the Commission.''
    After the SEC Ethics Office denied the former head of Enforcement 
in Fort Worth's June 2005 request, in September 2006, Stanford retained 
this individual to assist with inquiries Stanford was receiving from 
regulatory authorities, including the SEC. The former head of 
Enforcement in Fort Worth met with Stanford Financial Group's General 
Counsel in Stanford's Miami office and billed Stanford for his time on 
this representation. In late November 2006, he called his former 
subordinate, the Assistant Director working on the Stanford matter in 
Fort Worth, who asked him during the conversation, ``[C]an you work on 
this?,'' and in fact told him, ``I'm not sure you're able to work on 
this.'' After this call, the former head of Enforcement in Fort Worth 
belatedly sought permission from the SEC's Ethics Office to represent 
Stanford. The SEC Ethics Office replied that he could not represent 
Stanford for the same reasons given a year earlier and he discontinued 
his representation.
    In February 2009, immediately after the SEC sued Stanford, this 
same former head of Enforcement in Fort Worth contacted the SEC Ethics 
Office a third time about representing Stanford in connection with the 
SEC matter--this time to defend Stanford against the lawsuit filed by 
the SEC. An SEC Ethics official testified that he could not recall 
another instance in which a former SEC employee contacted the Ethics 
Office on three separate occasions trying to represent a client in the 
same matter. After the SEC Ethics Office informed the former head of 
Enforcement in Fort Worth for a third time that he could not represent 
Stanford, he became upset with the decision, arguing that the matter 
pending in 2009 ``was new and was different and unrelated to the matter 
that had occurred before he left.'' When asked during our investigation 
why he was so insistent on representing Stanford, he replied, ``Every 
lawyer in Texas and beyond is going to get rich over this case. Okay? 
And I hated being on the sidelines.''
    Based upon this evidence, our investigation determined that the 
former head of Enforcement in Fort Worth's representation of Stanford 
appeared to violate State bar rules that prohibit a former Government 
employee from working on matters in which that individual participated 
as a Government employee.
    In summary, our report of investigation concluded overall that the 
SEC's Fort Worth office was aware since 1997 that Stanford was likely 
operating a Ponzi scheme after conducting examination after examination 
for a period of 8 years, but merely watched the alleged fraud grow, and 
failed to take any action to stop it.

Recommendations of the OIG's Stanford Report of Investigation
    We provided our Report of Investigation on the SEC's handing of the 
Stanford matter to the Chairman of the SEC on March 31, 2010. We 
recommended that the Chairman carefully review the Report's findings 
and share with Enforcement management the portions of the Report that 
related to the performance failures by those employees who still work 
at the SEC, so that appropriate action (which may include performance-
based action, if applicable) would be taken, on an employee-by-employee 
basis, to ensure that future decisions about when to open an 
investigation and when to recommend that the Commission take action are 
made in a more appropriate and timely manner.
    We also made numerous recommendations to improve the operations of 
several divisions and offices within the SEC. Specifically, we 
recommended that:

  1.  Enforcement ensure that the potential harm to investors if no 
        action is taken is considered as a factor when deciding whether 
        to recommend an enforcement action, including consideration of 
        whether this factor, in certain situations, outweighs other 
        factors such as litigation risk;

  2.  Enforcement emphasize the significance of bringing cases that are 
        difficult, but important to the protection of investors, in 
        evaluating the performance of an Enforcement staff member or a 
        regional office;

  3.  Enforcement consider the significance of the presence or absence 
        of United States investors in determining whether to open an 
        investigation or recommend an enforcement action that otherwise 
        meets jurisdictional requirements;

  4.  There be improved coordination between the Enforcement and OCIE 
        on investigations, particularly those investigations initiated 
        by an OCIE referral to Enforcement;

  5.  Enforcement reevaluate the factors utilized to determine when 
        referral of a matter to State securities regulators, in lieu of 
        an SEC investigation, is appropriate;

  6.  There be additional training of Enforcement staff to strengthen 
        their understanding of the laws governing broker-dealers and 
        investment advisers; and

  7.  Enforcement emphasize the need to coordinate with the Office of 
        International Affairs and the Division of Risk, Strategy, and 
        Financial Innovation, as appropriate, early in the course of 
        investigations.

    We also referred our Report of Investigation to the Commission's 
Ethics Counsel for referral to the Bar Counsel offices in the two 
States in which the former head of Enforcement in Fort Worth was 
admitted to practice law.

Follow-up on Recommendations
    My Office is committed to following up with respect to all of the 
recommendations made in our Stanford report to ensure that appropriate 
changes and improvements are made in the SEC's operations as a result 
of our findings. We are aware that many improvements have already been 
undertaken under the direction of Chairman Schapiro and Enforcement 
Director Khuzami as a result of the findings and many recommendations 
we made as a result of our Madoff investigation. We note that 
Enforcement has indicated that it has taken action on the 
recommendations of our Stanford report, and we are in the process of 
reviewing those actions to ensure that they are adequate and fully 
address the OIG's concerns. We are confident that under Chairman 
Schapiro's leadership, the SEC will carefully take the appropriate 
steps to implement fully our Stanford recommendations and ensure that 
fundamental changes are made in the SEC's operations so that the errors 
and failings we found in our investigation are properly remedied and 
not repeated in the future.

Similarities to Failures in the Madoff Matter
    While my Office has not conducted any formal analysis of 
similarities between the findings in our Madoff and Stanford reports, 
we have identified some striking parallels between the two situations. 
First, in both cases, the SEC received credible and substantive 
complaints about possible fraud, but failed to follow up appropriately 
on these complaints. Second, in both the Madoff and Stanford matters, 
the SEC had in its possession ample evidence of potential fraud, which 
should have triggered thorough and comprehensive Enforcement 
investigations and actions. Third, and most unfortunately, in both 
situations, prompt and effective action on the part of the SEC could 
have potentially uncovered fraud and prevented investors from losing 
billions of dollars.
    Our Office intends to remain vigilant to ensure that the SEC 
benefits from the lessons learned as a result of its failures in both 
these cases and makes the necessary improvements to ensure that such 
failures do not occur again in the future.

Conclusion
    In conclusion, I appreciate the interest of the Chairman, the 
Ranking Member and the Committee in the SEC and my Office and, in 
particular, in the facts and circumstances pertinent to our Stanford 
report. I believe that the Committee's and Congress's continued 
involvement with the SEC is helpful to strengthen the accountability 
and effectiveness of the Commission. Thank you.

                                 ______
                                 
                      JOINT PREPARED STATEMENT OF
                             ROBERT KHUZAMI
 Director, Division of Enforcement, Securities and Exchange Commission
                                  And
                           CARLO V. DI FLORIO
Director, Office of Compliance Inspections and Examinations, Securities 
                        and Exchange Commission
                           September 22, 2010

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify today on behalf of the 
Securities and Exchange Commission (SEC).
    The Commission commends the work of the Inspector General and his 
staff investigating this matter and drafting the report, Investigations 
of the SEC's Response to Concerns Regarding Robert Allen Stanford's 
Alleged Ponzi Scheme, OIG-526 (Inspector General Report). The Office of 
the Inspector General conducted an extensive investigation that clearly 
identifies missed opportunities for protecting investors, and no one 
should evade responsibility for the SEC's handling of the Stanford 
matter. We deeply regret that the SEC failed to act more quickly to 
limit the tragic investor losses suffered by Stanford's victims.
    The Inspector General Report makes important recommendations 
identifying areas for improvement throughout the SEC and, as we will 
discuss today, both the Division of Enforcement and the Office of 
Compliance Inspections and Examinations (OCIE) have instituted various 
measures to address those recommendations.
    In addition to the Inspector General Report's recommendations, as 
new leaders, each of us has engaged in a top to bottom review of our 
respective Division and Office since joining the Commission within the 
last year and a half and have implemented measures to reform our 
organizational processes and improve our effectiveness. We have vastly 
expanded our training programs; hired staff with new skill sets; 
streamlined management; put seasoned investigative attorneys back on 
the front lines; improved our examiners' risk-assessment techniques; 
revised our enforcement and examination procedures to improve 
coordination and information-sharing; leveraged the knowledge of third 
parties; instituted new initiatives to identify fraud; and revamped the 
way that we handle the tremendous volume of tips, complaints, and 
referrals that we receive annually.
    Despite the many changes, more needs to be done. This will require 
commitment and creativity. We embrace the challenge and are confident 
that our efforts will continue to enhance investor protection and the 
integrity of our financial markets.

Status of the Stanford Case
    In February 2009, the SEC filed an emergency civil action to halt 
sales of Stanford Certificates of Deposit (CDs) and seek the return of 
funds to harmed investors. Shortly thereafter, the SEC filed an amended 
complaint against Robert Allen Stanford, James M. Davis, Stanford 
International Bank (SIB), and others alleging a massive Ponzi scheme in 
the sale of SIB CDs.
    By the end of 2008, SIB had sold more than $7.2 billion of CDs by 
touting the bank's safety and security, consistent double-digit returns 
on the bank's investment portfolio, and high rates of return on the CDs 
that greatly exceeded rates offered by U.S. commercial banks. The SEC's 
complaint alleged that Stanford and Davis misappropriated billions of 
dollars of investor funds and invested funds in speculative, 
unprofitable private businesses controlled by Stanford. In an effort to 
conceal their fraudulent conduct, Stanford and Davis allegedly 
fabricated the performance of the bank's investment portfolio and lied 
to investors about the nature and performance of the portfolio. The SEC 
alleged that, rather than making principal redemptions and interest 
payments from earnings, Stanford made purported interest and redemption 
payments from money derived from CD sales.
    Working in close coordination with the SEC, the Department of 
Justice, on June 19, 2009, unsealed indictments against Stanford, Davis 
and three other former Stanford employees, alleging that they committed 
securities, wire and mail fraud and obstructed the SEC's investigation. 
On June 30, 2009, the court ordered that Stanford be detained in jail 
pending his criminal trial.
    In June 2009, the SEC also sued Leroy King, the former 
Administrator and Chief Executive Officer for the Antigua Financial 
Services Regulatory Commission (AFSRC), alleging that Stanford bribed 
King to help him conceal his fraud and thwart the SEC's investigation. 
As alleged in the SEC's complaint, while King received bribes from 
Stanford, he rebuffed SEC inquiries into Stanford's conduct by stating, 
among other things, that further investigation of Stanford was 
``unwarranted,'' and that his bank was ``fully compliant'' with 
Antiguan bank regulations. \1\ King also permitted Stanford to, in 
effect, ``ghost write'' the response by the AFSRC to the SEC, which 
rejected the SEC's demand for information. Bribing King permitted 
Stanford to keep his fraud alive for years. In addition to the SEC's 
charges, the Department of Justice indicted King for charges, including 
obstruction of justice, for allegedly accepting tens of thousands of 
dollars in bribes to facilitate the scheme.
---------------------------------------------------------------------------
     \1\ SEC v. Stanford International Bank Ltd., et al., No 3:09-cv-
0298-N (N.D.Tex), Second Amended Complaint at par. 88.
---------------------------------------------------------------------------
    The SEC is vigorously pursuing its case against Stanford and the 
others charged in this massive Ponzi scheme. In addition, the staff's 
investigation into possible misconduct by others (including former 
employees and third parties) is ongoing.

