U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

63–685 PDF 2011

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/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

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)

(1) 

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 
2 

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 
3 

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 Enforce-
4 

ment 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 
5 

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. 
6 

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. 
7 

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. 
8 

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 21⁄2 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 Stan-
9 

ford 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, 
10 

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 appro-
11 

priate 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. 
12 

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 
13 

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—— 
14 

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 
15 

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 
16 

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 
17 

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—— 
18 

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 
19 

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 lowerlevel 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 
20 

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. 
21 

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 
22 

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 
23 

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. 
24 

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. 
25 

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. 
26 

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 
27 

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 
28 

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 
29 

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? 
30 

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 
31 

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. 
32 

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. 
33 

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—— 
34 

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 
35 

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 re-
36 

gion, 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 in-
37 

vestigation 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? 
38 

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? 
39 

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:] 
40 

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 impor-
41 

tant 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, con-
42 

duct 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 21⁄2 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. 
43 

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 BrokerDealer 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 
44 

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 dayto-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 re-
45 

turns 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 
46 

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. 
47 

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. 
48 

1SEC v. Stanford International Bank Ltd., et al., No 3:09-cv-0298-N (N.D.Tex), Second 

Amended Complaint at par. 88. 

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 informationsharing; 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. 

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 
49 

2This figure includes amounts claimed in lawsuits filed or intended to be filed by the Receiver; actual recovery may vary depending on litigation outcome. 3http://www.stanfordfinancialreceivership.com/documents/SIPClLetter.pdf 4http://www.sec.gov/divisions/enforce/enforcementmanual.pdf 

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

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 brokerdealer 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. 

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 
50 

Report, we have instituted mandatory Enforcement Manual training for all Division 

staff to ensure compliance. 

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 fac-
51 

tors 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 
52 

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. 
53 

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 riskbased 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 en-
54 

forcement 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, counterparties 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. 
55 

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. 
56 

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 
57 

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 
58 

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 brokerdealer 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. 
59 

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 work-
60 

ing 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 
61 

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 con-
62 

sider 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-mailbased 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. 
63 

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 
64 

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 
65 

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 
66 

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 Jerseybased 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 
67 

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 
68 

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’’ pub-
69 

lished 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 onsite 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? 
70 

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. 
71 

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. 
72 

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.