[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                       THE STANFORD PONZI SCHEME: 
                         LESSONS FOR PROTECTING 
                           INVESTORS FROM THE 
                         NEXT SECURITIES FRAUD 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 13, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-30

                               ----------
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66-868 PDF                       WASHINGTON : 2011 

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 13, 2011.................................................     1
Appendix:
    May 13, 2011.................................................    49

                               WITNESSES
                          Friday, May 13, 2011

di Florio, Carlo, Director, Office of Compliance Inspections and 
  Examinations, U.S. Securities and Exchange Commission (SEC)....     9
Kauffman, Stan, victim, Stanford Financial Group Ponzi scheme....    32
Ketchum, Richard G., Chairman and CEO, Financial Industry 
  Regulatory Authority (FINRA)...................................    11
Robert Khuzami, Director, Division of Enforcement, U.S. 
  Securities and Exchange Commission (SEC), accompanied by 
  Michael Conley, Deputy Solicitor, SEC..........................     8
Kotz, H. David, Inspector General, Office of the Inspector 
  General, U.S. Securities and Exchange Commission (SEC).........     6
Preuitt, Julie, Assistant Regional Director, U.S. Securities and 
  Exchange Commission, Fort Worth Regional Office................    29
Rawl, Charles W., former employee, Stanford Financial Group, and 
  Stanford Financial Group whistleblower.........................    31

                                APPENDIX

Prepared statements:
    Harper, Hon. Gregg...........................................    50
    Luetkemeyer, Hon. Blaine.....................................    52
    di Florio, Carlo.............................................    54
    Kauffman, Stan...............................................    70
    Ketchum, Richard G...........................................    78
    Robert Khuzami...............................................    54
    Kotz, H. David...............................................    86
    Preuitt, Julie...............................................   105
    Rawl, Charles W..............................................   112

              Additional Material Submitted for the Record

Cassidy, Hon. Bill:
    Statements from constituents who have been affected by the 
      Stanford Ponzi scheme......................................   118
Harper, Hon. Gregg:
    Statements from constituents who have been affected by the 
      Stanford Ponzi scheme......................................   199


                       THE STANFORD PONZI SCHEME:
                         LESSONS FOR PROTECTING
                           INVESTORS FROM THE
                         NEXT SECURITIES FRAUD

                              ----------                              


                          Friday, May 13, 2011

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 11:22 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Fitzpatrick, 
Pearce, Posey, Hayworth, Canseco; and Capuano.
    Ex officio present: Representative Bachus.
    Also present: Representatives Harper, McCaul, and Cassidy.
    Chairman Neugebauer. Good morning. The committee will come 
to order.
    I would like to thank everyone for being here today.
    I know that we have a number of visitors in the gallery 
today, and we appreciate you being here; we just would remind 
folks who are in the gallery that you are an observation team 
only and that we would ask not to have any placards or any 
verbal shows of support for or against the testimony.
    This is a very important hearing on a very important issue. 
We want to have plenty of time for members to give this panel 
appropriate questions. We want to hear from the panelists, as 
well.
    We want to remind everyone, particularly the members who 
are here, that you can submit an opening statement for the 
record, and that will be made a part of the permanent record.
    We have four Members who are not currently on the 
subcommittee or on the committee who have asked to join us 
today. And so I ask unanimous consent that Mr. McCaul, Mr. 
Cassidy, Mr. Harper, and Ms. Schwartz be a part of the panel 
today.
    What I am going to do here is, I am going to have one 
Member who is going to make a brief statement and then going to 
submit his questions for the record. And so, I am going to go 
ahead and yield 2 minutes to the gentleman from Texas, Mr. 
McCaul, for a statement.
    Mr. McCaul. Thank you, Mr. Chairman. Thank you for holding 
this hearing today and allowing me to participate.
    Many of my constituents were hurt by the fraud committed by 
the Stanford Group, and I am pleased to see that Congress is 
investigating the reasons why this fraud was allowed to 
continue for so long after the SEC received initial warnings 
that something was wrong.
    In addition to learning from past mistakes and correcting 
them to prevent another case like this, we must also do what we 
can to help the investors and the victims in this case recover 
what they can. I believe, as in the Madoff Ponzi scheme, that 
the Stanford investors should be covered by the SIPC, and I 
would like to work with this committee and the SEC to see that 
this gets done.
    Unfortunately, due to my flight schedule, I will not be 
able to stay for the entire hearing. So, Mr. Chairman, with 
your consent, I would like to submit questions in writing for 
the witnesses.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. McCaul. Once again, Mr. Chairman, thank you for letting 
me participate. And I yield back my time.
    Chairman Neugebauer. Thank you.
    I am going to yield myself just a few minutes here.
    This is a very important hearing. And I think as we go 
through the hearing today, we are going to see some very 
alarming facts: that here was a Ponzi scheme that really 
started off from the very beginning as a Ponzi scheme and that, 
along the way, very early in the process, people were trying to 
call attention to the fact that this was, in fact, a Ponzi 
scheme.
    We are going to put a chart up on the screen here in just a 
minute. But, basically, what we see is, in a very short period 
of time, really from 1995, where we were starting off with a 
fund that had a very limited number of investors, around $200 
million, at the end had nearly $7 billion. And all along the 
way, where you see the little stars, were opportunities where 
people were saying that this fund was a fraud, was a Ponzi 
scheme, and yet people ignored those warnings and let the fund 
get larger and larger. And then, of course, when you look at 
2005, as with all Ponzi schemes, the larger they get, the 
larger the appetite for more funds, and so the more pressure to 
bring more money in.
    I had the opportunity recently, when I was back in Texas, 
to meet with some of the victims. And what I think we will 
learn is that a good number of the victims were people who came 
in here at the end. It is just egregious that so many points 
along the way would have saved so many billions of dollars but 
not--I want to take the dollar signs off of it--and saved the 
life savings of a number of people.
    And so the questions are going to be tough today, because 
we had people trying to make others act on the fact that this 
was, in fact, a Ponzi scheme and yet they were ignored by not 
just one agency, but two agencies.
    I hope that several things will come out of this hearing.
    One, it is important for regulators to do their job. And 
one of the things we are going to hear today is that, even if 
we would have had Dodd-Frank in place, it wouldn't have 
prevented this from happening; the resources were there, the 
infrastructure was in place, and yet people just didn't do 
their job. So when people call for more regulations in a lot of 
cases, it is sometimes when we find government not living up to 
its expectations. And, unfortunately, the Washington answer 
generally has been, we just need more people and we need more 
regulations. This is a case where more people and more 
regulations wouldn't have solved it. What would have solved 
this problem is if we would have had regulators actually doing 
their job.
    And I think it also points out the importance of what 
happens when regulators don't do their job, particularly in 
these agencies where the people in our country have--expecting 
these agencies to have integrity inside the agencies and to 
address these issues, and yet we have seen a fairly systemic 
failure.
    In many ways, I don't want to minimize the Madoff issue, 
but this is a case different from Madoff, in that Madoff was--
toward the end, people realized that was a Ponzi scheme. But 
what is so egregious about this is, from the very beginning, 
people realized that this was a Ponzi scheme, and yet it went 
unanswered.
    And so, I look forward to having a very robust hearing 
today.
    And now it is my pleasure to yield to the ranking member, 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you for having 
this hearing.
    And for the victims who are in the audience listening to 
this, I can only tell you that, as part of the government, I 
apologize. I agree with what the chairman said, that the 
government failed you in this situation.
    But I also think that it is indicative of the situation 
that was going on for the last 15 years. This country has 
continuously let itself believe that the lack of regulation or 
the lack of enforcement of regulations, somehow everything 
would just take care of itself. And it was endemic, across-the-
board, which, in my opinion, caused the economic collapse that 
we witnessed in the last 10 years.
    This is certainly a part of it, and I agree with the 
chairman that no laws can stop illegal behavior. But the 
attitude that is endemic upon all of us for the last 15, 20 
years, that somehow regulation is not necessary, somehow a free 
and unfettered market, free of any oversight, would police 
itself and everything would just be okay is wrong. This is more 
proof that it is wrong.
    Regulators must regulate. Enforcers must enforce. And when 
we don't, we owe an apology to the people who have been hurt 
and we owe them our best efforts to make it right.
    With that, Mr. Chairman, I yield back.
    Chairman Neugebauer. The Chair now recognizes the gentleman 
from New Mexico, Mr. Pearce, for 2 minutes.
    Mr. Pearce. I think the chairman.
    Any time a nation makes a promise that it does not keep, 
the entire nation loses confidence in itself and in its 
capabilities, especially when middle-class and just working-
class families are affected.
    So I appreciate the chairman calling the hearing today, and 
we are listening with interest to the comments that are made 
from the people whom we asked to be in charge. We appreciate 
your service, but we also have questions about why it arose.
    Thank you very much. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And I now yield 2 minutes to Mr. Harper, the gentleman from 
Mississippi.
    Mr. Harper. Thank you, Mr. Chairman. I appreciate very much 
you holding this very important hearing, something that is 
extremely important to our office and to many of our 
constituents.
    And I think about all of the natural disasters that my 
State of Mississippi has and is enduring, but at least we had 
warning. At least we had a little early detection on what was 
going on there so you could take action to protect your 
families. But the Stanford financial Ponzi scheme and the lives 
it shattered in my home State stands in stark contrast to those 
natural disasters. For years, while this calamity was brewing, 
there were many warning signs and reliable forecasts that could 
have been given by our government but were not.
    Mr. Chairman, by and large, these were not wealthy 
investors. On the contrary, these were hardworking people--
parents, grandparents, factory workers, school teachers, 
retired individuals--who lost their life savings. Eighty 
percent of those victims invested less than $500,000. Of the $7 
billion in total losses, $2 billion was lost by over 5,000 
victims in the United States. Of those, 125 that we know of 
were from my State of Mississippi alone, totaling over $64 
million.
    From many meetings that we have had and research that has 
been done, there was a monumental breakdown within our 
regulatory and enforcement agencies. From what I have seen, the 
SEC's own Inspector General uncovered problems as far back as 
1977, when the first examinations were conducted and when there 
was only $250 million in deposits with Stanford. And yet, 
investors were not warned, and investments continued until 
2009, when deposits totaled $7.2 billion.
    I find that absolutely unbelievable, how this could happen. 
How could it go unnoticed by the SEC? Why did former SEC 
employees receive jobs in the Stanford company? Why did the SEC 
hesitate? Why weren't investors alerted years earlier? Indeed, 
how could this happen in our country? And what do we do now?
    It is my understanding that the SEC's own forensic 
accounting investigators determined that none of the invested 
funds ever went to purchase a security. This is absolutely 
amazing, the lavish and extravagant lifestyle that was done by 
these Stanford leaders.
    It is quite clear that there is a very hyper-technical 
dispute on whether these victims warrant coverage by the 
Securities Investor Protection Corporation. So we have to ask, 
if they failed to do their job, then why would these victims' 
investments not be covered by SIPC?
    Mr. Chairman, I thank you for holding this very important 
hearing. We need closure and a final resolution by the SEC and 
their government.
    Mr. Chairman, I have in my possession a document here 
representing over 80 Stanford Financial constituents' stories. 
And I ask unanimous consent that it be entered into the 
permanent record of this subcommittee.
    Chairman Neugebauer. Without objection, it is so ordered.
    And I thank the gentleman.
    Mr. Harper. Thank you, Mr. Chairman.
    Chairman Neugebauer. And now the gentleman from Louisiana, 
Mr. Cassidy, for 2 minutes.
    Mr. Cassidy. I thank the chairman and the ranking member 
for holding these hearings and allowing me to join.
    It is estimated that 1,500 Stanford victims live in 
Louisiana, with more than $500 million in assets lost. But ``an 
asset lost'' is kind of a nice way of saying ``a human 
tragedy.'' The typical person in my district worked in a 
petrochemical plant, and saved a lifetime so their kids could 
go to college and have a better life. They paid their mortgage, 
and then they sacrificed a little extra so that after 
retirement, they could live independently. That said, after 
they retire, they took their savings, put it with Stanford, 
and, poof, it is gone--a lifetime of work not there.
    You can imagine how they feel, particularly when the IG's 
report looked at the SEC and found that, as early as 1997, 
there were indications that something was wrong. Double-digit 
returns on these CDs could not be possible, it was said.
    But it wasn't pursued, presumably because--or at least, 
according to the IG's report, because that Fort Worth office 
preferred slam-dunk cases, as opposed to complex things. 
Unfortunately, this was complex--unfortunately, for the victims 
in my district.
    But the level of victimization doesn't stop there. It is 
perceived that the court-appointed receiver was more interested 
in billable hours than in pursuing the best interests of those 
victims. And, lastly, there is one more level of victimization: 
They don't qualify for SIPC, supposedly because they were given 
CDs which had a value. But the value of that CD was fictitious.
    We cannot make these people whole most of the time, but 
about 80 percent of them were teachers, petrochemical workers, 
blue-collar folks who did it right, planning for independence. 
What we can do is extend them the SIPC coverage to allow them 
to have a second chance at that for which they worked a 
lifetime.
    With that, I ask for unanimous consent to enter these 
reports from my constituents on their personal fraud, and I 
yield back. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    That concludes our opening statements. And I will remind 
members that their full statements will be made a part of the 
record, and we will hold the record open.
    At this time, I will introduce our first panel:
    Mr. H. David Kotz, Inspector General, Office of the 
Inspector General, U.S. Securities and Exchange Commission; Mr. 
Robert Khuzami, Director, Division of Enforcement, U.S. 
Securities and Exchange Commission; Mr. Carlo di Florio, 
Director, Office of Compliance Inspections and Examinations, 
U.S. Securities and Exchange Commission; and Mr. Richard 
Ketchum, Chief Executive Officer, Financial Industry Regulatory 
Authority, or FINRA.
    Welcome.
    Mr. Kotz?