Status of Recovery for Stanford Investors
    The SEC's focus in the Stanford matter is to hold wrongdoers 
accountable while providing maximum recovery to investors harmed by 
this egregious fraud. We are proceeding on several fronts:
    First, after filing its civil action in February 2009, the SEC 
filed a motion requesting that the district court appoint a Receiver 
over the defendants' assets to prevent waste and dissipation of those 
assets to the detriment of investors. Second, to complement the 
Receiver's efforts, the SEC, in coordination with the DOJ, moved to 
freeze SIB assets held in international financial institutions. 
Freezing assets in international jurisdictions poses complex litigation 
challenges, but this step was crucial to ensure the protection of 
investor funds. Third, the SEC is working with the Receiver, DOJ, and 
securities regulators and law enforcement agencies in the United 
Kingdom, Switzerland, Canada, Mexico, and in several countries 
throughout Central and South America, to identify, secure, and 
repatriate for the benefit of investors over $300 million in cash and 
securities held in non-U.S. bank accounts.
    In a status report filed July 1, 2010, the Receiver identified 
several categories of major assets for possible distribution to harmed 
investors:

    $80.5 million in cash on hand;

    $17.2 million in private equity investments already 
        recovered and liquidated, with an additional $7.7 million in 
        proceeds from additional pending transactions expected;

    $2.3 million in inventory and accounts receivable, 
        specifically in coins and gold bullion;

    $6.4 million in real estate sale proceeds, with an 
        additional $11.7 million expected from sales of other 
        identified properties; and

    $511 million in pending fraudulent transfer and unjust 
        enrichment claims. \2\
---------------------------------------------------------------------------
     \2\ This figure includes amounts claimed in lawsuits filed or 
intended to be filed by the Receiver; actual recovery may vary 
depending on litigation outcome.

    In conjunction with the SEC, the Receiver is focused on identifying 
and liquidating the largest possible pool of obtainable assets for 
distribution to harmed investors.
    The SEC is closely monitoring the Receiver's costs to ensure 
optimal recovery for the victims of this massive fraud. We have 
strongly urged the Receiver to stringently apply a cost-benefit 
analysis and pursue only those legal claims that could generate maximum 
proceeds for the benefit of investors while minimizing the Receiver's 
legal fees and expenses. We also have cautioned the Receiver that we 
are carefully scrutinizing all bills requesting payment for fees and 
expenses. In fact, on at least three occasions, the SEC has formally 
challenged the Receiver's bills. We will continue to do so where 
appropriate.

Status of SIPC Determination in Stanford
    The Commission oversees the activities of the Securities Investor 
Protection Corporation (SIPC), which plays a critical role in 
protecting the customers of a broker-dealer entering liquidation under 
the Securities Investor Protection Act (SIPA). In the Stanford matter, 
SIPC has indicated that, in its view and based on the facts presented, 
there is no basis for SIPC to initiate a proceeding under SIPA. \3\ The 
Commission is investigating the facts to determine whether that 
determination is appropriate, including meeting with the Stanford 
Victims' Coalition and reviewing documents provided in support of their 
claims. The Commission will continue to monitor the issues surrounding 
the Stanford matter as it relates to SIPC.
---------------------------------------------------------------------------
     \3\ http://www.stanfordfinancialreceivership.com/documents/
SIPC_Letter.pdf 
---------------------------------------------------------------------------
Enforcement and OCIE Responses to Inspector General Recommendations
    On April 16, 2010, the SEC released a report by the Inspector 
General concerning the investigation of the Stanford matter. The report 
identified the need for reforms in the Division of Enforcement and in 
the Office of Compliance Inspections and Examinations.

Division of Enforcement
    The Division of Enforcement has taken action on all seven of the 
formal recommendations identified in the Inspector General Report. On 
July 20, 2010, Enforcement submitted a closing memorandum to the 
Inspector General containing information that we believed fully 
addressed all seven recommendations. We are working with the Inspector 
General and hope to receive his concurrence on closing the 
recommendations as soon as possible.
    First Recommendation. The Inspector General recommended that we 
evaluate the potential harm to investors when deciding whether to bring 
an enforcement action that also may involve litigation risks. The 
Division's Enforcement Manual, \4\ developed in October 2008, provides 
that staff should consider several factors when determining whether to 
open an investigation, including: (i) the potential losses involved or 
harm to investors and (ii) the egregiousness of the potential 
violation. In addition, the Enforcement Manual also states that first 
among the factors the staff should consider before closing an 
investigation is the seriousness of the conduct and potential 
violations. As these Enforcement Manual provisions indicate, prior to 
the Inspector General Report, the Division encouraged staff to 
carefully assess factors such as potential harm to investors and 
seriousness of potential violations when deciding whether to open or 
close investigations. In response to the Inspector General Report, we 
have instituted mandatory Enforcement Manual training for all Division 
staff to ensure compliance.
---------------------------------------------------------------------------
     \4\ http://www.sec.gov/divisions/enforce/enforcementmanual.pdf
---------------------------------------------------------------------------
    In addition to its Enforcement Manual provisions and related 
training, the Division regularly files actions in Federal court seeking 
emergency temporary restraining orders and asset freezes to prevent 
imminent investor harm and protect assets for the benefit of 
investors--actions that often present litigation risk given the exigent 
circumstances of the very early stages of an investigation. In fiscal 
year 2010 to date, Enforcement has obtained 45 emergency temporary 
restraining orders to halt ongoing misconduct and prevent imminent 
investor harm and 56 asset freezes to preserve funds for the benefit of 
investors. We believe that these measures address the Inspector 
General's concern that Enforcement staff should carefully consider the 
potential harm to investors when deciding to bring an enforcement 
action that may otherwise pose litigation risks.
    Second Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying staff and regional office 
performance evaluation procedures that recognize the significance of 
bringing difficult cases focused on investor protection. The 
Enforcement Division has revised the metrics used to manage and 
evaluate the performance of its staff. Rather than emphasizing the 
number of actions filed, we focus on the programmatic priority of the 
case, which reflects a consideration of multiple factors, including 
whether the matter:

  1.  presents an opportunity to send a particularly strong and 
        effective message of deterrence, including with respect to 
        markets, products and transactions that are newly developing, 
        or that are long established but which by their nature present 
        limited opportunities to detect wrongdoing and thus to deter 
        misconduct;

  2.  involves particularly egregious or extensive misconduct;

  3.  involves potentially widespread and extensive harm to investors;

  4.  involves misconduct by persons occupying positions of substantial 
        authority or responsibility, or who owe fiduciary or other 
        enhanced duties and obligations to a broad group of investors 
        or others;

  5.  involves potential wrongdoing as prohibited under newly enacted 
        legislation or regulatory rules;

  6.  involves potential misconduct that occurred in connection with 
        products, markets, transactions or practices that pose 
        particularly significant risks for investors or a systemically 
        important sector of the market;

  7.  involves a substantial number of potential victims and/or 
        particularly vulnerable victims;

  8.  involves products, markets, transactions or practices that the 
        Enforcement Division has identified as priority areas (i.e., 
        conduct relating to the financial crisis; fraud in connection 
        with mortgage-related securities; financial fraud involving 
        public companies whose stock is widely held; misconduct by 
        investment advisers; and matters involving priorities 
        established by particular regional offices or the specialized 
        units); and

  9.  provides an opportunity to pursue priority interests shared by 
        other law enforcement agencies on a coordinated basis.

