THE US Securities and Exchange Commission (SEC) didn’t conduct a meaningful probe of indicted money manager R Allen Stanford until 2005, even though examiners suspected him of operating a Ponzi scheme eight years earlier, an internal report found.

The agency’s Forth Worth, Texas, office did four reviews of Houston-based Stanford Financial Group Co starting in 1997 and determined after each one that Stanford’s purported returns on certificates of deposit were highly unlikely, SEC Inspector General H David Kotz wrote in a report released Friday.

The SEC sued Stanford, 60, in February 2009, claiming his Antigua-based firm, Stanford International Bank Ltd, defrauded investors by selling billions of dollars in bogus certificates of deposit. He is jailed awaiting a January trial on related criminal charges that he oversaw a $7-billion Ponzi scheme.

“Much has changed and continues to change regarding the agency’s leadership, its internal procedures and its culture of collaboration,” SEC Chairman Mary Schapiro said in a statement. “We will carefully analyse the report and implement any additional reforms as necessary.”

Stanford denies all wrongdoing. The government claims he misrepresented investments and paid unrealistically high returns to early investors by taking funds from later buyers of the CDs.

The SEC’s reluctance to pursue a case against Stanford after its earlier examinations didn’t stem from improper “professional, social or financial” relationships between agency employees and his firm, Kotz said. He did find that senior officials in the Fort Worth office felt employees were being judged on the number of cases they brought and that “complex cases were disfavoured”, the report said.

“Cases like Stanford, which were not considered quick-hit or slam-dunk cases were not encouraged,” Kotz wrote.

He recommended that the SEC, in deciding whether to pursue cases, evaluate the potential harm to investors if no action is taken. The enforcement unit should also consider evaluating employees based on their willingness to pursue difficult probes that are important to the protection of investors.

The SEC released Kotz’s Stanford report Friday after the agency separately announced it had sued Goldman Sachs Group Inc. The agency accused New York-based Goldman Sachs, the most profitable firm in Wall Street history, of structuring and selling mortgage securities without disclosing that hedge fund Paulson & Co helped pick the underlying assets and bet against them.

The timing of the Stanford report’s release wasn’t tied to the Goldman Sachs case, SEC spokesman John Nester said.

Lawmakers urged Kotz last year to take a second look at the SEC’s handling of Stanford after an initial review he released in July found no fault with investigators. The new report focuses on examinations dating back to an earlier time period.

The SEC investigation that began in 2005 was hampered by jurisdictional limits, a government official in Antigua and Stanford’s refusal to co-operate, Kotz’s July report said.

The agency halted its probe at the Justice Department’s request after referring the case to federal prosecutors. After Bernard Madoff’s larger fraud collapsed in 2008, investigators felt renewed urgency, and while interviewing a former Stanford employee, they obtained “critical” information, Kotz wrote.

Last October, Republican Senators Richard Shelby of Alabama and David Vitter of Louisiana pressed Kotz to undertake a more “comprehensive and complete investigation”. In a letter to Kotz, they contrasted his 11-page report from July regarding Stanford with a 457-page document his office produced on the SEC’s handling of Madoff’s $65-billion fraud.

The Madoff review found the agency never conducted a competent investigation of at least six tips dating back to 1992. Madoff, 71, is serving a 150-year prison sentence after pleading guilty last year to defrauding clients at his New York money management firm.

(Courtesy of Washington’s Bloomberg Bureau)