 STATEMENT OF H. DAVID KOTZ, INSPECTOR GENERAL, OFFICE OF THE 
  INSPECTOR GENERAL, U.S. SECURITIES AND EXCHANGE COMMISSION 
                             (SEC)

    Mr. Kotz. Thank you for the opportunity to testify before 
this subcommittee. I appreciate the interest of the chairman, 
the ranking member, and the other members of the subcommittee 
in the SEC and the Office of Inspector General.
    On October 13, 2009, we opened an investigation into the 
handling of the SEC's investigation into Robert Allen Stanford 
and his various companies. In the course of our investigation, 
we obtained and searched over 2.7 million e-mails from a total 
of 42 current and former SEC employees for pertinent time 
periods from 1997 to 2009. We also conducted 51 interviews of 
individuals with knowledge relating to the SEC's examinations 
and investigations of Stanford.
    On March 31, 2010, we issued to the Chairman of the SEC a 
comprehensive report of our investigation in the Stanford 
matter, containing over 150 pages of analysis and 200 exhibits. 
The report found that the SEC's Fort Worth office was aware 
since 1997 that Stanford was likely operating a Ponzi scheme, 
having reached that conclusion merely 2 years after Stanford 
Group Company, Stanford's investment advisor, registered with 
the SEC in 1995.
    We found that, over the next 8 years, the SEC's Fort Worth 
examination group, including Julie Preuitt, who is a witness in 
this hearing, conducted four examinations of Stanford's 
operations, finding in each examination that the CDs Stanford 
was promoting could not have been legitimate and that it was 
highly unlikely that the returns Stanford claimed to generate 
could have been achieved with their purported conservative 
investment approach. The only significant difference in the 
exam group's findings over the years was that the potential 
fraud was growing exponentially, from $250 million to $1.5 
billion.
    We found that the Fort Worth examination group, and 
particularly Ms. Preuitt, made multiple efforts after each 
examination to convince the enforcement group to conduct an 
examination of Stanford. However, no meaningful effort was made 
by the enforcement group to investigate the potential fraud 
until late 2005.
    Even in 2005, the enforcement group missed an opportunity 
to bring an action against Stanford Group Company for its 
admitted failure to conduct any due diligence regarding 
Stanford's investment portfolio, which could have potentially 
halted the sales of the Stanford CDs and also could have 
provided investors and prospective investors with notice that 
the SEC considered such sales to be fraudulent.
    In our investigation, we found evidence that SEC-wide 
institutional influence with enforcement factored into its 
repeated decisions not to undertake a full and thorough 
investigation of Stanford. We found that senior Fort Worth 
officials perceived that they were being judged on the number 
of cases they brought, so-called ``stats,'' and communicated to 
the enforcement staff that novel or complex cases were 
disfavored. We found that because Stanford was not going to be 
a quick hit, it was not considered to be as high a priority as 
other easier cases.
    We also found that the former head of enforcement in Fort 
Worth, who played a significant role in multiple decisions over 
the years to quash investigations of Stanford, sought to 
represent Stanford on three separate occasions after he left 
the Commission and, in fact, represented Stanford briefly in 
2006 before he was informed by the SEC's ethics office that it 
was improper for him to do so.
    We provided our report of our investigation on Stanford to 
the SEC Chairman, with numerous recommendations to improve the 
operations of the SEC. We have followed up with those offices 
and Divisions, and they have all been implemented and closed to 
our satisfaction.
    In addition, we recently completed an audit of the process 
by which the compliance group refers examination results to 
enforcement in all of the SEC's regional offices to determine 
if the concerns about the Fort Worth office existed in other 
offices. Our audit found that examiners across the regional 
offices are generally satisfied with actions taken by 
enforcement in response to exam-related referrals. We further 
found that where there was dissatisfaction with the referral 
process, the level of concern dramatically dropped over time 
and particularly in 2010. We also found that the large majority 
of examiners in these other offices do not believe that 
enforcement will only take referrals that involve high-dollar 
amounts; and, in addition, even those who did, believed that 
this approach was more evident in the past.
    In September 2009, we completed another investigation 
involving the SEC's Fort Worth office and Ms. Preuitt. In this 
investigation, we found that Ms. Preuitt and a former colleague 
in the Fort Worth office voiced their differences at a planning 
meeting about management's initiative to begin conducting a 
certain type of examination. Shortly thereafter, Ms. Preuitt's 
supervisor called her into several meetings and admonished her 
for opposing the office's exam initiative. And a few months 
later, Ms. Preuitt's supervisor issued her a letter of 
reprimand. Eventually, Ms. Preuitt was involuntarily 
transferred to non-supervisory duties.
    Ms. Preuitt's former colleague, who also voiced opposition 
to the new exam initiative, complained to senior management at 
SEC headquarters about the initiative and about the treatment 
of Ms. Preuitt. Shortly after he sent his complaint, he was 
issued a performance counseling memo. And less than a month 
later, he was issued a letter of reprimand for discussing, 
``unfounded and inaccurate allegations with senior 
management.''
    Our investigation concluded that it was improper for Fort 
Worth management to take action against employees for voicing 
opposition to program initiatives and for complaining. Based on 
our investigative findings, we recommended the consideration of 
performance-based or disciplinary action against the two senior 
officials.
    In conclusion, I appreciate the interest of the chairman, 
the ranking member, and the subcommittee in the SEC and my 
office and, in particular, in our investigative reports. Thank 
you.
    [The prepared statement of Mr. Kotz can be found on page 86 
of the appendix.]
    Chairman Neugebauer. Thank you.
    Excuse me. I think, Mr. Khuzami, you have someone with you 
that I didn't introduce. As you make your opening statement, if 
you would introduce--
    Mr. Khuzami. I will, Mr. Chairman.
    Chairman Neugebauer. Thank you. You are recognized.