    We further consider in our evaluations the difficulty, complexity 
and investigative challenges of the case, as well as the efficiency of 
the resources used, the swiftness of the action, and the success of the 
outcome.
    In addition, the Division now generates a national priority case 
report that identifies and tracks cases deemed programmatically 
significant to ensure that appropriate resources are devoted to these 
cases. Finally, the SEC's Strategic Plan for Fiscal Years 2010-2015--as 
circulated for public comment--identifies the performance standards 
that it will use to gauge the success of its enforcement program. Those 
performance measures are not exclusively focused on the number of cases 
filed per fiscal year, but rather include: (i) the percentage of 
enforcement cases successfully resolved; (ii) the percentage of 
enforcement cases filed within 2 years, and (iii) our success in 
collecting and returning money to investors in a timely fashion. We 
believe that these new procedures and metrics address the issues raised 
in the Inspector General Report regarding the role that metrics played 
in the Stanford matter and the need for an enhanced qualitative 
assessment of staff performance.
    Third Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying procedures regarding the 
significance of the presence or absence of U.S. investors in 
determining whether to open an investigation or bring an enforcement 
action that otherwise meets jurisdictional requirements. As previously 
described, the Division's Enforcement Manual identifies a number of 
factors that the staff should consider when deciding whether to open an 
investigation including, but not limited to, potential losses and harm 
to any investor, namely: (i) the egregiousness of the potential 
violation; (ii) the potential magnitude of the violation; (iii) whether 
the potentially harmed group is particularly vulnerable or at risk; 
(iv) whether the conduct is ongoing; (vi) the size of the victim group; 
and (vii) the amount of potential or actual losses to investors. As 
demonstrated by these provisions, prior to the Inspector General 
Report, the Division encouraged its staff to assess victim losses and 
victim impact when deciding to open an investigation. Moreover, in 
response to the Inspector General Report, the Division instituted 
mandatory Enforcement Manual training to ensure full compliance.
    In addition, the Division currently is evaluating a recent Supreme 
Court decision, Morrison v. National Australia Bank, that placed 
jurisdictional limitations on securities fraud claims involving conduct 
and activities outside the U.S., in light of certain Dodd-Frank Wall 
Street Recovery and Reform Act of 2010 (Dodd-Frank Act) provisions 
concerning the territorial scope of the Federal securities laws. In 
connection with the Inspector General's recommendation, we are 
assessing the impact of that decision and the related Dodd-Frank Act 
provisions, and currently are working with other SEC offices to 
determine whether any additional guidance should be provided to 
Enforcement staff. We continue to work with the Inspector General to 
address his concern that staff should evaluate the presence or absence 
of U.S. investors when deciding to open an investigation.
    Fourth Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying procedures regarding 
coordination between Enforcement and OCIE on investigations, 
particularly those investigations initiated by a referral to 
Enforcement by OCIE. As a result of various Enforcement/OCIE 
initiatives, there now exists a significantly increased level of 
collaboration between Enforcement and OCIE staff. Enforcement and OCIE 
hold regular meetings to discuss issues raised in ongoing examinations. 
In addition, the many risk-based investigative initiatives undertaken 
as part of the overall restructuring of the Enforcement Division 
require early and frequent contact between Enforcement and OCIE to: (i) 
jointly develop risk metrics; (ii) identify entities with risk profiles 
indicative of the need for a risk-based examination; (iii) discuss the 
findings of ongoing examinations; and (iv) discuss the scope and nature 
of referrals to Enforcement for investigation.
    In November 2006, Enforcement and OCIE established a process to 
facilitate the tracking of examination referrals, and ensure that there 
is a record of all OCIE referrals that are both accepted and declined 
by Enforcement (or are accepted and later closed), and the reasons why. 
This process includes referral committees at both the regional and 
headquarters office. To ensure ongoing coordination with OCIE where 
appropriate, Enforcement's new guidance for written investigative plans 
encourages staff to carefully evaluate and reevaluate issues throughout 
an investigation to minimize the risk that investigative steps are 
overlooked, and to better identify issues that require consultation 
with OCIE or other Divisions or Offices.
    Lastly, as part of the Chairman's initiative to improve the 
handling of tips, complaints and referrals (TCRs), Enforcement has 
established the Office of Market Intelligence (OMI) and staffed it with 
market surveillance specialists, accountants, attorneys and other 
support personnel, and additional hiring is expected. OMI's mission is 
to ensure that we collect all TCRs in one place, combine that data with 
other public and confidential information on the persons or entities 
identified in the TCRs, and then dedicate investigative resources to 
those TCRs presenting the greatest threat of investor harm. OCIE's 
referrals to Enforcement are tracked through this new TCR system to 
ensure proper Enforcement staff assignment. We believe that these 
measures will address the issues identified in the Inspector General 
Report regarding poor coordination between Enforcement and OCIE.
    Fifth Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying procedures regarding when to 
refer a matter to State securities regulators. Prior to the Inspector 
General Report, the Enforcement Manual identified factors to guide 
referrals to Federal or State criminal authorities, SROs, the Public 
Company Accounting Oversight Board, or State agencies, including: (i) 
the egregiousness, extent and location of the conduct; (ii) the 
involvement of recidivists in any suspected conduct; and (iii) the 
potential for additional meaningful protection to investors upon 
referral. In response to the Inspector General Report, we now require 
mandatory Enforcement Manual training for all Enforcement staff.
    The Inspector General recommended that we consider promulgating 
and/or clarifying procedures regarding when to refer a matter to State 
securities regulators. Prior to the Inspector General Report, 
Enforcement had strong working relationships with our law enforcement 
and regulatory partners, including State securities regulators. 
Moreover, the Enforcement Manual identifies factors to guide referrals 
to Federal or State criminal authorities, SROs, the Public Company 
Accounting Oversight Board, or State agencies, including: (i) the 
egregiousness, extent and location of the conduct; (ii) the involvement 
of recidivists in any suspected conduct; and (iii) the potential for 
additional meaningful protection to investors upon referral.
    In addition, as indicated, Enforcement has created the Office of 
Market Intelligence to oversee and coordinate Enforcement's collection, 
analysis and distribution of TCRs. OMI staff has been directed to 
provide relevant information and data obtained in its initial triage of 
TCRs to the appropriate State or Federal agencies or other regulatory 
partners. Further, in connection with our work on the Financial Fraud 
Enforcement Task Force, we continue to work closely with our law 
enforcement and regulatory partners, including State securities 
regulators. These strengthened relationships facilitate effective 
information-sharing and provide us with clear points of contact for 
referrals to State securities regulators. We continue to work to 
address the Inspector General's concern related to the appropriate and 
timely referral of relevant investigative information to State 
securities regulators.
    Sixth Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying procedures regarding training 
of Enforcement staff to strengthen staff understanding of the laws 
governing broker-dealers and investment advisers. Newly created 
specialized units in the Enforcement Division, including one dedicated 
to Asset Management issues (including investment advisers) have 
unveiled intensive training modules in their respective specialty 
areas, which have been made available to all staff throughout the 
Division. In addition, Enforcement has strengthened training both for 
new hires and for existing staff, including training specifically 
focused on the laws governing broker-dealers and investment advisers. 
Enforcement also has created a new formal training unit led by a senior 
Enforcement official. This training unit will coordinate further 
training for the staff and has created a training site on our intranet 
to allow staff to easily find training opportunities and materials from 
prior training events. These formal training initiatives are 
complemented by Enforcement staff's efforts to take advantage of 
substantive expertise within other Divisions and Offices. We believe 
that these initiatives address the Inspector General's concerns related 
to the staff's working knowledge of the laws governing broker-dealers 
and investment advisers.
    Seventh Recommendation. The Inspector General recommended that we 
consider promulgating and/or clarifying procedures regarding 
coordination with the Office of International Affairs (OIA) and the 
Division of Risk, Strategy, and Financial Innovation (RiskFin), as 
appropriate, at the early stages of investigations where relevant 
documents, individuals or entities are located abroad. As indicated 
above, the Division has adopted new guidance concerning written 
investigative plans that requires the staff to identify issues 
appropriate for coordination with other Divisions or Offices, such as 
OIA or RiskFin. In addition, Enforcement has established a formal 
quarterly case review process to assist the staff in identifying 
whether and when to consult with experts in OIA and RiskFin.
    Also, both OIA and RiskFin have designated Enforcement liaisons to 
serve as a point of contact for staff with questions requiring 
investigative assistance. Enforcement staff regularly consults with and 
seeks assistance from OIA to obtain documents and information from 
foreign regulators, to locate and freeze assets abroad, and to assist 
with other international enforcement issues. Moreover, OIA and RiskFin 
provide training to Enforcement staff concerning their available 
resources. We believe that these measures address the Inspector 
General's concern that staff properly consult with other SEC Divisions 
and Offices to further their investigations.

Office of Compliance Inspections and Examinations
    The Inspector General Report made several recommendations relating 
to coordination between Enforcement and OCIE on investigations of 
potential violations of the Federal securities laws, particularly those 
investigations initiated by a referral from OCIE to the Enforcement 
Division. OCIE has undertaken specific policy changes and instituted 
procedures to improve coordination and communication between the 
Enforcement Division and OCIE.
    Through a number of structural and process reforms, OCIE and the 
Enforcement Division are working to identify misconduct earlier and to 
move to shut it down more rapidly. OCIE and Enforcement staff and 
leadership have been directed to evaluate potential referrals from the 
OCIE Exam staff against Enforcement's criteria (referenced above) 
regularly and determine the disposition of referrals. If there is 
disagreement on a case at the regional level, Exam staff has been 
instructed to escalate the matter to the attention of senior leadership 
in Washington. These processes ensure that concerns can be escalated in 
a timely manner to senior leadership of both the Exam and Enforcement 
programs for appropriate review and resolution.
    Exam and Enforcement coordination with respect to particular 
matters is also the subject of periodic reviews. OCIE policy now 
requires that OCIE Exam staff hold quarterly Exam Reviews, in which the 
progress and status of every exam in the Regional Office is discussed 
and evaluated for several factors, including evaluating any significant 
issues with the firm that is the subject of the exam, determining 
whether more staff resources are needed on the exam and deciding if the 
exam is a potential referral to the Enforcement Division. These reviews 
are an opportunity to summarize and preview findings that appear likely 
to trigger possible Enforcement referrals, as well as to flag any 
potential differences in the assessment of urgency, potential harm to 
investors, or other issues that can then be raised at the joint 
regional meetings or to OCIE senior management.
    Finally, OCIE Exam staff is working closely with the Specialized 
Units created recently within the Enforcement Division to identify key 
risks presented by entities registered with the SEC and key risks to 
the markets. This partnership with the Specialized Units has already 
resulted in new approaches to joint efforts to identify risky firms 
that may warrant examination or an Enforcement investigation. In 
addition, OCIE recently announced the creation of several Specialized 
Working Groups that will focus on areas where OCIE plans to increase 
its specialization and market knowledge.

Additional Significant Enforcement and OCIE Reforms
    In addition to the reforms prompted by the Inspector General 
Report, we are engaged in a number of significant initiatives designed 
to enhance our performance.

Division of Enforcement
    The Division is embracing a range of initiatives designed to 
increase our ability to identify hidden or emerging threats to the 
markets and act quickly to halt misconduct and minimize investor harm. 
Across the Division, we are launching risk-based investigative 
initiatives, tapping into the expertise of our colleagues in OCIE and 
other SEC offices and divisions, hiring talent with particularized 
market expertise, and reaching out to academia, law enforcement, and 
the regulated community to collect data on fraud hotspots.
    One example of this new approach is our new national specialized 
units, which were formally staffed and fully launched in May 2010. 
These units are focused on the key areas of Structured and New 
Products, Market Abuse, Municipal Securities and Public Pensions, Asset 
Management, and violations of the Foreign Corrupt Practices Act. The 
creation of these units further demonstrates the Division's emphasis on 
the programmatic significance--rather than the quantity--of cases. To 
assist them in their investigative efforts, the units are hiring 
industry experts to work directly with our teams of experienced 
attorneys and accountants to ensure that we stay on the cutting edge of 
industry trends for the benefit of investors.
    In addition to investigative work, the specialized units are 
engaged in a number of initiatives with our colleagues in OCIE and 
other Divisions to develop risk analytics that proactively identify red 
flags for further examination and investigation. To take but one of 
numerous examples, Enforcement, OCIE and RiskFin developed metrics and 
risk analytics for an Aberrational Performance Inquiry to identify 
those investment advisers whose operations shared characteristics of 
those of a Ponzi or other illegal scheme. Specifically, working with 
RiskFin's computer platform, we applied performance and volatility 
benchmarks to thousands of hedge fund advisers, and those that emerged 
from that analysis as outliers (e.g., those with above-market returns 
coupled with an absence of expected volatility) are being subject to 
further examination or investigation. This kind of proactive, risk-
based investigative approach is being duplicated across the Division.
    In addition, the completion of other organizational reforms--such 
as streamlining our management structure and obtaining delegated 
authority from the Commission to allow us to swiftly obtain formal 
orders and related subpoena power--has enabled our staff of attorneys 
and accountants to focus on what they do best, investigate and stop 
securities fraud. Across the Regional Offices and throughout the Home 
Office, our staff has responded to challenging times by concentrating 
on making smart investigative decisions, obtaining key evidence, 
tracing investor funds and aggressively pursuing wrongdoers.
    To support our staff's efforts, we continue to build on our already 
strong working relationships with our law enforcement partners, 
particularly the Department of Justice and the FBI, as well as the 
banking regulators, other Federal and State agencies, and our other 
partners around the world. In particular, our work as cochair of the 
Securities and Commodities Fraud Working Group of the Financial Fraud 
Enforcement Task Force facilitates effective communication with our law 
enforcement partners nationwide engaged in parallel investigations 
alongside of our own.
    Finally, we are rapidly integrating the new authority and 
responsibility granted to us under the Dodd-Frank Act. The Act 
authorizes the creation of a Whistleblower Program, which will be 
housed in our Office of Market Intelligence, and provides us with 
numerous measures to further our investigations, including: nationwide 
service of process; the ability to seek civil penalties in cease-and-
desist proceedings; the ability to seek penalties against aiders and 
abettors under the Investment Advisers Act of 1940; and the ability to 
charge aiding and abetting violations under the Securities Act of 1933 
and the Investment Company Act of 1940, among other initiatives. We are 
grateful that Congress included these legislative initiatives in the 
Dodd-Frank Act, and we are now focused on using these new tools to 
enhance our mission of investor protection.
Office of Compliance Inspections and Examinations
    In addition to specific Exam/Enforcement coordination reforms, OCIE 
has instituted several recent changes to its examination program and 
has plans for significant additional strategic initiatives, all to 
increase the effectiveness and efficiency of the National Exam Program.

