Fraud and the Unwilling Regulator

In the annals of financial fraud, Allen Stanford is remarkable for how long he kept up his game after examiners from the U.S. Securities and Exchange Commission decided he was likely running a Ponzi scheme. He sold $7.2 billion in fake certificates of deposit and a billion in mutual funds, mostly to middle-class people, many of them retirees.

“You could possibly argue that by not stopping Madoff, the SEC showed ineptitude or a lack of skills. I am not persuaded, given that SEC examiners strongly suspected Madoff and were prevented from investigating further by a high official. Nevertheless you might make a case that the SEC showed itself unable to do its duty, despite the many complaints and even detailed reports about the fraud, due to incompetence in some sense or another.

That argument cannot be made at all with respect to Stanford. The SEC does not come across as inept in the Stanford affair—on the contrary, its mid-level examiners proved themselves to be highly competent and conscientious. As soon as Stanford appeared on their radar, they identified his investment scheme as a likely fraud. They urged that this business – at that time small, with few American clients – be investigated thoroughly. They left a paper and electronic trail marking Stanford as a major potential threat to investors. They did so as clearly as possible. They repeated the warning, again and again, year after year. There is no ambiguity in the matter.

By not stopping Stanford, the SEC itself showed unwilling to do its duty. It was able, but particular decision makers did not want to. No matter how much the examiners urged that the scheme be stopped, higher up in the bureaucracy there was no desire to catch him. The Stanford case has a profound implication for our understanding of how government agencies function: it highlights the motives, not any lack of skills.”

From Ponzi Regulation


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