STATEMENT OF ROBERT KHUZAMI, DIRECTOR, DIVISION OF ENFORCEMENT, 
 U.S. SECURITIES AND EXCHANGE COMMISSION (SEC), ACCOMPANIED BY 
             MICHAEL CONLEY, DEPUTY SOLICITOR, SEC

    Mr. Khuzami. Thank you.
    Chairman Neugebauer, Ranking Member Capuano, and members of 
the subcommittee, thank you for the opportunity to testify on 
behalf of the Securities and Exchange Commission.
    I have served as Director of the Division of Enforcement 
since March 2009. Prior to that, I was a Federal prosecutor in 
New York doing criminal securities fraud prosecutions in the 
U.S. Attorney's Office for the Southern District of New York 
and as chief of the Securities and Commodities Fraud Task 
Force. Prior to that, I also served in the Office of 
Counterterrorism Unit, where I was involved in the prosecution 
of the ``blind sheik,'' Omar Ahmad Ali Abdel-Rahman, and nine 
codefendants for operating an international terrorism 
conspiracy responsible for, among other things, the 1993 
bombing of the World Trade Center. I previously served as 
general counsel for the Americas for Deutsche Bank AG and as 
the bank's global head of litigation and regulatory affairs.
    Mr. di Florio, who is Director of Compliance, and I are 
joined today by Michael Conley, who is the Commission's Deputy 
Solicitor for the Office of the General Counsel. Mr. Conley is 
involved in the Commission's analysis of the issues surrounding 
a potential liquidation of the Stanford Group Company under the 
Securities Investors Protection Act. He is here to answer any 
questions you may have in that regard.
    The Commission commends the work of the Inspector General 
and the staff investigating the Stanford matter and in their 
April 2010 report. Their investigation clearly identifies that 
the SEC missed opportunities in the Stanford investigation. We 
did not do our job. We did not protect the Stanford investors 
as we should have, as our mission of investor protection 
requires us to do. We cannot evade responsibility for this 
failure, and we deeply regret our failure to act more quickly.
    We cannot undo the past; what we can do is to act as a 
responsible agency going forward, which means, in this case, to 
take steps to prosecute those who perpetuate the fraud, to 
maximize recovery for the victims, and to change the way we 
operate in order to minimize the chance of this happening 
again. That is happening in four ways.
    First, we are vigorously pursuing Mr. Stanford. In February 
2009, we filed an emergency civil action to halt sales of the 
Stanford CDs and to seek return of funds to harmed investors. 
We later filed an amended complaint against Stanford and other 
perpetrators, alleging a massive Ponzi scheme. We also sued at 
that time Leroy King, the former CEO of Antigua's Financial 
Services Regulatory Commission, whom we alleged accepted bribes 
to conceal Stanford's activities. Our investigation of the 
Stanford fraud continues, and we are closely focused on the 
conduct of others connected to the fraud, while also working 
closely with the Department of Justice, which has filed 
criminal charges against Stanford. And that trial is scheduled 
for September 12th.
    Second, we are working with the Stanford receiver, the 
criminal authorities, and others to recover assets for the 
Stanford investors. That includes assets in Switzerland, 
Canada, and the United Kingdom which are subject to government 
restraints. For example, in April 2010, we worked with the 
receiver and Panama's regulatory authorities to secure millions 
of dollars from the sale of certain Stanford-related entities 
located there.
    Third, the Inspector General's report identified a need for 
reforms in the Division of Enforcement and the Office of 
Compliance Inspections and Exams, seven of which related to the 
Division of Enforcement. They included: revamping the way we 
handle the tens of thousands of complaints and tips and 
referrals we get every year; improving coordination between 
enforcement and examination; adopting written investigative 
plans that make sure we coordinate with other experts in the 
AG, including those in the Office of International Affairs and 
the Division of Risk, Strategy, and Financial Innovations; and 
enhancing our procedures for opening and closing 
investigations. All seven of these have been deemed closed to 
the satisfaction of the Inspector General.
    And, fourth, in the 2 years I have been with the 
Commission, we have undertaken a top-to-bottom review of our 
Division in what has been described as the largest 
restructuring in the history of the Enforcement Division. We 
have hired experts from the private sector with extensive 
knowledge of complex products, transactions, and practices; 
streamlined management; put attorneys back to the front line of 
conducting investigations; improved coordination; initiated new 
steps to prevent fraud; and improved our training.
    Despite the many changes in the Division, more needs to be 
done. This will require commitment and creativity, and that I 
commit to you we will do. It also requires that we not forget 
how and why we fell short in the Stanford investigation.
    We thank the Stanford Victims Coalition, the Official 
Stanford Investors Committee, the examiner, and others for 
their help and assistance, and hope and expect to work 
cooperatively with them in the future.
    Thank you.
    [The joint prepared statement of Mr. Khuzami and Mr. di 
Florio can be found on page 54 of the appendix.]
    Chairman Neugebauer. Mr. di Florio?

 STATEMENT OF CARLO di FLORIO, DIRECTOR, OFFICE OF COMPLIANCE 
  INSPECTIONS AND EXAMINATIONS, U.S. SECURITIES AND EXCHANGE 
                        COMMISSION (SEC)

    Mr. di Florio. Thank you, Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee. Thank you for 
the opportunity to testify today on behalf of the U.S. 
Securities and Exchange Commission regarding the lessons 
learned from the Stanford Ponzi scheme.
    As Mr. Khuzami said, we deeply regret that the SEC failed 
to act more quickly to limit the tragic investor losses 
suffered by Stanford's victims.
    I joined the SEC last year, in January 2010. Prior to that, 
I was a partner with PricewaterhouseCoopers in New York in the 
financial services regulatory practice. Since joining the SEC, 
I have initiated a top-to-bottom review of the exam program to 
strengthen our effectiveness and our efficiency.
    The SEC's examination program helps protect investors to 
ensure market integrity by examining for fraud, monitoring 
risk, informing policy, and promoting compliance as the eyes 
and ears of the SEC in the field. Our exams assess whether 
registrants are treating investors fairly or whether they are 
engaged in fraud, such as insider trading, market manipulation, 
Ponzi schemes.
    In the Stanford matter, examiner Julie Preuitt showed the 
kind of determination that we encourage in all of our skilled 
and dedicated examiners, and I commend her. Unfortunately, Fort 
Worth leadership at that time did not act on the concerns about 
Stanford raised by Ms. Preuitt and the exam team. Those 
individuals are no longer with the SEC.
    The SEC's Inspector General's recommendations identify the 
need for better coordination between enforcement and 
examination, and we are committed to doing just that. OC and 
enforcement are working together on multiple fronts to identify 
misconduct earlier so we can shut it down more rapidly.
    During 2010 and 2011, nearly 200 enforcement investigations 
were opened and significant cases brought as a result of good 
exam work. We have introduced joint referral committees to 
proactively review referrals at a very senior level and a new 
governance process to ensure early escalation of any issues or 
concerns about how referrals are being handled.
    Our new tips, complaints, and referral system helps ensure 
that we have one system of record for logging, tracking, 
escalating, and resolving referrals from the exam program to 
the enforcement program across the country.
    More broadly, over the past year, we have been engaged in a 
top-to-bottom review of our exam program, taking a critical 
look at our strategy, our structure, our people and skills, our 
processes, and our technology. This has resulted in 
comprehensive improvement initiatives to become more effective 
and more targeted.
    For example, we have implemented a new national governance 
process that breaks down silos and facilitates coordination, 
consistency, effectiveness, and accountability across the 
country, across Divisions, and across regulatory partners, 
including FINRA. We have implemented a new central Risk 
Analysis and Surveillance Unit to enhance our ability to target 
those firms, individuals, practices that present the greatest 
risk to investors and our capital markets. We have begun to 
recruit experts and launch new specialty groups that will bring 
deep technical knowledge and experience to our exam program in 
critical areas. And we are working to implement a new certified 
examiner training program across the country that raises 
technical training and certification standards.
    As the Inspector General noted, he has also recently noted 
a report on an audit of the process by which examination 
findings are referred to enforcement. I am pleased that the 
report was generally positive and found satisfaction among 
examiners with enforcement's responsiveness to exam referrals, 
particularly over this past year. The IG's audit report also 
made some very valuable recommendations, which will further 
improve our process and which we are currently working to 
effectively implement.
    In conclusion, both OC and enforcement are committed to the 
reforms that strengthen our programs and address the lessons 
learned from the Stanford fraud. Thank you, and I welcome your 
questions.
    [The joint prepared statement of Mr. Khuzami and Mr. di 
Florio can be found on page 54 of the appendix.]
    Chairman Neugebauer. Thank you.
    I assume, Mr. Conley, you don't have an opening statement?
    Mr. Conley. That is correct, Mr. Chairman.
    Chairman Neugebauer. Thank you.
    And now, Mr. Ketchum.

 STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND CEO, FINANCIAL 
             INDUSTRY REGULATORY AUTHORITY (FINRA)