Recent Changes at OCIE
    OCIE has instituted significant reforms to sharpen its focus on a 
risk-based examination process that also provides clear data for 
coordination and decision making with Enforcement. OCIE is improving 
its risk assessment procedures and techniques, to better identify areas 
of risk to investors and more effectively allocate limited resources to 
their highest and best use. For instance, OCIE is enhancing the 
information that financial firms submit and is improving techniques to 
better identify those particular firms that represent the highest risk 
profiles and therefore warrant a closer look. Once we select firms for 
examination using a risk-focused methodology, OCIE Exam staff are more 
rigorously reviewing information about these individual firms before 
sending examiners out to the field, so that we can use our limited 
resources more effectively and target key risk areas at those firms 
with the greatest overall risk profiles.
    We also have instituted measures to improve the ability of 
examiners to detect fraud involving theft of assets and other types of 
violations. OCIE Exam staff across the country now routinely reaches 
out to third parties such as custodians, counter-parties and customers 
during examinations to verify the existence and integrity of all or 
part of the client assets managed by the firm. The measures also 
include expanded use of exams of an entire entity when firms have joint 
or dual registrants such as affiliated broker-dealers and investment 
advisers.
    OCIE also has been hiring new staff with diverse skill sets to 
expand its knowledge base and improve its ability to assess risk, 
conduct examinations, detect and investigate wrongdoing, and focus our 
priorities. We have hired new Senior Specialized Examiners--and will 
bring on board more--who have specialized experience in areas such as 
risk management, trading, operations, portfolio management, options, 
compliance, valuation, new instruments and portfolio strategies, and 
forensic accounting. We also have been hiring additional staff with 
expertise in financial products and techniques--such as derivatives, 
structured products and hedge fund activities. This will permit other 
staffers to tap into that expertise to help them identify emerging 
issues and understand the ways the industry is changing. Such expertise 
can also be helpful in efforts to improve the techniques used in 
examinations and the collection and analysis of data.
    In addition, OCIE has instituted several measures to integrate the 
activities of the broker-dealer and investment adviser examination 
programs. The New York Regional Office, for example, has adopted a 
protocol that integrates examination teams to make sure people with the 
right skill sets are assigned to examinations. Under the protocol, a 
single team of examiners, drawn from the broker-dealer and investment 
management units, jointly examines selected dually registered firms to 
ensure that the examination team includes those personnel relevant to 
the subject of the exam. In addition, the examination program has 
expanded opportunities for examiners to cross-train and increase 
coordination between broker-dealer and investment management staff on 
their examination plans. Finally, the examination program has begun to 
include experts from other SEC divisions and offices in exams to ensure 
we are leveraging SEC expertise and knowledge across the exam process. 
For instance, we recently involved RiskFin colleagues with algorithmic 
model experience in exams of High Frequency Trading firms.

OCIE's Ongoing Strategic Initiatives
    In March, OCIE launched an intensive nationwide self assessment 
program. We reviewed the OCIE Examination Program by looking at the 
five components of Strategy, Structure, People, Process and Technology. 
Since July, we have moved quickly to implement additional reforms from 
the nationwide self-assessment.
    OCIE has focused our strategy to identify the areas of highest risk 
and deploy our examiners against these risks, in order to improve 
compliance, prevent fraud, monitor risk and inform policymaking. We 
have reinforced our strategy by developing a highly specific set of Key 
Performance Indicators (KPIs) which we have shared with Enforcement, 
and on which we plan to report periodically.
    OCIE also has already implemented a new governance structure, which 
is transforming our lines of communication and accountability. As 
mentioned above, the OCIE National Leadership Team now includes 
Directors of the Regional Offices, who manage both the Enforcement and 
Examinations programs in each Regional Office. This strengthens the 
OCIE/Enforcement partnership and speeds alerts, information hand offs, 
and transitions from OCIE Exam staff to the Enforcement Division when 
warranted. OCIE governance also forges interrelated bonds of 
policymaking, information sharing, and communication among staff in our 
Washington Home Office and our mission-critical examination teams in 
the 11 Regional Offices.
    In addition, OCIE has outlined a new ``open architecture'' 
structure for staffing exams that will enable management to reach 
across disciplines and specialties to better match the skills of 
examination teams to the business models and risk areas of registrants. 
OCIE is also redesigning our exam team structure to redeploy the 
expertise and experience of managers from office administration to on-
site exams in the field. These changes will help ensure that managers 
spend additional time and attention on supervision and oversight in the 
field on exams of registrants.
    Our self assessment concluded that we needed not only to streamline 
our processes and policies, but also to create an environment for our 
staff of open, candid communication and personal accountability for 
quality, in order to build on OCIE's core strengths and eliminate 
repetition of the systemic flaws that may contribute to situations like 
the Stanford case. Accordingly, OCIE has accelerated enrollment of OCIE 
managers in the SEC's Successful Leaders Program and volunteered as the 
pilot site for many of the SEC's Office of Human Resources' new 
initiatives on hiring and professional development.
    Finally, OCIE is placing continuous, focused attention on 
technology, another area that our self assessment identified as 
essential to a healthy examination program. We have developed and are 
about to test a standardized examination tool across the national exam 
program. We are also upgrading equipment and connectivity for examiners 
to match that available to examiners and auditors at other regulatory 
agencies and in the private sector.

Conclusion
    The scope and egregiousness of Stanford's conduct and the resulting 
injury to investors underscores that it is essential for us to push 
forward with our efforts to hold the wrongdoers accountable and seek 
maximum investor recovery. The Inspector General Report identified 
numerous areas for reform, and we have moved aggressively to implement 
these reforms. There is much more work that remains to be done, but we 
are confident that we are putting in place the people and structures to 
prevent another occurrence of Stanford-type problems.
    Finally, we would note that both the SEC and the Department of 
Justice continue to have open investigations into the Stanford matter. 
Our efforts to bring potential wrongdoers to justice in this case are 
still very much ongoing, and the defendants vigorously contest our 
allegations. In responding to your questions today, we intend to be as 
forthcoming and candid as possible and will identify when we are 
concerned that disclosure of information through an answer could 
compromise the Commission's ability to bring the wrongdoers to justice 
or to provide maximum recovery for investors.
    We thank you for the opportunity to appear before you today.

                                 ______
                                 
                  PREPARED STATEMENT OF ROSE L. ROMERO
Regional Director, Fort Worth Regional Office, Securities and Exchange 
                               Commission
                           September 22, 2010

Introduction
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify today about the reforms the 
Fort Worth Regional Office (FWRO) is making in response to the issues 
raised in the Inspector General's Report on the Office's performance in 
the Stanford matter.
    Like Mr. Khuzami and Mr. di Florio, I regret that that the SEC 
failed to act more quickly to limit the investor losses suffered by 
Stanford's victims. All of us at the SEC share responsibility for the 
handling of the Stanford matter and are taking significant steps to 
ensure that we implement the reforms recommended by the Inspector 
General.
    I want to begin by saying that, from a regional perspective, the 
initiatives outlined in the remarks of Mr. Khuzami and Mr. di Florio 
are making a significant impact upon the Commission and its staff. A 
streamlined management structure; delegation of authority to the staff; 
expanded training opportunities; improvements to risk assessment and 
examination procedures; specialization initiatives; and procedures to 
insure coordination and information sharing are some of the critical 
reforms that have greatly enhanced our capabilities.
    By way of background, I served for 4 years in the United States Air 
Force. I have served as a Fort Worth police officer, an assistant 
district attorney and, prior to joining the Commission staff, I worked 
as a Federal prosecutor for 16 years. I came to the Commission in 2006 
with many objectives. Principal among them was to bring a more 
aggressive, law enforcement-like focus to the way we do our job. During 
my tenure, the staff of the Fort Worth Regional Office has performed 
with dedication and diligence, and with an aggressiveness and integrity 
that has earned for it a true partnership with its criminal agency 
counterparts. In fact, the Justice Department has commended us for our 
``remarkable collaboration'' with them. This fiscal year alone, 
investigations by the FWRO staff have resulted in criminal charges 
against 14 individuals, and many members of our staff now serve as 
special Federal prosecutors, assisting in the prosecution of important 
criminal cases. Since last year, in addition to their regular case-
loads, Fort Worth's 25 staff attorneys have filed 19 emergency actions 
in Federal court, preserving millions of dollars stolen from investors.
    While we certainly believe that our recent efforts have enhanced 
the Commission's ability to protect investors, we must not forget the 
painful lessons taught to us by past mistakes. The team that is leading 
us now has done much and is prepared to do more. I have every 
confidence that Chairman Schapiro and Directors Khuzami and di Florio 
will continue to shape an agency that will stand as a bulwark for the 
investing public.

Status of the Stanford Case
    Mr. Khuzami has summarized the status of the current litigation. I 
wanted, however, to highlight a few additional points.
Status of Ongoing Investigation
    Immediately after filing the civil action, my staff worked closely 
with the Justice Department to ensure that responsible executives of 
Stanford were brought to justice. We aggressively continued our 
investigation, aided by access to Stanford financial records and other 
key documents obtained by the Receiver, and access to key employees in 
Stanford's auditing and accounting departments. Our work allowed us to 
understand how Stanford manipulated its financial documents to further 
the scheme. In particular, my staff played a critical role in securing 
the cooperation of James M. Davis, Stanford Financial Group's Chief 
Financial Officer. We developed critical evidence in support of the 
allegation that Leroy King, Antiguan's head of the Financial Services 
Regulatory Commission, conspired with Stanford and obstructed the 
Commission's efforts to investigate Stanford over many years. Our work 
assisted the criminal authorities in filing a criminal case in June 
2009 and was recognized by Assistant Attorney General Lanny A. Breuer 
as ``resilient dedication.''
    I have directed my staff to continue our investigation of the 
Stanford matter to determine if other executives and employees at 
Stanford deceived U.S. investors in the sale of fraudulent certificates 
of deposit. Over the course of the past 12 months, we have collected 
and reviewed tens of thousands of documents; reviewed e-mail 
communications of more than 150 former employees; interviewed and taken 
sworn statements of more than 60 former employees and other witnesses; 
and interviewed approximately 200 victims of the Stanford fraud. We 
have worked with the Stanford Victims Coalition, State regulators, and 
FINRA to gather relevant information and evidence to further this 
important investigation.
    We have, through our Wells Process, notified several former 
Stanford executives that we intend to recommend fraud charges against 
them. These persons include former high level executives and financial 
advisors. Our investigation of these matters is continuing, as are our 
efforts to maximize the recovery for the Stanford victims.

Status of Recovery
    Upon filing its civil action in February 2009, the SEC filed a 
motion requesting that the district court appoint a Receiver over the 
defendants' assets (including over 100 Stanford-related entities 
operating around the world) to prevent waste and dissipation of those 
assets to the detriment of investors. While a Receiver was a necessary 
tool in this case, the SEC has closely monitored the receivership to 
help maximize investor recovery. To complement the Receiver's efforts, 
the SEC, in coordination with the Justice Department, moved to secure 
assets held in international financial institutions. Securing assets in 
international jurisdictions poses complex litigation challenges, and 
those challenges have been magnified in this case by, among other 
issues, the appointment in Antigua of a competing Receiver that has not 
cooperated with the staff and that, in fact, has challenged various 
steps taken by the Receiver, the SEC and the Justice Department. But, 
securing international assets was crucial to ensure the protection of 
investor funds and we continue to work closely with the Receiver, 
Justice Department, and securities regulators and law enforcement 
agencies in the U.K., Switzerland, Canada, Mexico, and in several 
countries throughout Central and South America, to identify, secure, 
and repatriate for the benefit of investors over $300 million in cash 
and securities held in non-U.S. bank accounts.
    Mr. Khuzami has set forth categories and amounts of assets 
recovered for possible distribution to harmed investors. While I will 
not repeat those items again here, I want to point out that we have 
worked vigorously with the Receiver to recover assets in Panama, 
Ecuador, Colombia, Venezuela, Peru, and Mexico.
    In conjunction with the SEC, the Receiver is focused on identifying 
and liquidating the largest possible pools of assets to prepare for a 
future distribution to harmed investors. In addition, the SEC has 
recently worked with other involved parties in the creation of an 
investor committee to provide an additional mechanism for investor 
input as to the receivership operations.
    Throughout this case, the SEC has worked closely with a court-
appointed Examiner to monitor the Receiver's costs and ensure maximum 
recovery to the victims of this massive fraud. These efforts have had 
tangible benefits. For example, the Receiver and the professionals 
assisting him have reduced their customary fees by at least 20 percent 
and have capped the rates charged by senior lawyers. In addition, we 
carefully scrutinize the Receiver's bills for fees and expenses. In 
fact, in response to our objections, the district court has held back, 
on an ongoing basis, an additional 20 percent from the Receiver's fees 
and expenses. We have strongly urged the Receiver to stringently apply 
a cost-benefit analysis and pursue only those legal claims that could 
generate maximum proceeds for the benefit of investors while minimizing 
the Receiver's legal fees and expenses. As with our monitoring of the 
Receiver's fees and expenses, the SEC has intervened when it believed 
the Receiver was pursuing inappropriate claims. For example, the SEC 
challenged the Receiver's lawsuits seeking net profits from innocent 
investors. Conversely, when the Receiver properly pursues assets, we 
intervene in support of that effort where appropriate. For example, the 
SEC recently submitted an amicus brief in the Fifth Circuit supporting 
the Receiver's efforts to maintain a freeze over approximately $24 
million in accounts held by former Stanford financial advisers. We will 
continue to be closely involved with the Receiver's activities.

Status of SIPC Coverage
    As you know, the Commission oversees the activities of the 
Securities Investor Protection Corporation. Prior to the emergency 
filing of the Stanford action, I directed my staff to contact SIPC, 
notify them of the proposed enforcement action and consider whether 
coverage under SIPA would be appropriate under the facts and 
circumstances of this case. Since the filing of this action, we have 
communicated with counsel for the Stanford Victims Coalition regarding 
its position with respect to SIPC coverage and assisted them where 
possible. My staff has also responded to informational requests and 
worked with the Commission's Division of Trading and Markets in its 
evaluation of the relevant facts of this case. I understand that the 
Commission continues to investigate whether SIPC coverage is 
appropriate for the victims of the Stanford fraud.

Reforms
    In an effort to reform and improve its Programs, the Fort Worth 
Regional Office has worked to integrate its broker-dealer and 
investment adviser examination programs and to build strong 
collaboration ties between its Enforcement and Examination staff.

Exam Program Integration
    During the past 4 years, the FWRO has worked to integrate the 
activities of its broker-dealer and investment adviser examination 
programs. In late 2006, it was clear that we could not adequately 
oversee an increasingly integrated registrant population, unless we 
brought to each examination the right skills and expertise to 
effectively review a firm's business activities, whether those were 
advisory activities, brokerage activities or some combination thereof. 
We immediately took action to: (1) break down the long-standing silos 
that divided the investment adviser and broker-dealer exam programs; 
(2) provide cross-training opportunities for exam staff to allow them 
to expand their knowledge and experience; (3) routinely employ joint 
teams of exam staff drawn from both sides of the program; (4) employ 
strategic techniques to quickly assess risks to investors, especially 
at firms who operate as both a broker dealer and an investment adviser; 
and (5) significantly increase the level of coordination and 
collaboration across the program. In 2009, the FWRO moved to a fully 
integrated examination program with investment adviser, broker-dealer 
and some fully crosstrained examiners working together under managers 
responsible for the program as a whole rather than two distinct 
programs. This formalized integration has allowed us to use staff 
expertise more strategically, in conformity with the new OCIE 
initiatives.

Collaboration Between the Examination and Enforcement Programs
    Another top priority has been to build collaboration and teamwork 
across the examination and enforcement programs, so that we are better 
able to find fraud and significant problems through examinations and 
quickly take action to stop the fraud and protect investors. We have 
taken a number of specific actions to increase coordination between 
exam and enforcement staff, starting with collaboration between senior 
management across the office. The success of this increased 
collaboration, as well as the integration of the examination program, 
can be measured by the accomplishments we have achieved. For example, 
the percentage of enforcement cases brought by the FWRO resulting from 
examination referrals to Enforcement has increased from 12 percent in 
fiscal year 2005 to 38 percent in fiscal year 2009.

Conclusion
    The Fort Worth Regional Office is dedicated to protecting investors 
and aggressively pursuing those who defraud them. We thank you for the 
opportunity to appear before you today. I would be pleased to answer 
your questions.

        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
           FROM ROBERT KHUZAMI AND CARLO V. DI FLORIO

Q.1. Dealing with managerial ``Bad Apples''. Mr. Khuzami/di 
Florio, the Inspector General's report 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 Ethics Office that it was improper to do 
so. How does your Division prevent abuse of discretion by 
senior staff such as this? What are the current relevant 
policies and how are they enforced?

A.1. We share your concern about ethical violations by any SEC 
personnel. With respect to the conduct of the former Head of 
Enforcement in the Fort Worth Regional Office, it appears that 
this individual twice contacted the SEC Ethics Office and 
inquired about his ability to represent Stanford. On both 
occasions, he was told that such representation was not 
permitted. When he contacted his former colleagues in the Fort 
Worth Regional Office, they too questioned the appropriateness 
of his involvement. These circumstances indicate that Fort 
Worth personnel were sensitive to the ethical issues presented, 
and that the Ethics Office gave the appropriate advice. The 
fact that the individual, at some point in that process, may 
have disregarded some or all of that advice and billed Mr. 
Stanford for approximately twelve hours of representation is 
unacceptable. We can never guarantee, however, that former SEC 
personnel will comply with ethical advice that they have 
received from the Commission. While we have not undertaken a 
survey of the actions of all former SEC personnel, we are not 
aware of another instance where this has occurred. We also 
understand that the former Head of Enforcement in the Fort 
Worth Regional Office has been referred to the proper State bar 
committee based on his actions in representing Mr. Stanford.
    As a general matter, all employees and members of the SEC 
are bound by Government-wide postemployment restrictions based 
on Section 207 of Title 18 of the U.S. Code. This statute 
contains several postemployment restrictions, including a 
permanent bar on representations and appearances before the 
Commission on any matter in which a former employee or member 
participated, personally and substantially, while at the 
Commission; a 2-year bar on representations and appearances 
before the Commission on matters that were under the former 
employee's official responsibility while at the Commission; and 
a 1-year ``cooling off'' period for former senior officials 
which prohibits communicating with or appearing before the 
agency on any matter on behalf of another with an intent to 
influence. In addition, the SEC has enacted supplemental ethics 
regulations which require former employees and members, within 
2 years of leaving the agency, who are employed or retained as 
the representative of any person outside the Government in any 
matter in which it is contemplated that he or she will appear 
before the Commission, or communicate with the Commission or 
its employees, to file with the agency for clearance to do so.
    In addition, the Government-wide standards of conduct 
contain provisions that prohibit any current Federal employee 
from working on a matter in which someone with whom he is 
seeking employment is, or represents, a party to the matter. 
Further, Section 208 of Title 18 of the U.S. Code prohibits any 
Federal employee from working on any matter that could have a 
direct and predictable effect on the financial interests of 
someone with whom he is negotiating for employment.
    In addition, due to the unique work of the exam staff that 
requires them to spend considerable time on-site at regulated 
entities, the Office of Compliance, Inspections, and 
Examinations (OCIE) has in place ethics guidelines specific to 
the examination program. This guidance covers various potential 
personal and financial conflicts of interest, as well as 
circumstances that may create the appearance of a conflict of 
interest. The goal of OCIE's guidance is to ensure that 
examiners do not engage in conduct that could create even the 
appearance of a personal or financial conflict of interest 
related to an examination. OCIE provides mandatory annual 
training on its ethics guidelines to all examination staff. In 
addition, OCIE managers conduct exit interviews with departing 
examiners to evaluate if any potential conflicts of interest 
could arise based on the examiner's new employment and to 
discuss with the examiner any restrictions on the examiner's 
ability to work on SEC examination matters based on those 
potential conflicts.