    Mr. Ketchum. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. I am Richard Ketchum, 
chairman and CEO of the Financial Industry Regulatory 
Authority, or FINRA. On behalf of FINRA, I would like to thank 
you for the opportunity to testify today.
    Unfortunately, we are here today because of a massive fraud 
that had tragic results for many investors. No regulator can 
feel good about its performance regarding Stanford. FINRA 
clearly could have done better, and we deeply regret that we 
did not.
    In the wake of Stanford, we took a hard look at our 
regulatory programs and approaches and searched for ways to 
more effectively uncover misconduct, especially fraud, and 
enhance our programs to better protect investors. In early 
2009, the FINRA board of governors established a special 
committee to conduct a review of FINRA's examination program as 
it related to the detection of fraud and Ponzi schemes, 
including the one Alan Stanford is charged with perpetrating.
    The committee, which was chaired by former U.S. Comptroller 
General Charles Bowsher, found that FINRA missed opportunities 
to investigate the Stanford firm's role in this scheme 
involving offshore CDs. First, FINRA's Dallas office curtailed 
a 2005 investigation because of a concern that offshore CDs 
were not securities regulated under Federal securities laws. 
Second, FINRA procedures at the time did not set forth criteria 
for escalation of a matter to senior management or the use of 
especially trained investigators based on the gravity and 
substance of fraud allegations. Finally, during this period, 
FINRA did not have a centralized database that gave examiners 
direct electronic access to all relevant complaints and 
referrals associated with the firm. As a result, no single 
FINRA staff member was aware of the totality of information our 
organization had relating to the Stanford firm.
    Following its review, the special committee made a series 
of recommendations intended to enhance the effectiveness of 
FINRA's examination program by increasing its ability to detect 
fraud. FINRA approached the special committee's recommendations 
with the utmost seriousness and immediately instituted a plan 
to address each of them. FINRA has either implemented or is in 
the process of implementing all of the recommendations that did 
not require action by the SEC or Congress.
    One of the first initiatives FINRA undertook to implement 
the committee's recommendations was the creation of the Office 
of Fraud Detection and Market Intelligence, or OFDMI, in 
October 2009. This group is responsible for the centralized 
intake and triage of regulatory filings and investor 
compliance. In 2010 alone, OFDMI referred more than 550 matters 
involving potential fraudulent or illegal conduct to the SEC or 
other Federal law enforcement agencies for further 
investigation.
    FINRA's Office of the Whistleblower, first established in 
March 2009 and now part of OFDMI, received and triaged over 390 
substantive calls and e-mails in 2010.
    FINRA also enhanced its examination programs and procedures 
in a variety of ways intended to help us better detect conduct 
that could be indicative of fraud:
    First, we are focusing resources on the highest-priority 
matters. In response to the special committee report, FINRA's 
staff created an ``urgent'' designation of those regulatory 
matters posing the greatest potential for substantial risk to 
the investing public. The committee also identified that the 
lack of a formal mechanism for the escalation of policy issues 
created risk within the organization. FINRA issued new 
procedures to enhance the process for escalation and 
documentation of complex legal and policy issues.
    Second, we have undertaken efforts to enhance the expertise 
of our regulatory staff. We have increased the number of staff 
in district offices tasked with realtime monitoring of business 
and financial changes occurring at the firms we regulate.
    Third, we have enhanced our use of third-party information 
to inform our regulatory programs. We have established 
procedures for third-party verification of customer assets.
    Finally, we have established a multiyear technology 
enhancement program to strengthen our programs.
    In addition to the internal initiatives I have described, 
FINRA has increased communication and coordination with the SEC 
relative to our programs. FINRA and SEC staff meet routinely to 
share details about strategic design and tactical delivery of 
information to our regulatory programs, as well as risk 
assessment, including models to measure risk for broker 
dealers, branch offices, and registered representatives.
    The special review committee's report and recommendations 
provide an important roadmap for FINRA to enhance our ability 
to quickly identify and investigate conduct that could indicate 
fraud or other serious customer harm. I assure this 
subcommittee that I am fully committed to continue making the 
necessary changes to strengthen our programs and raise the 
level of protection for all investors.
    Again, I appreciate the opportunity to testify today and I 
would be happy to answer any questions you may have.
    [The prepared statement of Mr. Ketchum can be found on page 
78 of the appendix.]
    Chairman Neugebauer. I thank the panel.
    I would like for the folks to put our chart back up. I 
think some of you have a copy of the chart, but let's put the 
chart back up.
    Mr. Kotz, you mentioned that in 2005, there was a very 
significant event that happened that was not executed on, in 
your testimony. Do you want to go back over and just kind of 
frame what happened in 2005 where there was a real opportunity 
there, an opportunity missed?
    Mr. Kotz. Sure.
    So, over time, even before that, this issue was raised. And 
then, finally, in 2005, the Enforcement Division in the Fort 
Worth office decided to take on the case. But instead of going 
forward with sort of emergency relief and immediately taking an 
action, they spent more time investigating and doing research 
and didn't actually bring an action until many years later.
    And we found that there was a possibility, even though we 
didn't have enough evidence of any alleged fraud at that point, 
to bring an action based on the lack of due diligence. Stanford 
Group Company was an investment advisor, and they were 
referring and getting referral fees for folks to invest in the 
CDs for Stanford International Bank. But they didn't have 
information about why they were able to achieve these returns, 
what they were getting the fees for.
    So there was certainly a strong argument to be made that 
you could have brought an action saying that Stanford Group 
Company didn't perform appropriate due diligence. If that 
action had been brought, then, even if it hadn't been 
successful, it would have triggered for the investors out there 
that the SEC believes that there is a potential fraud in 
Stanford Group Company.
    There are always difficult cases, and sometimes cases take 
a long time to fully go forward with. But if you are in a 
situation where you realize in 2005 that there has been a fraud 
growing for 8 years, then you need to take action immediately, 
even if you lose in court eventually.
    Nevertheless, we did interviews and we spoke with lots of 
victims, and we did a survey, and an overwhelming percentage of 
those folks said if they had heard any whiff of a problem with 
Stanford, even any lawsuit that was brought, they would have 
immediately taken out their money. So--
    Chairman Neugebauer. Thank you.
    Mr. Kotz. --we believe that there is an obligation on the 
part of the regulators to do something to let investors know 
that there are issues, even if you don't have enough evidence, 
necessarily, to go forward with a full-blown Ponzi scheme case. 
And we believe that that opportunity was in 2005.
    Chairman Neugebauer. Okay.
    I want everybody to look up at this chart. This is 
basically the fund balance of Stanford through the process. And 
I think the thing that is so discouraging and really incenses, 
I think, a lot of members of this panel today is, had--of 
course, there were other opportunities, there were four other 
opportunities that were missed there, but in 2005, what we see 
is the amount of money flow increased exponentially.
    So who was the head of enforcement in the Fort Worth office 
during this time?
    Mr. Kotz. There was an individual named Degenhardt and then 
Addleman over time, depending on the periods of time.
    Actually--I am sorry--the enforcement head was a man named 
Spencer Barasch, who, as we indicated in our report, after he 
left the SEC and had been involved in efforts to not allow the 
SEC to go forward with the Stanford case, made efforts to 
represent Stanford against the SEC and, in fact, was able to 
represent Stanford for a short period of time.
    In fact, Julie Preuitt, as she was trying to push the SEC 
to go forward and bring this case, actually prepared a memo and 
waited for Spencer Barasch to leave the agency because she 
knew, while Spence Barasch was there, they were never going to 
go ahead with the case.
    And immediately after the decision was made to go forward 
with the case because Spence Barasch had left, then Spencer 
Barasch wanted to try to represent Stanford in the case on the 
other side.
    Chairman Neugebauer. Now, in your report, I think if I am 
correct on this, did you refer your report to the SEC's Ethics 
Counsel for referral to the Texas bar?
    Mr. Kotz. Yes. And there was a referral to both the Texas 
Bar and the D.C. Bar. Both of them are continuing to actively 
look at that matter. We also referred it to the U.S. Attorney's 
Office and the FBI, and there is an active matter on that, as 
well.
    Chairman Neugebauer. Mr. Khuzami, do you agree that Mr. 
Barasch engaged in unethical and improper professional conduct?
    Mr. Khuzami. Congressman, the rules clearly prohibited him 
from representing, in my view, my personal view, prohibited him 
from representing Mr. Stanford. That was a matter under his 
control and management at the time. So my personal conclusion 
would be, certainly the evidence appears to be the case.
    I will say one thing. He called the Fort Worth office twice 
and asked about representation, and both times the people in 
the Fort Worth office told him, no, you cannot do that. He 
called a third time to the ethics office, who gave him the same 
advice. And then, he later went ahead and represented Mr. 
Stanford, I believe, for, I think the records show, 10 hours or 
so thereafter.
    So my only point is that I think the ethics office and the 
Fort Worth people gave him the right answer in this case.
    Chairman Neugebauer. But when he violated that, is there 
any kind of action that the SEC would take to prohibit him, 
then, for future opportunities? What is the policy on that?
    Mr. Khuzami. I think the problem here was we did not know 
that he represented Mr. Stanford for that period of time. Had 
we known, we would have made the same referrals that were made 
in this case years later when that fact became apparent.
    Chairman Neugebauer. So now that you know that, what kinds 
of action have you taken?
    Mr. Khuzami. Against Mr. Barasch? He is no longer an 
employee, since 2005. So the referrals have been made, and the 
criminal authorities and the ethics authorities are conducting 
their investigations.
    Chairman Neugebauer. But could he represent a client before 
the SEC today?
    Mr. Khuzami. He has a permanent ban on any matter in which 
he was personally or substantially involved in while he was an 
SEC employee, so I think the answer is ``no.''
    Chairman Neugebauer. But, today, he can actively represent 
clients before the SEC?
    Mr. Khuzami. He is permanently banned from anything he was 
involved in.
    Chairman Neugebauer. But what about things he was not 
involved in?
    Mr. Khuzami. Without speaking to the particulars, in 
general, SEC employees who leave are subject to a 1-year 
cooling-off period; they can't represent anything. After 2 
years, they can't represent a client in any matter that they 
managed or were involved in. And, like I said, a permanent ban 
on anything they were personally and substantially involved in.
    Chairman Neugebauer. I understand that the ban currently is 
such that I can advise a client, that I might have had an 
enforcement or something, but I can't represent that client. Is 
that correct?
    Mr. Khuzami. You can't represent the client before the 
Commission, which means you can't appear, you can't sign 
papers, and stuff like that.
    Chairman Neugebauer. But you can advise them.
    Mr. Khuzami. You could advise them, that is correct, 
subject to, I believe--I have to get back to you on that. I am 
not sure whether or not the 1- or 2-year prohibitions prevent 
even that kind of conduct.
    Chairman Neugebauer. I think one of the things that 
hopefully comes out of this is some title rules on that and 
where we have seen this kind of behavior for that individual to 
be able to continue. I understand that Mr. Barasch is still 
practicing law. In fact, I think on his firm's Web site, he is 
listed as the leader of corporate governance in the securities 
enforcement team. So, obviously, that is very alarming.
    I have gone way over my time, so we will now go to Mr. 
Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Mr. Kotz, in your opinion, did the SEC have the authority 
and the resources at their disposal to prevent the Stanford 
Ponzi scheme from occurring?
    Mr. Kotz. I do believe that they certainly were aware of 
the possibility of a Ponzi scheme back since 1997, and they had 
the manpower to be able to bring an action to attempt to stop 
the alleged Ponzi scheme from going forward. So I don't think 
that this was a question of lack of resources, no.
    Mr. Fitzpatrick. If you had to pinpoint the failure, where 
was it? Not resources.
    Mr. Kotz. It was an attitude failure. It was that the 
office at Fort Worth, at that time, was concerned about 
numbers. They wanted to show that they brought more cases than 
other offices. And in order to bring more cases than other 
offices, you have to bring easy, slam-dunk, quick-hit cases. If 
you brought a case like Stanford, which was complicated and 
complex, involved Antigua, foreign issues, the question of 
whether the CD was a security, etc., that wouldn't give you a 
number very quickly. It would take a long time.
    It would have saved investors billions of dollars, but, at 
that time, their focus was on the numbers. And that, we 
believe, was the primary reason.
    Mr. Fitzpatrick. And so, would the enactment of the Dodd-
Frank legislation have prevented the Ponzi scheme?
    Mr. Kotz. I don't believe that Dodd-Frank or either the 
procedures involved or the resources would have made a 
difference, in this case.
    Mr. Fitzpatrick. Mr. Kotz, I believe that this case and the 
Madoff case have demonstrated that more resources were not 
needed at the SEC, that more regulations were not needed. What 
we needed were the regulators to just do their job. Yet, the 
SEC has been before this committee asking for further 
appropriations after repeatedly failing investors in this 
country.
    Along those lines, I am aware of a report that you are 
working on related to the SEC's decision to lease $400 million 
of office space without a competitive bidding process. And that 
occurred just 2 weeks after the Dodd-Frank Act passed, an act 
which authorized lawmakers to double the agency's budget to 
2015.
    Can you elaborate on your findings of that report thus far?
    Mr. Kotz. We are looking at that. We haven't completed it 
yet. We are almost near completion. We actually plan to issue 
that report very, very shortly. But we are looking into the 
whole circumstances of how the SEC got to a point where they 
obligated the Federal Government for over $550 million with 
respect to that lease. And so, we will get that report to you 
shortly and be able to give you a full reckoning of what 
happened.
    Mr. Fitzpatrick. Are you able to elaborate on any of the 
details of the report at this point?
    Mr. Kotz. I would rather not get into too many details. I 
can say that some of the things we are finding are quite 
disturbing, in terms of what the SEC's actions were in this 
case.
    Mr. Fitzpatrick. I have nothing further.
    Chairman Neugebauer. I thank the gentleman.
    Now, the gentleman from New Mexico, Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. di Florio, you mentioned that the managers are no 
longer with the SEC. Did you recommend any punitive action? Did 
you terminate them? Or did they just quit and look for greener 
pastures?
    Mr. di Florio. These were the enforcement managers who were 
involved in not accepting the referral at that time, and I 
believe that they left the SEC.
    Mr. Pearce. I am asking, did you terminate them or did they 
leave?
    Mr. di Florio. I believe they left. I don't believe they 
were terminated.
    Mr. Pearce. So you had two managers. Who were the managers 
during that period of time?
    Mr. di Florio. I believe that was Spencer Barasch, 
principal.
    Mr. Pearce. Only 1 for 10 years?
    Mr. di Florio. Was there another Director of Enforcement?
    Mr. Khuzami. Mr. Barasch was the Enforcement Director until 
2005. An interim Director was there from 2005 to 2006.
    Mr. Pearce. How about from 1997 on? If you would put that 
chart back up there, that is kind of an effective chart showing 
that things are happening all around and somebody is ignoring 
it.
    And so you only had two managers then, temporary managers, 
from 1997 on?
    Mr. Khuzami. No, no, I am sorry. Mr. Barasch was there, I 
believe, from about late 1997-1998 through 2005. Then for 1 
year, there was an interim manager and then a permanent manager 
in 2006.
    Mr. Pearce. Okay. Now, somewhere in that period of time, 
someone wrote a letter of reprimand, did I hear that, on Ms. 
Preuitt?
    Mr. di Florio. Congressman, if I could--
    Mr. Pearce. Who wrote that letter of reprimand? And they 
wrote the letter of reprimand because she kept insisting that 
the agency do its job, right?
    Mr. di Florio. Correct, Congressman