Q.2. How will SEC funding increase impact SEC work? Mr. 
Khuzami/di Florio, the Dodd-Frank Act authorizes the SEC budget 
to double by 2015. That will be an increase from $1.1 billion 
in 2010 to $2.25 billion in 2015. How would this large increase 
in funding improve the enforcement, compliance and Ft. Worth 
Office efforts to protect investors?

A.2. Although Section 991 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act increases the authorized level of 
funding for the SEC, the actual level of funding will depend 
upon the appropriations Congress provides over the next several 
fiscal years. Recently, the SEC's House and Senate 
appropriations subcommittees each marked up bills that would 
provide the agency with an FY2011 appropriation of $1.3 
billion. If enacted, this funding level would allow us to build 
out new oversight programs for derivatives, private funds, 
credit rating agencies and other requirements imposed by the 
Dodd-Frank Act. The funding would also help enhance the SEC's 
base program capabilities. Notably, the enforcement program 
would add 45 positions, a portion of which would go to 
strengthen its new Office of Market Intelligence that handles 
the thousands of tips, complaints, and referrals the agency 
receives each year. The SEC also would hire 67 new personnel in 
its examination program to augment its risk assessment, 
monitoring, and surveillance functions and conduct additional 
adviser and fund inspections.
    It is worth noting that pursuant to the funding reforms 
adopted in Section 991 of Dodd-Frank, whatever amount we are 
appropriated would be fully offset by matching fee collections.

Q.3. Will staff provide ongoing progress reports to Committee? 
Mr. Khuzami/di Florio, in order for the Committee to remain 
apprised of efforts that the Commission is taking to improve 
its effectiveness, would you provide this Committee with 
reports every three months describing your efforts to prevent 
problems similar to those raised by the Stanford fraud?

A.3. We are happy to provide any updates requested by Chairman 
Dodd or the Committee. We understand that Chairman Schapiro 
intends to coordinate with Enforcement and OCIE to provide 
updates to the Committee approximately every three months until 
the recommendations from the Inspector General's Report on 
Stanford are closed.

Q.4. Issues from Emphasis on ``Stats''. Mr. Khuzami, the 
Inspector General Report found evidence that

        SEC-wide institutional influence within Enforcement did 
        factor into its repeated decisions not to undertake a 
        full and thorough investigation of Stanford, 
        notwithstanding staff awareness that the potential 
        fraud was growing. We found that senior Fort Worth 
        officials perceived that they were being judged on the 
        numbers of cases they brought, so-called ``stats,'' and 
        communicated to the Enforcement staff that novel or 
        complex cases were disfavored. As a result, cases like 
        Stanford, which were not considered ``quick-hit'' or 
        ``slam-dunk'' cases, were not encouraged.

    Have you conducted or will you conduct a review of whether 
other cases at other SEC Offices were passed over because they 
were deemed ``too difficult'' and share the results with the 
Committee?

A.4. There is no reason to believe that any matter has been 
declined because it was ``too difficult'' in the absence of 
careful evaluation of the facts, evidence, and legal issues 
presented. The Enforcement Division has a series of robust 
systems and procedures in place to assure that matters receive 
appropriate investigative attention. Each region has a case 
review process that includes, among other things, discussions 
between supervisors and members of each investigative team in 
order to perform a detailed review of ongoing matters.
    In addition, there is a Division-wide quarterly case review 
protocol that involves an evaluation of all matters under 
investigation. As part of the protocol, topics for discussion 
include investigative planning, staffing considerations, 
techniques to gather evidence, quality of evidence, relevant 
legal theories and appropriate investigative steps. Quarterly 
case reviews are conducted at the staff-Assistant Director 
level; the Assistant Director-Associate Director level; and 
between the Director and Deputy Director with the Associate 
Directors and Regional Directors at each Regional Office and 
the Home Office.
    In these reviews, we discuss performance metrics with 
individual senior officers, including both quantitative and 
qualitative factors. We assess qualitative factors to insure 
that we give proper recognition to the challenges that certain 
cases present, so that staff members receive due credit and are 
not penalized for taking on difficult cases. This recognizes 
that there are many worthwhile cases that present unique 
challenges, such that they will take longer, and more 
resources, to bring, and that this fact should be taken into 
account in assessing performance. The qualitative factors we 
consider include (i) investigative creativity and perseverance 
(overcoming unique challenges and vigorous defenses, adoption 
of successful investigatory strategies that lead to resource 
efficiencies or that avoid pitfalls and hurdles, persistence 
that uncovers or develops critical evidence); (ii) unique or 
particularly effective deterrent message in the case; (iii) 
breadth of misconduct, harm and victims, including vulnerable 
victims; (iv) involvement of persons occupying substantial 
authority, responsibility, or fiduciary obligations; (v) case 
of first impression (violative of newly enacted legislation, or 
new or previously unprosecuted products, transactions or 
practices); (vi) challenging coordination issues with other law 
enforcement authorities; (vii) novel or complex legal issues; 
(viii) large number of defendants or violations; and (ix) 
number of defendants and amount of monetary recovery, bars and 
other relief.
    Additionally, the clear message from Division leadership is 
to escalate matters of concern. We also have established an e-
mail-based suggestion box that provides a forum for staff and 
managers to submit comments and suggestions if desired on an 
anonymous basis. The suggestion box is monitored on a weekly 
basis and provides a direct link to Division leadership.
    The cases filed by the Enforcement Division in the past 
approximately 18 months reflect the fact that cases are not 
declined because of a fear of difficulty. They have been 
complex and challenging investigations, and certainly do not 
result in ``quick hits.'' Examples include investigations 
involving wrongdoing in the areas of complex mortgage-related 
securities and disclosure (Countrywide, New Century, Beazer 
Homes, American Home Products), COOs and other structured 
products (Goldman Sachs, ICP), complex insider trading 
(Galleon), intricate accounting fraud (Bally/E&Y, AIG, Dell, 
Diebold, GE), TARP fraud (Colonial Bank), nondisclosure of 
subprime risk (Citigroup, State Street Global Advisors, 
Evergreen, Morgan Keegan), interdealer market manipulations 
(ICAP), municipal securities violations (State of New Jersey), 
and Ponzi Schemes (Petters). Included in the list are cases 
brought by the Fort Worth Regional Office, including Acxiom 
(insider trading), Home Solutions (financial statement fraud 
and related-party transactions), Perot Systems (insider trading 
case brought in two days following tip), and Lightspeed (short 
sale order violations). This list is evidence that the message 
currently being communicated to the staff is that cases are not 
to be avoided because they present difficult investigative 
challenges.

Q.5. Emphasis on ``Stats'' and Easy Cases. Mr. Khuzami, the 
Inspector General's Report found evidence of an SEC-wide 
institutional influence against novel or complex cases during 
the period under investigation. As a result, cases like 
Stanford, which were not considered ``quick-hit'' or ``slam-
dunk'' cases, were not encouraged. This is a poor practice and 
appears to mean that investors lured into more complex frauds 
were less protected than others. Such a practice sends a signal 
to potential fraudsters that if you veil your crime well, the 
SEC will not come after you.
    Please describe the genesis of the emphasis on ``quick-
hit'' and ``slam-dunk'' cases. When did the Commission stop 
this practice? Please describe the current policy.

A.5. The Enforcement Division has emphasized the importance of 
pursuing investigations and cases with a high deterrent impact 
that involve complex schemes. Senior management designates 
select investigations as National Priority investigations. 
These matters involve cases of programmatic importance, where 
the alleged misconduct could significantly undermine the 
integrity of the U.S. securities markets, or disproportionately 
harm a broad number of investors, or is of a significantly 
egregious or extensive nature, or involves wrongdoing by 
persons occupying positions of substantial authority or 
responsibility. We are developing a series of robust metrics to 
capture the quality of cases and investigations in the 
Division. These metrics allow us to evaluate the workload, 
productivity, quality, timeliness, and efficiency of the 
Division's investigative and litigation efforts. By tracking 
the progress of each ongoing matter in the Division, we are 
better able to pursue matters across a broad spectrum of 
potential violative conduct.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
           FROM ROBERT KHUZAMI AND CARLO V. di FLORIO

Q.1. Mr. Khuzami/di Florio, your testimony was made explicitly 
on behalf of the SEC, whereas Ms. Romero did not state that she 
was speaking for the SEC. Are there aspects of Ms. Romero's 
testimony at this hearing or last year's hearing on the 
Stanford fraud that the SEC does not stand behind? If so, what 
are they and why?

A.1. On September 22nd, we each testified in response to the 
September 15th invitation from the Senate Committee on Banking, 
Housing, and Urban Affairs to Mary Schapiro, Chairman of the 
SEC. The invitation allowed Chairman Schapiro to testify 
personally, or designate individuals to testify on behalf of 
the Commission. In that manner, our statements were offered as 
Commission witnesses before the Committee. We understand that 
Ms. Romero was a witness designated by the Minority for 
invitation to the hearing, and thus testified in response to 
the Committee's request for her individual testimony. In any 
event, prior to the testimony, the Commission reviewed and 
approved the written testimony submitted to the Committee by 
Ms. Romero, as well as the written testimony submitted by us.

Q.2. Mr. Khuzami/di Florio, aside from Commission-wide reforms 
you described in your testimony, have you discovered any 
problems unique to the Fort Worth District Office that you are 
addressing with solutions tailored to that office?

A.2. As you know, in 2010, the Division of Enforcement 
completed its comprehensive internal review and subsequent 
structural reforms--the most Significant in four decades. 
Similarly, OCIE has undertaken a top to bottom review of OClE's 
strategy, culture, people, processes, and technology. 
Throughout these reviews, all members of OCIE and Enforcement, 
including those in the Fort Worth Regional Office, were 
encouraged to submit their ideas for enhancing the programs and 
processes of OCIE and Enforcement.
    One area of improvement identified by our Forth Worth 
examiners is the need to enhance collaboration between 
examination and enforcement staff, particularly on matters that 
could give rise to an enforcement referral. As you know, the 
SEC's Inspector General also identified this as an area in 
which we could improve. OCIE and Enforcement are working 
together to develop collaborative relationships and improve 
coordination on examination referrals to enforcement.
    Further, as recently reported in the press, some personnel 
issues have been identified that appear to be unique to the 
Fort Worth Regional Office. OCIE senior management is 
continuing to monitor and evaluate the operations and culture 
of the Fort Worth Regional Office to ensure the change process 
includes any solutions that should be specifically tailored to 
the Fort Worth Regional Office.

Q.3. Mr. Khuzami, at the hearing, you contended that the 
``stats'' culture that contributed to the failure by the Fort 
Worth District Office's failure to pursue an enforcement action 
against Stanford is a relic of the past. Nevertheless, several 
hours later, at a hearing before the Senate Committee on the 
Judiciary, you touted the Enforcement Division's statistics--
634 enforcement actions brought so far this year. As you 
acknowledged, cases brought by the SEC include some very 
complex cases and some more simple cases. Moreover, an 
incredibly complex enforcement action that is based on an 
internal investigation might involve less work than an apparent 
simpler case. If the head of the Enforcement Division touts 
numbers of cases as a measure of achievement, how can regional 
offices of the SEC be expected to assume that they will not be 
measured on the numbers of enforcement actions they generate?

A.3. The clear and unambiguous message from the leadership of 
the Enforcement Division has been to emphasize the importance 
of high-quality investigations with maximum deterrent impact. 
Managers and staff repeatedly have been assured that they will 
not be evaluated simply on the basis of quantitative 
statistics. We are introducing a series of metrics to capture 
this principle, including metrics designed to measure the 
workload, productivity, quality, timeliness, and efficiency of 
the Division. In addition to these metrics, Division leadership 
designates select investigations as National Priority cases. 
These include, among others, cases of programmatic importance, 
where the alleged misconduct could significantly undermine the 
integrity of the U.S. securities markets, or disproportionately 
harm a broad number of investors.
    At the same time, it is important to have a vibrant and 
robust enforcement program across various types of cases that 
may involve large, smaller, complex, and simpler matters. 
Quantitative measures are therefore not irrelevant. If by 
tracking quantitative measures one learns that there has been a 
sharp increase (or decrease) in the number of cases filed, or 
in how long it takes to file a case, that is an important data 
point to discuss with a senior officer. There may well be a 
perfectly appropriate explanation for the change (an unusually 
large number of complex cases, more cases than expected 
proceeded to trial rather than settled, delay due to obtaining 
overseas evidence, etc.), but it is important to ask the 
question to understand why the change occurred. That is the 
proper use of metrics--as a starting point upon which to 
further inquire. What must be avoided, and what we do not do, 
is to present quantitative targets or quotas. Indeed, I have 
given out awards during this past year for cases that took a 
great deal of time and resources to investigate, and that we 
ultimately declined to pursue. That certainly sends the message 
that persons are not evaluated and rewarded based on the number 
or ease of cases.
    My testimony was entirely consistent with this approach. 
For example, I described the number of enforcement actions, the 
amounts of ordered disgorgement and penalties, and the numbers 
of asset freezes and emergency temporary restraining orders. I 
also highlighted that the Division had, thus far, distributed 
nearly $2 billion to injured investors. At the same time, I 
emphasized the complex, wide-ranging and programmatically 
significant casework of the Division, including descriptions of 
nearly twenty cases involving mortgage-related securities, 
structured products, institutional market abuses, financial 
fraud, municipal securities, undisclosed executive compensation 
and other types of securities law violations. I also described 
our continued cooperation and coordination efforts with 
criminal and other regulatory authorities; our internal process 
reforms and management streamlining; our new initiatives to 
identify securities fraud; and new tools provided under the 
Dodd-Frank Wall Street Reform and Consumer Protection Act.

Q.4. Mr. Khuzami, I understand that you have instituted a 
number of structural changes and procedural changes in the 
SEC's Division of Enforcement. Real change, however, will only 
come if the culture in your division changes. People need to 
know that they will be recognized for bringing good cases and 
dropping bad ones. A good case might be a small dollar case 
that prevents many small investors from getting defrauded down 
the road. If SEC employees perceive that they will only be 
recognized for enforcement matters that involve household name 
companies, that is where they will focus their attention. What 
are you doing to change the culture of your Division?

A.4. As noted in my answer above, throughout the Division 
senior management emphasizes the importance of high-quality 
investigations rather than simply the number of investigations 
or enforcement actions. Similarly, the Enforcement staff works 
diligently to detect, deter, and obtain strong remedies in 
response to unlawful conduct regardless of the notoriety, or 
lack of notoriety, of the entity involved in the misconduct. As 
described above, we have instituted a robust quarterly case 
review protocol that involves an evaluation of all matters 
under investigation. As part of the protocol, topics for 
discussion include investigative planning, staffing 
considerations, techniques to gather evidence, quality of 
evidence, relevant legal theories and appropriate investigative 
steps. Quarterly case reviews are conducted at the staff 
Assistant Director level; the Assistant Director-Associate 
Director level; and between the Director and Deputy Director 
with the Associate Directors and Regional Directors at each 
Regional Office and the Home Office. The message within and 
beyond the Division is clear: we are focused on timely 
detecting and preventing securities law violations in order to 
protect investors and deter unlawful conduct.

Q.5. Mr. Khuzami, the SEC's revised performance metrics do not 
seemed designed to encourage enforcement staff to work on cases 
like Stanford early enough to prevent investor harm. The factor 
seems to push staff toward pursuing cases that involve 
violations prohibited under new laws, violations that pose 
systematically important risks, or violations in so-called 
``priority areas'' that the SEC is emphasizing at the 
particular time. Ponzi schemes are a very old form of fraud 
that often target middle class investors using boring 
investment products, like the supposed certificates of deposit 
that Stanford was selling. These cases may not involve cutting-
edge legal arguments, but marshaling of evidence may be 
difficult. What are you doing to ensure that sufficient SEC 
resources are devoted to detecting and shutting down plain 
vanilla frauds that target ordinary Americans before those 
frauds swell to the size of the Stanford fraud?

A.5. As noted in my response above, the Division focuses on 
quality cases across the spectrum of potential securities law 
violations. Offering frauds and Ponzi schemes, which are 
described in the question as ``a very old form of fraud,'' 
continue to evolve and remain an important focus of our 
enforcement program. In FY2010, offering frauds comprised 
approximately 22 percent of the cases brought by the 
Commission. In these actions, the Commission seeks to freeze 
assets, where possible, in order to maximize the recovery to 
investors and prevent new investors from being harmed.
    For example, in an action expedited by Enforcement's newly 
created Asset Management Unit, the SEC charged a New Jersey-
based investment adviser, Sandra Venetis, and three of her 
firms with operating a multimillion dollar offering fraud 
involving the sale of phony promissory notes to investors, many 
of whom were retired or unsophisticated investors. Venetis 
falsely stated that the promissory notes were guaranteed by the 
FDIC, would earn a high rate of interest and would be used to 
fund loans to doctors. In April, the Commission charged a 
prominent Miami Beach-based businessman and philanthropist, 
Nevin Shapiro, with fraud for orchestrating a $900 million 
offering fraud and Ponzi scheme involving the sale of 
securities that Shapiro claimed would fund his company's 
grocery diverting business, were risk-free, and had rates of 
return as high as 26 percent annually. The SEC also filed an 
emergency asset freeze and fraud charges against Daniel 
Spitzer, a purported fund manager based in the U.S. Virgin 
Islands, who perpetrated a $105 million Ponzi scheme against 
400 investors. Spitzer's investors were promised that their 
money would be invested in funds that would be invested in 
foreign currency with annual returns that could reach over 180 
percent.
    Even recently, in an emergency action filed on October 6, 
2010 against Imperia Invest IBC, the Commission obtained a 
temporary restraining order and emergency asset freeze against 
Imperia for defrauding more than 14,000 investors worldwide. 
The Commission's complaint alleges that Imperia solicited 
investor funds via the Internet; promised returns of 1.2 
percent per day; and raised in excess of $7 million, $4 million 
of which was collected primarily from deaf investors in the 
United States. The Commission's complaint alleges that Imperia 
took proactive steps to conceal the identity of its control 
persons by using an anonymous browser to host its Web site, by 
communicating with all investors via e-mail without disclosing 
the identity of the control persons, and by establishing 
offshore PayPal style bank accounts to conceal the identity of 
the recipient of the investment proceeds. Despite these 
challenges, the case was filed without the typical evidence in 
an offering fraud, including knowledge of the identity of the 
perpetrators. Rather than being stymied by this absence of 
proof, or taking weeks or months to gather it, we developed a 
theory that did not rely on this proof, and moved quickly 
because we suspected that investors were being defrauded on an 
ongoing basis. Even on these unique facts, the Division was 
able to act swiftly to halt the fraudulent offering activity, 
and seek a court order to secure assets related to the 
offering.
    The many things we are doing to ensure that sufficient 
resources are focused on detecting and preventing Stanford-type 
frauds have resulted in: improved collection, investigation and 
referral of tips, complaints and referrals through our newly 
created Office of Market Intelligence; increased communication 
with the Office of Compliance, Inspections and Examinations 
(OCIE), including joint inquiries and escalation procedures to 
resolve differences over referrals; greater sensitivity in 
Ponzi scheme investigations to factors such as outsized 
investment returns, absence of volatility and related-party 
transactions; an increased number of executed Memorandums of 
Understanding with foreign governments to facilitate the 
securing of evidence in foreign jurisdictions; and improved 
access to ``insider'' evidence of wrongdoing, including our new 
cooperation initiative and the Dodd-Frank whistleblower 
legislation.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
                      FROM ROSE L. ROMERO

Q.1. Dealing with managerial ``Bad Apples''. Ms. Romero, the 
Inspector General's report 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 
Ethics Office that it was improper to do so. How does your 
Office prevent abuse of discretion by senior staff such as 
this? What are the current relevant policies and how are they 
enforced?

A.1. During my tenure with the SEC, I have personally 
participated in the periodic review of all cases within the 
FWRO. These reviews function, in part, to prevent any single 
individual from having the sole discretion to close an 
investigation. Also, Rob Khuzami has instituted additional 
procedures that require, each quarter, that every level of 
management (assistant directors, the enforcement associate and 
the regional director) conduct a detailed review of all matters 
being handled by their staff. Subsequent to these reviews, Mr. 
Khuzami personally conducts a review of pending matters with 
the Regional Director and the Associate Director of 
Enforcement.
    In regard to the conduct of the former head of Enforcement, 
it should be noted that when the FWRO staff learned that 
Stanford had retained this individual in 2006, the staff 
immediately objected to the representation. Shortly thereafter, 
he ceased all work in connection with the investigation. My 
staff is trained each year on their ethical obligations in 
connection with seeking outside employment and their duties 
regarding the permissible range of post-SEC employment.

Q.2. Issues from the Emphasis on ``Stats''. Ms. Romero, the 
Inspector General Report found evidence that ``SEC-wide 
institutional influence within Enforcement did factor into its 
repeated decisions not to undertake a full and thorough 
.investigation of Stanford, notwithstanding staff awareness 
that the potential fraud was growing. We found that senior Fort 
Worth officials perceived that they were being judged on the 
numbers of cases they brought, so-called `stats,' and 
communicated to the Enforcement staff that novel or complex 
cases were disfavored. As a result, cases like Stanford, which 
were not considered `quick-hit' or `slam-dunk' cases, were not 
encouraged.''
    Have you conducted or will you conduct a review of whether 
other cases at your Office were passed over because they were 
deemed ``too difficult'' and share the results with the 
Committee?