    Mr. Pearce. And so who wrote that letter of reprimand?
    Mr. di Florio. I believe that was the letter written in the 
2008 timeframe, and it was written by the Associate Director 
for Examinations in the Fort Worth regional office.
    Mr. Pearce. He was uncomfortable that she kept pressing the 
envelope here, wanting some action, and he said that is 
inappropriate on her part, is that right? Is that the basic 
context of the letter? He didn't like that she was pushing the 
deal?
    Mr. di Florio. My understanding, Congressman--this was 
before I was at the SEC, obviously--was that there were 
circumstances and facts regarding behavior that the Associate 
Director was--
    Mr. Pearce. Having to do with Stanford?
    Mr. di Florio. Not having anything to do with Stanford.
    Mr. Pearce. Nothing to do with Stanford?
    Mr. di Florio. Nothing to do with Stanford.
    Mr. Pearce. So the Fort Worth office was an anomaly; they 
were more concerned about numbers. Who reviewed the stuff up 
above? Surely those four instances on the chart there, surely 
those four red stars on the chart got reviewed by somebody 
above Fort Worth. Did it ever get reviewed by anybody above 
Fort Worth?
    Mr. di Florio. Congressman, I believe that one of the 
points that is made in the Inspector General's report that is 
disturbing is that it was not escalated outside of Fort Worth 
and reviewed above.
    Mr. Pearce. Who would have been responsible to review that 
on a higher level?
    Mr. di Florio. On a higher level--
    Mr. Pearce. What department, what office?
    Mr. di Florio. If there was any concern in Fort Worth that 
a matter wasn't being addressed effectively, I would expect and 
certainly under my leadership today that would be escalated 
directly to my attention.
    Mr. Pearce. Are those people who were in that office still 
employed at SEC?
    Mr. di Florio. No, they are not, Congressman.
    Mr. Pearce. Were they terminated or did they quit?
    Mr. di Florio. They left, Congressman.
    Mr. Pearce. Have you brought official actions against 
anybody from Mr. Barasch on up? In other words, have you 
brought proceedings against them to--
    Mr. di Florio. We don't have authority over folks once they 
leave the SEC, so we have--
    Mr. Pearce. You don't have a Web page that describes the 
actions of people while they are in your employ so that people 
could come on and take a look and see what your report is? Did 
you prepare any final report on that so that people who would 
want to know, people who were going to hire him as a lawyer? 
Did you ever do anything like that?
    Mr. di Florio. Congressman, I believe, if we take action, 
we do make that public so people are aware, if they want to 
hire that individual or they want to do business with that 
individual, that individual has an action.
    Mr. Pearce. Mr. Khuzami, you gave us your four-point plan. 
Which exact item--you said you are fixed, it is all okay now. 
Which item on your four-point plan, if it were in place before, 
would have stopped the circumstances from moving forward, would 
have made sure that manager did not have the ability to push 
the stuff under the rug? Which point would have stopped this?
    Mr. Khuzami. Congressman, first, we are never done. We have 
done a lot, and we are going to keep ongoing.
    Mr. Pearce. No, I want to know which point. Because I don't 
believe, myself--I don't think that the agency is going to 
change much, because I don't see anything where people are 
being held accountable and responsible. So I am suspicious that 
your four-point plan is mostly just a little bit of eyewash, 
and we warmed it up and we shined it up.
    But I would like to know which point in your four-point 
plan would have stopped this thing from moving forward so that 
any of those stars at any point would have been pushed further 
and so that you would have had somebody at a higher level say, 
something is not right down there. Which point in your four-
point plan?
    Mr. Khuzami. We do quarterly reviews, and we review every 
case that each senior officer has within their docket, and we 
discuss problems, roadblocks, investigative challenges, 
theories. We have more expertise available across the Division. 
We have escalation of the process so that if an exam personnel 
does not get satisfaction in how their referral is being 
treated by the Enforcement Division, that gets escalated.
    And, in fact, the Inspector General's report, which he just 
indicated, showed that, in the last couple of years, the level 
of dissatisfaction in that regard has dropped dramatically.
    Mr. Pearce. I am not convinced.
    Thank you, Mr. Chairman. My time is up.
    Chairman Neugebauer. I appreciate the gentleman.
    The gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. di Florio said that some of the individuals involved in 
this are no longer with the agency. And Chairman Schapiro 
shared that with us, about the 50-some investigators and 
examiners who are culpable in the Madoff crimes, as well. That 
doesn't do anybody a whole lot of good, to know that they are 
no longer with the agency.
    A question that always begs for an answer is, where are 
they now? Are they examining or investigating for somebody 
else? And now, we have learned that this guy is actively 
involved in a law practice, apparently.
    We have said that the authorities were given a referral. 
What authorities, and when were they given the referral? Can 
you share that with us?
    Mr. Khuzami. I believe Mr. Barasch was referred to both the 
State ethics boards of Texas and the District of Columbia, as 
well as criminal authorities.
    Mr. Posey. What about the Justice Department, racketeering?
    Mr. Khuzami. I am sorry. By criminal authorities, I meant 
the Justice Department. I am sorry.
    Mr. Posey. Thank you. When?
    Mr. Khuzami. Shortly after the release of Mr. Kotz's report 
in April of 2010, I believe.
    Mr. Kotz. Yes, and we have been working with the Justice 
Department and the FBI on the ongoing case against Mr. Barasch.
    Mr. Posey. Okay.
    In regard to the IG's report that is forthcoming, we were 
all privy to the opportunity to look at the Madoff report, 
which was very incriminating, wasn't quite as bad as Mr. 
Markopolos' book, but it was still very incriminating. Over 50 
examiners and investigators botched it. The IG was kind of 
silent on the head management people who were culpable, but 
obviously, there were some.
    Can you tell us, at this point, the depth to which we have 
examiners and investigators who failed to do their job in the 
Stanford investigation?
    Mr. Khuzami. I am sorry. The extent to which they are out 
there working in the industry, is that the question?
    Mr. Posey. How many of them failed to do their job? We know 
there were over 50 in the Madoff case. Are we finding a similar 
depth in this case?
    Mr. Khuzami. Congressman, in my opinion, the failure here 
was largely the result of the senior management. The staff who 
were working the case on the enforcement side are the same 
staff who eventually brought the case in 2009. So, from my 
personal opinion--
    Mr. Posey. Okay. That is good.
    Mr. Khuzami. --just primarily the managers who refused to--
didn't let the case go forward.
    Mr. Posey. The next question. Have we canonized Julie 
Preuitt yet?
    Mr. di Florio. Congressman, as I said in my opening 
statement, I publicly commend Julie Preuitt. She did a terrific 
job, exactly what we expect and hope from our examiners in 
uncovering this fraud, in referring it and trying to 
persistently--
    Mr. Posey. Have we done anything to thank her? Has she been 
promoted? She probably should be running the agency.
    Mr. di Florio. Congressman, we are working closely with Ms. 
Pruitt right now to structure a portfolio of responsibilities 
that we think will let her demonstrate her talents to their 
fullest potential and include not only critical issues like oil 
and gas fraud in the Southwest region but also examines issues 
of national significance and importance.
    Mr. Posey. My point is we should reward her foresight and 
courage and dedication to her job with more than a mere ``thank 
you.'' It should be something to be recognized for decades, 
something that other employees should look up to and seek to 
emulate.
    Most importantly, my concern is with the rightful 
compensation of the victims.
    Mr. Posey. I have written the chairman as recently as April 
27th. She has responded--actually, her response is April 27th--
and said, I expect the Commission will make final decisions on 
whether the Securities Investor Protection Corporation should 
initiate a civil proceeding as soon as all this information has 
been thoroughly reviewed, which should occur in the near 
future. It has only been 3, 4 years now. Are we at a point 
where we can make a call on this and get this on the table and 
see if the acceptances are valid and the rejections are invalid 
and this can be debated?
    Mr. Conley. Congressman, this matter is now with the 
Commission, and we do anticipate that there will be a decision 
in the very near future.
    Mr. Posey. Could you define ``near future'' for me?
    Mr. Conley. I would say within the next few weeks we will 
have an answer from the Commission on this question.
    Mr. Posey. Very good.
    Next of all, what type of enhanced restrictions on 
employment do you foresee--any of you, feel free to speak up on 
this--as necessary to stop the revolving door of regulators to 
exploiters. I look at this current financial crisis. You are 
aware of the players from top to bottom. You are aware of the 
key positions in the highest levels of government that people 
have gone from regulator to profiteer to manager when it was 
convenient and a good reason to sell off their stock and take 
profits and run. What do you think we should do, in your 
professional opinions, to tighten up the regulations, to stop 
the revolving door from regulator to exploiter or profiteer or 
whatever you want to call it?
    Mr. di Florio. Congressman, I would note that, under 
Chairman Schapiro's leadership, we have started to undertake a 
top-to-bottom review of the ethics and compliance function at 
the SEC to make sure that we do have appropriate controls 
around the revolving door. So under Chairman Schapiro's 
leadership, she has appointed the first ever Chief Compliance 
Officer for the SEC, a new Senior Ethics Council that has 
embarked on looking at how to strengthen those controls and 
make sure that there aren't revolving door issues.
    We have put in place a system that is one of the leading 
systems in the Federal agency--among the Federal agencies--
concerning conflicts of interest and managing those conflict of 
interests. So I think there are a lot of positive steps under 
Chairman Schapiro's leadership that have been taken.
    In addition, GAO is looking at the revolving door. We are 
working closely with them and their report is due out soon. We 
expect that there will be good recommendations there on how we 
can further strengthen those controls and make sure there 
aren't those conflicts of interest. And we will certainly 
implement those recommendations.
    Mr. Posey. Thank you for your forthright answers.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. Thank you.
    I am going to change order here and have the gentleman from 
Mississippi, Mr. Harper.
    Mr. Harper. Thank you, Mr. Chairman.
    I thank each of the witnesses for being here in a very 
difficult situation and to those in the Stanford Victims Group, 
our hearts go out to you. This matter is not over. And I 
certainly admire and all of us admire your diligence and your 
persistence in staying in the fight.
    Mr. Kotz, I want to say, first of all, thank you for your 
hard work, your very long but very detailed and revealing 
report. And so I just wanted to express on my behalf that we 
really appreciate the effort that you made in putting this 
together.
    Mr. Kotz. Thank you very much, sir.
    Mr. Harper. Now, Mr. Ketchum, when we look at this issue 
and we look at the things here, we look at the efforts of 
FINRA, did FINRA review-- and I have a few of their marketing 
materials--these materials, your agency?
    Mr. Ketchum. FINRA reviews advertising materials that 
specifically go to the sale of products, yes. They don't review 
every material that broker-dealers put out.
    Mr. Harper. But you do review most or at least you make an 
effort to review?
    Mr. Ketchum. We review products that in one way or another 
try to sell securities.
    Mr. Harper. Do you request those materials from them or do 
they send them to you on a voluntary basis?
    Mr. Ketchum. No. They are obligated by rule to send them to 
us.
    Mr. Harper. When you look at many of these, it says here in 
the fine print in most of these that security products and 
services in the United States are offered through the Stanford 
Group Company, member FINRA and SIPC. Would the average 
investor conclude from reading that that there was SIPC 
coverage?
    Mr. Ketchum. It is difficult without seeing the full thing 
there and what they say about the CDs that were being sold. But 
clearly, Stanford cynically used the broker-dealer to create 
the impression there was going to be coverage, yes.
    Mr. Harper. I guess if this hearing underlies the 
contention that the victims believed that they were indeed 
purchasing registered securities and, in fact, they were not 
and that the SEC failed to do its job, then the question for 
all of the victims here and for us is, why would these victims' 
investments not be covered by SIPC?
    Mr. Ketchum. I think that is a fair question, though 
fairly, I think I properly should defer that to the SEC that 
has the oversight responsibility with respect to SIPC.
    Mr. Harper. Tell me what efforts FINRA made to protect the 
investors, the Stanford investors.
    Mr. Ketchum. As I indicated in both my written statement 
and oral statement, clearly not enough. We as well missed red 
flags that indicated concerns. We, as well as the SEC, became 
overly intimidated by the jurisdictional issues and the issues 
as to whether the CDs were securities and didn't focus on the 
fundamental exposure and risk to investors. And that was 
unacceptable behavior and unacceptable from the standpoint of 
how we responded.
    Mr. Harper. When this is being reviewed and you are looking 
at information--go back to 2007. When it is determined that SGC 
had an almost $3 million overdrawn account in 2007, what did 
FINRA do in response to that?
    Mr. Ketchum. I am sorry. I don't know exactly what you are 
referring to with respect to the $3 million over--
    Mr. Harper. In the investigation looking at--maybe it is a 
question that one of the other witnesses could answer better. 
But did FINRA take any action--when was the first action that 
FINRA took to protect investors?
    Mr. Ketchum. Our actions were cooperative with the SEC from 
the standpoint of the investigation that finally led to the 
actions of 2009. We also commenced investigations, just as the 
SEC does, in part from a Dallas/Fort Worth referral with 
respect to the case that did not lead to actions other than a 
minor action with respect to advertising that Stanford put out.
    Mr. Harper. Mr. Chairman, I thank you.
    And with that, I yield back my time.
    Chairman Neugebauer. Thank you.
    Now we go to Mr. Cassidy. I am sorry.
    I messed up there.
    Mr. Canseco, after you have been so polite--exactly. 
Cassidy, Canseco, you know. The gentleman from Texas.
    Mr. Canseco. Thank you, Mr. Chairman.
    And, gentlemen, thank you very much for appearing here 
today. Just before I get started with questioning, I do want to 
say several things. It is a little disconcerting to sit here 
today and see how for over a decade, employees of the SEC 
continuously notified their superiors and the enforcement group 
that something needed to be done with Stanford. And for a 
number of reasons, they were ignored. Nobody in a position of 
authority seemed interested in drawing outside the lines, 
whether it was because SIB was located outside of the United 
States or because the SEC was only focused during that time on 
taking on cases that could be quickly resolved.
    Nobody seemed to step back from the situation and say, 
something doesn't look right here. And as a consequence, people 
were hurt, investors were hurt. And I want to point out someone 
from my district--one of the ones who was hurt from my 
district, Mr. Barney Hallman from Alpine, Texas, wrote to me. 
And I am just going to read a little excerpt from it. He said, 
``I went to the SEC and FINRA's Web site and checked the 
history of the FA as well as the history of Stanford Group 
Company. Both Web sites reported no allegations, no fines and 
no discernible problems with either.''
    And he goes on to say, ``At that time, I had no idea that 
the SEC had been investigating SGC for 10 years since 1997, nor 
did I know that the Fort Worth's regional office per the OIG's 
Investigative Report 526 clearly believed that SGC was part of 
Stanford's Ponzi scheme. I also didn't know that for over a 
decade, the SEC knew investors who used their Web site and 
FINRA's to base their critical decisions would lose their money 
with certainty.''
    It highlights what fell between the cracks here. And it is 
particularly disconcerting given the fact that recent 
legislation has thrown new burdens on the SEC and other 
agencies without allowing for structural problems to be fixed 
first. The worst part about this is even if Dodd-Frank bill had 
been in place beforehand, its provisions still wouldn't have 
stopped the Stanford case. The laws were there. The regulators 
were there, but the regulators failed. And so now, the honest 
companies in the industry are paying the price for Stanford, as 
well as the good citizen investors who invested with Mr. 
Stanford.
    It is a travesty that these companies need to pay the price 
and that these individuals need to pay the price of the SEC and 
FINRA's failures.
    Let me start by asking Mr. Kotz, in your March 31st report 
from your office, you noted that by early summer of 2003, you 
say, ``It had been approximately 6 years since the SEC 
examination staff had concluded that SIB CDs were likely a 
Ponzi scheme. During that period, the SEC had conducted three 
examinations resulting in two enforcement referrals. An 
enforcement inquiry had been opened and closed with no 
meaningful effort to obtain evidence related to the Ponzi 
scheme. It would take almost another 6 years, another 
examination and enforcement referral and the collapse of the 
Madoff Ponzi scheme before the SEC acted to shut down 
Stanford's Ponzi scheme.''
    Are enforcement personnel who were involved--and this is 
the question--in the Stanford matter still employed by the SEC 
and in what capacity?
    Mr. Kotz. The managers who made the ultimate decisions left 
the SEC some time ago.
    Mr. Canseco. And have any SEC personnel been disciplined 
for missing the Stanford fraud?
    Mr. Kotz. Not to my knowledge, no.
    Mr. Canseco. Okay. I still have some time.
    Mr. Khuzami and Mr. di Florio, the SEC in the Fiscal Year 
2010 report notes that the Division of Enforcement completed 
structural reforms that were the most significant in 4 decades 
and noted that the Office of Compliance, Inspections, and 
Examinations established a new national governance structure. 
But absent in the Fiscal Year 2010 report, it seems, is any 
description of how these two Divisions are going to improve 
their communication and work with one another. The divide 
between the two was at the heart of the Stanford matter. What 
are your two Divisions doing to improve your work with one 
another?
    Mr. Khuzami. From the Division Enforcement's perspective, 
Congressman, we are doing a lot. We have much better 
integration between the two Divisions. We meet early on in 
investigation cases. We educate ourselves about the particular 
registrant that might be under examination. There is much 
better communication. We track referrals. We have an escalation 
approach to make sure the referrals are properly handled by the 
Enforcement Division, and we have expertise that we have hired 
in each Division to deal with particular types of market 
practices that might be under scrutiny.
    All in all, I think, a change of culture and, frankly, also 
due to the change in personnel who understands the value of the 
examination staff and what they bring.
    Mr. Canseco. Thank you. We are short on time.
    Mr. di Florio?
    Mr. di Florio. I would just endorse what Mr. Khuzami said. 
I think it starts with the tone at the top. And we have a 
commitment to a culture of teamwork and collaboration, starting 
with the chairman setting that tone. We meet regularly. Our 
staff meet regularly. We have put in place governance processes 
that bring us together to talk about cases earlier, raise 
concerns earlier, think about ways we can collaborate to stop 
fraud and rapidly shut it down. So there are a number of 
mechanisms, and I think we are very competent here today that 
this kind of situation wouldn't occur, we would nip it in the 
bud, we would have mechanisms in place to ensure that it got 
escalated and addressed.
    Mr. Canseco. Thank you. Mr. Chairman, may I have one more 
question, sir?
    Chairman Neugebauer. Quickly.
    Mr. Canseco. Yes, sir.
    Mr. Ketchum, have the rules and regulations promulgated by 
Dodd-Frank--would they have helped solve the situation at 
Stanford?
    Mr. Ketchum. No, no. This was a matter from all of our 
agencies' standpoint of being able to identify and push through 
a difficult situation and ensure that a serious fraud didn't 
continue. This wasn't about rules and regulations. We had the 
rules and regulations on our books.
    Mr. Canseco. Thank you very much, sir.
    I yield back, and thank you for my time.
    Chairman Neugebauer. And now the gentleman from Louisiana, 
Mr. Cassidy. Thank you.
    Mr. Cassidy. Thank you, Mr. Chairman. The goal of my office 
has been to ensure an effective, transparent, and compassionate 
response.
    Frankly, it seems as if all three have failed. Not to point 
fingers, because none of you were involved, again, Mr. Kotz, if 
anyone else was supposed to be made a saint, it so should be 
you because the only transparency has come from your office.
    For example, my office, as well as eight or nine other 
Members of Congress, Senate, and bipartisan, bicameral, 
requested the chance to look at an unredacted copy of the IG's 
report. Some of the redactions seemed to have pertained to 
someone's name, but others are just redacted. I have no clue 
what is behind there. We sent that letter sometime ago and have 
never received a response. Asking committee staff, an 
unredacted report has not been sent nor made available. Why 
can't we get a chance to look at an unredacted report?
    Mr. di Florio. Congressman, I don't know the answer to 
that. I don't know whether or not there are Privacy Act 
restrictions that come into play.
    Mr. Cassidy. I am willing to look at it in a room without 
windows with you standing behind my back to make sure that I 
don't take notes. But as I try to ensure a transparent response 
to people for whom transparency has been totally lacking, 
except for Mr. Kotz, why not?
    Mr. di Florio. I don't know. I will find the answer out for 
you, Congressman. My understanding is that a lot of their 
redactions have to do with maybe the ongoing investigations or 
other sensitive matters, but I will get back to you with a 
response.
    Mr. Cassidy. Sounds great.
    FINRA apparently or your predecessor in September of 2003 
sent a letter to SEC suggesting that this may not be on the up 
and up.
    Mr. Ketchum, did FINRA, your predecessor, send it to the 
Fort Worth office, or did they send it to the D.C. office? 
Because it seems like, if you will, blame is being put on the 
gentleman who was in charge of Fort Worth--and again, the lack 
of transparency has made me a little bit concerned. Do we know 
that higher-ups were not culpable and/or negligent? So I am 
asking, that report sent from September of 2003, to whom did 
that go?
    Mr. Ketchum. The communications between the SEC and FINRA 
were done at the Dallas and Fort Worth offices. I think 
actually the letter you are referring to or at least the 
primary letter you are referring to was a letter from the 
Dallas/Fort Worth SEC office to FINRA providing a partial 
referral to the thing.
    But, no. Part of the problem I think on both of our sides 
was an absence of escalation. It stayed at the two offices.
    Mr. Cassidy. One of you, maybe Mr. Conley, I understand 
that SIPC will cover Madoff because the stock transactions were 
fictitious but the underlying value of the CDs was fictitious. 
So why does the fictitious nature of the stock transaction of 
Madoff qualify for SIPC coverage but the fictitious value of 
the CDs does not?
    Mr. Conley. Congressman, this is one of the questions that 
the Commission is now looking at. The victims in this case 
through the Stanford Victims Coalition have made the argument 
to the Commission--they have met with the staff and made the 
argument and also in letters to the Commission that they 
believe that the CDs in this case should qualify as fictitious 
and, therefore, they should be--assuming they are customers, 
they would have an argument that they were entitled to the 
money that they invested. And that is a question that the 
Commission is looking at currently.
    Mr. Cassidy. I understand the Commission so far has been 
negative regarding that argument. Is that true or not?
    Mr. Conley. There has been no determination made by the 
Commission at this point. That is something that is currently 
under review by the Commission.
    Mr. Cassidy. Let us assume that they rule against. I am a 
physician, and I know that if a physician does something bad, 
something negligent, there is other recompense. Frankly, this 
is bureaucratic agency negligence. We have heard that. Is there 
sovereign immunity, or will there be civil cases allowed 
against the SEC for frankly totally failing their 
responsibility? Does the SEC have sovereign immunity?
    Mr. di Florio. As a general matter, I believe there is 
sovereign immunity, and I believe there have been some lawsuits 
filed. I don't know the current status of them.
    Mr. Cassidy. Can you let us know that?
    Mr. di Florio. Certainly, Congressman.
    Mr. Cassidy. Let us see. Also with the receiver. Now, I 
actually know some of those broker-dealers. They said that they 
showed up for work one day, and they were told to go home. The 
receiver was there. He hacked into their account, and he paid 
some IT people a lot of money to pull up lists that if they had 
stood behind him, he could have opened his account; they could 
have checked the documents he pulled down against the Pershing 
account and all of those billable hours that Janvey racked up 
are gone. So more money would have been there to compensate 
victims. I know the courts had told Janvey to downgrade his 
charges. The court was offended by the number of charges. Going 
forward, is there going to be a review of the procedures used 
to instruct receivers so that they can't maximize billable 
hours when there are shortcuts to the same thing?
    Mr. di Florio. Congressman, we vigorously check bills of 
receivers and, in this case, in fact, on a number of occasions, 
have achieved reductions in those bills.
    Mr. Cassidy. I understand that. But my fundamental question 
is, there was an easier way to do it. You just stand behind the 
guy as he opens it up, and you stand behind and have an IT guy 
there to make sure that maybe he opens up a similar computer 
with the same password so somebody who knows about computers 
can make sure there is not a game going on, and boom, you have 
all the accounts.
    And you don't take 2 months racking up IT--I am sure $200 
forensic accountants, etc., when you say here is the Pershing 
account data that Stanford is using, here is what you showed 
me. Why don't we do it that way and save a heck of a lot of 
dough?
    Mr. di Florio. I think that is entirely appropriate and 
that should happen. As the SEC, we don't control the receiver, 
and to some degree, the court is responsible ultimately for 
dictating how and in what method the receiver approaches his 
task. But we have been doggedly following his expenditures and 
suggesting ways he can do things more efficiently, including 
not spending money chasing assets that are overseas that are 
already subject to freeze orders.
    Mr. Cassidy. So it sounds like--it is understood that this 
particular receiver is problematic. I guess my question is, 
what does Congress have to do--I am not on this committee, and 
it is by the indulgence of the Chair that I am here--what does 
this committee or Congress need to do so that receivers operate 
within certain guidelines? I keep returning to this, but the 
perception is the guy is just racking up billable hours. It is 
a gold mine. I am sure he has made partner. The fact is that 
there are cheaper ways to do it. Are there guidelines that can 
be promulgated to help the fellow do so?
    Mr. di Florio. Congressman, I am not sure that is something 
that Congress could promulgate, but we will take a look at it 
and get back to you.
    Mr. Cassidy. You have been indulgent. Thank you. I yield 
back.
    Chairman Neugebauer. I thank the gentleman. Good questions. 
All good questions.
    I just have a quick follow-up. It is my understanding, Mr. 
Khuzami, is that the Texas State Bar has not received any kind 
of referral, and I think you testified that you had referred 
it, a formal complaint, to the Texas Bar on Mr. Barasch; is 
that correct.
    Mr. Khuzami. My understanding was that there was a referral 
made to both Texas and the District of Columbia, but I could be 
mistaken that it was one or the other and not both. That was my 
understanding. We can certainly confirm that and get back to 
you.
    Chairman Neugebauer. Would you think it would have been 
appropriate to refer to both?
    Mr. Khuzami. It depends on where he is registered to 
practice. So wherever he is registered, there should have been 
a referral.
    Chairman Neugebauer. Were you aware that Mr. Barasch had 
business before the Commission last Friday?
    Mr. Khuzami. I was not aware of that.
    Chairman Neugebauer. Should he be allowed to do that?
    Mr. Khuzami. Congressman, again, the government-wide ethics 
rule would say that if it is not something that he wasn't 
personally involved in, he is not permanently barred from 
representing clients in front of the SEC.
    Chairman Neugebauer. But I want to understand this. You 
said that you referred charges to--criminal charges; is that 
correct?
    Mr. Khuzami. We made a reference to the criminal 
authorities, correct. But there has been no result of that. If 
Mr. Barasch is ultimately criminally charged, then he could 
lose his license and not practice anywhere.
    Chairman Neugebauer. Another follow-up question. I think it 
was in the IG's report that there was a recommendation to 
discipline the supervisors whom I think most people think 
unfairly disciplined Ms. Preuitt. Have you taken any action 
against them?
    Mr. di Florio. Congressman, again, this was before I joined 
the SEC. But my understanding is that there was a review done 
when the Inspector General's report came out regarding the 
retaliation and the need to follow up with regard to those 
senior managers. The findings of that review apparently were 
that those senior managers had sought the consultation of 
counsel and experts on human resources throughout the process 
of developing their discipline, and so it was inappropriate to 
discipline them for following the procedures we encouraged them 
to follow. That is my understanding of how that occurred.
    Chairman Neugebauer. Do they have the facts that we all 
have now, that in fact, people were ignoring her, and in fact 
demoted her because she kept raising this flag? Do they have 
that information?
    Mr. di Florio. Congressman, what we have done since we have 
came on board, Mr. Khuzami and I, is when we learned of further 
concerns regarding treatment of Ms. Preuitt, we assembled a 
very senior team of our most senior deputies and sent them down 
to Fort Worth to do an independent review so that we could take 
appropriate action if there were circumstances that remained 
inappropriate. And as I mentioned earlier, we are working very 
closely as a result of that review with Ms. Preuitt to make 
sure that she has an appropriate opportunity to show her 
talents and to be able to work effectively in our mission.
    Mr. Posey. Mr. Chairman?
    Chairman Neugebauer. Yes, Mr. Posey.
    Mr. Posey. Can I follow up along that same line?
    Chairman Neugebauer. Sure.
    Mr. Posey. And it is mainly--probably we should invite Ms. 
Preuitt to come here.
    Chairman Neugebauer. She is here. She is on the next panel.
    Mr. Posey. Okay. Good.
    Chairman Neugebauer. I agree with you. We do.
    I would close--do any other members have any follow-up 
comments that they want to make? I would recognize members--
because we are about to dismiss this panel, and I don't want 
members to come away and say, I wish I had more time.
    Everybody good?
    I think the take-away here hopefully to both FINRA and the 
SEC is this was--this is not even defensible and that the 
American people deserve better than this. I can assure you as 
chairman of the Oversight Subcommittee, we are going to work 
extremely hard to make sure that the cultures in both of these 
organizations have changed in such a way that this doesn't 
happen again.
    When you go back and you look at the history on the number 
of occasions in both agencies where this thing should have been 
shut down when it was less than a billion dollars, really when 
it was in the millions of dollars and yet when we look and--at 
the escalation from the chart of how much money from 2005, 
almost $6 billion additional dollars, went into that--and this 
has been brought up; you have to personalize that. In many 
cases those were peoples' life savings, and it is extremely 
disturbing that we had a culture in agencies that demand high 
levels of disclosure and integrity that within, that very 
agency there wasn't the similar amount of integrity inside 
those agencies. It is inexcusable.
    And so I hope that I am hearing--I have met with Mr. 
Khuzami and Mr. Ketchum, and I hear them talking the talk, but 
we are going to want to see them walk the walk. And with that, 
we thank you for being here. And this panel is excused.
    We want to welcome our second panel. I don't think the 
first person needs any introduction after the conversation 
during the first panel, but Ms. Julie Preuitt, who is Assistant 
Regional Director of the U.S. Securities & Exchange Commission, 
Fort Worth regional office.
    Ms. Preuitt, welcome.
    And Mr. Charles Rawl, who is a former employee of Stanford 
Group Company.
    I would now like to yield to my colleague, Mr. Fitzpatrick, 
for the introduction of our third panelist.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I am very pleased indeed to introduce Mr. Kauffman, who 
traveled here to the Nation's capital from our home State of 
Pennsylvania. He and his wife Linda reside in a community right 
next to my community of Bucks County. Mr. Kauffman was a public 
school teacher in the City of Philadelphia where he educated 
some of the State's most disadvantaged children, making a real 
difference in the lives of many of them.
    Mr. Chairman, Mr. Kauffman retired 6 years ago, which is 
right around the same time that FINRA and the SEC were going 
back and forth about who had the authority do something about 
Stanford. The Kauffmans sought a safe and secure investment for 
their life savings and eventually chose CDs in the Stanford 
International Bank to invest their retirement savings.
    The tragedy of losing their life savings was only 
compounded by the fact that they were both diagnosed with 
cancer in 2009.
    Thankfully, they are both survivors, and Mr. Chairman, Mr. 
Kauffman is here today to share his story and to raise some 
very legitimate questions.
    So, sir, thank you for coming to the Nation's Capital. We 
look forward to your testimony.
    Chairman Neugebauer. I thank the gentleman.
    And now, Ms. Preuitt, you are recognized. Thank you for 
being here.