A.2. As noted in the answer to the previous question, the 
management of our office continuously reviews matters to insure 
that they are handled appropriately. I personally participated 
in frequent reviews of pending matters, and have done so since 
coming to the Commission in 2006. I am unaware of any matter 
that was not pursued because it was perceived as ``too 
difficult.'' I have attached hereto a brief description of 
complex cases handled by the Fort Worth office beginning in 
1998. As you review this document, you will see clearly that 
the Fort Worth staff frequently has tackled difficult and 
significant matters and has obtained outstanding results.

Q.3. How will SEC funding increase impact SEC work? Ms. Romero, 
the Dodd-Frank Act authorizes the SEC budget to double by 2015. 
That will be an increase from $1.1 billion in 2010 to $2.25 
billion in 2015. How would this large increase in funding 
improve the enforcement, compliance and Ft. Worth Office 
efforts to protect investors?

A.3. While I am not in a position to predict the nationwide 
impact of the above-referenced budget increases, additional 
resources would, from a regional perspective, no doubt, enhance 
the Commission's enforcement and examination programs. Simply 
put, I believe that the additional resources will enhance the 
Commission's ability to protect U.S. investors.
    Every day, managers in the SEC's Enforcement Division and 
Office of Compliance Inspections and Examinations are required 
to make difficult choices about which investigations and 
examinations to prioritize. Under the leadership of Director 
Khuzami and Director di Florio, the Enforcement Division and 
OCIE have implemented procedures designed to identify 
investigations and examinations that can best protect the 
greatest number of investors. That said, the scope of the SEC's 
jurisdiction is daunting. And increased resources will enable 
regional managers to effectively carry out their mission.

Q.4. Comment on Post article on the Fort Worth District Office. 
The Washington Post, in an article entitled ``SEC's regional 
offices present managerial problems, become an obstacle to 
reform'' published on June 10, 2010, reported that some years 
ago the SEC Fort Worth office changed how it performed 
inspections and this ``opened a rift between Fort Worth 
managers and staff that continues today, undercutting the 
effort by SEC leaders in Washington to rebuild the agency and 
promote coordination after years of setbacks, according to 
current and former SEC officials and internal agency documents, 
including three separate reports by the SEC's inspector 
general.''
    Ms. Romero, would you comment on this assertion based on 
your knowledge?

A.4. During the time period referenced in the Washington Post 
article, the FWRO's examination staff of 40 was responsible for 
examining more than 735 investment advisers, 350 broker-
dealers, and 15,000 branch offices. This significant resource 
mismatch meant that many of these registrants would likely 
never be examined. Moreover, the financial services industry 
and our registrant population, is becoming increasingly 
integrated--with firms and individual representatives routinely 
offering both investment management services and also selling 
products to those same clients and acting as a broker-dealer--
presenting significant conflicts of interest and heightened 
regulatory risks.
    Accordingly, the FWRO examination staff, in consultation 
with the OCIE's senior management at SEC headquarters, 
developed a pilot, risk assessment program designed to more 
efficiently assess risks to investors by obtaining basic 
information about a firm's business activities and controls 
through document reviews and on-site interviews of senior 
officers and other key staff. OCIE's National Examination 
Program now uses certain information gathering techniques based 
on the principles of this pilot program to conduct risk 
assessments of firms registered with the Commission to 
determine candidates for examination.
    Despite the market realities associated with examining such 
a sizeable registrant population and the clear need for a 
better approach to assessing risk, two FWRO managers strongly 
objected to the program. Nonetheless, the examination staff, 
working as a team with managers, put in place a highly 
successful risk assessment program. Moreover, examiners and 
managers have effectively broken down the long-standing 
``silos'' that previously existed between the broker-dealer and 
investment adviser exam teams as well as between exam and 
enforcement staff. These collective efforts have allowed us to 
quickly identify and halt fraudulent activities. The increase 
(from 2005-2010), in the number of enforcement cases that 
stemmed from examination referrals clearly demonstrates that 
our efforts to build a more cohesive team have resulted in 
significant improvements for the benefit of investors.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM ROSE L. ROMERO

Q.1. When did you first learn that there were Potential 
problems at Stanford? As Director of the SEC's Fort Worth 
Office, what was your role with respect to deciding whether and 
when to bring enforcement actions related to the Stanford 
fraud?

A.1. I first learned of potential problems at Stanford in early 
2006, shortly after my arrival at the SEC from the Department 
of Justice. At that time, the FWRO staff was working with the 
SEC's Office of International Affairs in an effort to obtain 
information from Antiguan authorities, about Stanford 
International Bank, Ltd. The staff also had contacted other 
Federal agencies in hopes of leveraging any information they 
might have about the bank. In June of 2006, I authorized the 
FWRO staff to seek formal order authority from the Commission 
so that the staff could compel documents and testimony from 
Stanford-related entities and individuals.
    After an extensive review by the SEC's divisions and 
offices, the Commission authorized the issuance of a formal 
order of investigation in October of 2006. As noted in the 
Inspector General's June 19, 2009, report, the FWRO staff, 
following issuance of the formal order, actively investigated 
Stanford's bank and its principals, including the review of 
thousands of pages of documents produced by Stanford Group 
Company, an SIBL-affiliated broker-dealer and investment 
adviser located in Houston, Texas.
    By April of 2008, the FWRO staff concluded, based on 
information provided to the FWRO by former Stanford employees 
and the bank's refusal to produce documents and information, 
that the case was appropriate for a criminal referral. 
Accordingly, I authorized the FWRO staff to contact the Fraud 
Section of the Department of Justice. Following a meeting with 
DOJ in June 2008, DOJ and the FWRO staff decided that DOJ was 
better Positioned to uncover evidence of wrongdoing at the 
Antiguan-based bank. In December of 2008, the DOJ and FWRO 
staffs jointly concluded that a parallel investigation was 
appropriate. As a result of our staff's efforts, I was able to 
authorize the staff to seek authority to file an emergency 
action in mid-February 2009.

Q.2. In advance of your testimony in August 2009 before this 
Committee, were you ever asked to limit your testimony to avoid 
revealing the length of time between the Fort Worth office's 
original suspicions of fraud at Stanford in 1997 and the SEC's 
filing of an emergency action to halt the fraud? If so, from 
whom did this request come?

A.2. I was not asked to avoid revealing any information.

Q.3. The Inspector General's report describes some very 
commendable performances by employees in your office and some 
very poor decision making by others. Are you taking, or have 
you taken, any personnel actions B positive or negative B in 
response to the Inspector General's report?

A.3. In recognition of their around-the-clock efforts and 
fortitude in overcoming efforts to obstruct the investigation 
by Stanford and his cronies, I nominated the attorneys, 
examiners and managers that completed the investigation for a 
``Director's Award.'' On my recommendation, Robert Khuzami, 
Director of the Division of Enforcement, issued the awards on 
July 1, 2010. As to those individuals that were involved in 
examining and investigating SIBL and its affiliates prior to my 
arrival at the SEC, it is my understanding that a review of the 
Inspector General's recommendations is being conducted by SEC's 
headquarters.

Q.4. During the hearing, you mentioned the efforts that are 
being made to collect additional assets for the benefit of the 
Stanford victims. It appears, however, that assets collected 
will fall far short of investor losses. Based on collections to 
date and reasonably likely additional collections, how many 
cents per dollar invested do you anticipate defrauded investors 
will receive?

A.4. It is difficult to provide an accurate estimate in 
response to this question, given that a variety of factors 
influence the return defrauded investors may receive. For 
example, while a pro rata distribution among investors is 
common, the details of any distribution (including how claims 
by investors will be treated in comparison to claims by other 
creditors) will be known only after a claims process and 
distribution process have been proposed to and approved by the 
district court. Moreover, it is difficult to estimate the 
amount of reasonably likely additional collections. For 
example, according to the Receiver, some assets are in the form 
of private equity that has a value not yet determined. 
Moreover, the Receiver has reported that a significant category 
of uncollected receivership assets is related to potential 
recovery in litigation against third parties.
    While the Receiver believes there are valid claims in that 
litigation, it is simply not possible at this stage to know 
with any degree of certainty what receivership assets may 
result from that litigation. Additional details about that 
litigation, including the amount claimed, have been discussed 
in previous submissions, and I would happy to supplement this 
response with more details if doing so would be helpful. 
Unfortunately, regardless of the outcome of that litigation, as 
you note, it appears that available assets will fall far short 
of investor losses. Nevertheless, we continue to use every 
effort to work help make as many assets as possible available 
to defrauded investors.

Q.5. The receiver's July 2010 interim report stated that 
$185,000 had been spent in April 2010 alone on responding to 
the SEC, among others, in connection with Government 
investigations. These expenses ultimately diminish the amount 
of money available for defrauded investors. Has the SEC 
considered the steps that it can take to limit the expenses 
incurred by the receiver in assisting the SEC with the SEC's 
enforcement work?

A.5. Throughout this case, the SEC has worked closely with a 
court-appointed Examiner to monitor the Receiver's costs and 
ensure maximum recovery to the victims of this massive fraud. 
These efforts have had tangible benefits. For example, the 
Receiver and the professionals assisting him have reduced their 
customary fees by at least 20 percent and have capped the rates 
charged by senior lawyers. In addition, we carefully scrutinize 
the Receiver's bills for fees and expenses. In fact, in 
response to our objections, the district court has held back, 
on an ongoing basis, an additional 20 percent from the 
Receiver's fees and expenses.
    Accordingly, we have worked with the Receiver to reduce any 
expenses associated with the SEC's ongoing investigations. For 
example, we worked with the Receiver to allow SEC staff to 
review voluminous hard copy documents stored by the Receiver 
with as little involvement (and expense) from receivership 
personnel as possible. We also earlier conferred with counsel 
to the Receiver to help minimize costs associated with 
examining voluminous electronic records that had potential 
relevance to both the SEC's ongoing investigations and possible 
third party receivership claims.
    Recently, the staff obtained approval of a contract with 
the Receiver's forensic accounting firm under which the SEC 
will directly absorb the cost (rather than seeking 
reimbursement out of the receivership estate) for certain 
expenses incurred responding to requests for information from 
the SEC's staff in connection with ongoing enforcement-related 
investigations. It is our understanding that the Department of 
Justice has entered into a similar contract. As we do regarding 
a variety of expenses, we will continue to confer with the 
Receiver and his counsel to identify ways to minimize any 
expenses associated with responding to requests for information 
from Government agencies.
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