 STATEMENT OF JULIE PREUITT, ASSISTANT REGIONAL DIRECTOR, U.S. 
 SECURITIES AND EXCHANGE COMMISSION, FORT WORTH REGIONAL OFFICE

    Ms. Preuitt. I want to thank you for the opportunity to 
testify before the subcommittee today. I have been asked to 
discuss my work for the Securities and Exchange Commission as 
it relates to R. Allen Stanford and his affiliated companies, 
as well as my experience as the whistleblower within the 
Commission.
    I am representing my personal views, which do not 
necessarily reflect the views of the staff, the Commission or 
the Commissioners.
    First, I really would like to note that I am just a 
representative of the many highly skilled experienced examiners 
who have done their best to protect all investors, including 
those defrauded by Stanford. I know this may not provide 
comfort. It certainly doesn't lessen Stanford victims' losses 
in any way, but I and the examination staff truly care about 
being an advocate for the investor. And behind the public and 
personal face of a large institution like the SEC are many 
individuals who truly, truly mourn their losses.
    The intertwining of my career with Stanford starts simply 
enough. In August of 1997, I selected Stanford's broker-dealer 
for examination because of the high-risk nature of its business 
model. That examination resulted in enforcement referral for 
the likelihood Stanford was engaging in a Ponzi scheme. 
Enforcement declined to open a formal investigation.
    In July of 1998, Fort Worth's investment advisory 
examination group also found concerns with Stanford. 
Enforcement also declined to pursue their referral.
    In November of 2002, the investment advisory examination 
group conducted another examination of Stanford. This time the 
Associate Director for Enforcement decided to refer their 
findings to the Texas State Securities Board.
    In approximately September of 2004, the Associate Director 
for Examinations asked me to conduct a fourth examination of 
Stanford. As expected, the fourth examination supported 
examination staff's belief that Stanford was engaged in a 
fraudulent scheme. The only difference is that the size of the 
scheme had gone from several hundred million to $1.5 billion. 
Again, enforcement did not want to pursue the findings from the 
fourth examination.
    That began a battle which went from April of 2005 until 
November of 2005 when I was able to extract a commitment from 
enforcement to pursue the investigation. It was still another 
11 months from that time until enforcement completed the 
process to get a formal order and to get subpoena authority and 
to kick the investigation to high gear.
    Much has been said about the SEC-wide institutional 
influence that created a disincentive to pursue matters that 
were resource-intensive and whose outcome was less than 
certain. And Stanford was certainly such a matter. There is no 
question that during the early Stanford timeframe, Fort Worth 
senior management firmly believed that the office's success was 
measured strictly by the number of cases filed each year.
    Unfortunately, the mentality that motivated managers in 
Fort Worth to sometimes ignore the best interests of the public 
into a race for numbers has not been limited to the enforcement 
program. In 2007, a new Associate Director for Examinations in 
Fort Worth wanted the broker-dealer examiners to conduct a new 
type of examination which would consist of only a half day of 
interviews.
    The sole purpose of these examinations was to boost 
examination numbers, even if it was at the cost of legitimate 
examinations, such as the ones conducted on Stanford.
    After 8 years of fighting the shortsighted mentality that 
kept enforcement from an opening an investigation on Stanford, 
I now had to battle with a similar mentality in my own program. 
I expressed my concerns to local senior management, but my 
concerns were met with hostility.
    I contacted headquarters regarding this new type of exam, 
and headquarters was unaware of this new initiative and also 
concurred with my belief that it was inappropriate. They 
ultimately stopped these mini-examinations from going forward.
    Unfortunately, I paid a very heavy price for complaining. I 
was given a letter of reprimand that actually cited my lack of 
support for the Associate Director's program initiatives and 
for contacting headquarters to complain about them.
    Two months later, I was transferred out of my position. My 
new position did not come with any supervisory responsibilities 
or any clearly assigned duties. The goal seemed only to 
convince me to leave the Commission.
    After finding no one within the Commission hierarchy 
willing to speak with me, much less help me resolve the 
situation, I complained to the IG. And even after the IG 
concluded in 2009 that there was merit to my retaliation claim 
and suggested discipline for the perpetrators, no discipline 
has occurred to the perpetrators. Further, no substantive 
actions have been taken to correct my situation.
    Many have asked me why I haven't left the Commission over 
the course of the last several years. And my answer is 
unwavering: I am passionately committed to the mission of the 
SEC. Thank you.
    [The prepared statement of Ms. Preuitt can be found on page 
105 of the appendix.]
    Chairman Neugebauer. Thank you.
    Mr. Rawl?

    STATEMENT OF CHARLES W. RAWL, FORMER EMPLOYEE, STANFORD 
  FINANCIAL GROUP, AND STANFORD FINANCIAL GROUP WHISTLEBLOWER

    Mr. Rawl. Chairman Neugebauer, Vice Chairman Fitzpatrick, 
Ranking Member Capuano, and members of the subcommittee, it is 
an honor and a privilege to appear before you today, to speak 
about my experience as a Stanford Financial Group advisor and 
my experience with the SEC and FINRA as a whistleblower.
    Thank you for inviting me to testify.
    My name is Charlie Rawl, and in December of 2007, my 
business partner, Mark Tidwell, and I resigned from Stanford 
Financial Group because of the company's unethical and illegal 
business practices. We fought an incredibly difficult 15-month 
battle against Stanford and were labeled by Stanford as 
disgruntled employees as management attempted to discredit the 
very serious allegations we made when we left the firm and 
filed a lawsuit.
    Once the SEC filed its civil suit against Stanford alleging 
massive ongoing fraud, we became known as the whistleblowers. 
Our testimony and evidence were used to support the SEC's civil 
lawsuit against Stanford to take a global network of companies 
into receivership on February 17, 2009.
    Mark and I believe Stanford would still be operating today 
if we had not come forward to the SEC and FINRA. I would not be 
here today if we had relied solely upon the present regulatory 
rules and procedures.
    I am in business today thanks to a strong business partner, 
Mark Tidwell, and an important third partner, my friend, 
client, and one of our attorneys--Mike O'Brien. It took the 
three of us to survive the past 3 years.
    Shortly after we resigned from Stanford in mid-December of 
2007, Stanford sued Mark and me in FINRA arbitration. Our worst 
fears became reality as we quickly learned that the FINRA 
arbitration process was in Stanford's favor. We later have 
learned that as many as 30 other FINRA arbitrations had taken 
place with other former Stanford employees, all alleging 
fraudulent business practice. FINRA had sided with Stanford in 
every single one of those cases, including at least one case in 
which a former employee alleged Stanford International Bank was 
a Ponzi scheme.
    It is an understatement to say that the regulatory process 
failed us. After realizing Stanford would likely crush us in 
arbitration, we accelerated our efforts to ask other regulators 
and law enforcement for help. We came first to the SEC. The 
allegations we brought to the SEC's attention did not appear to 
be a high priority, and nothing really happened until Madoff 
confessed in December of 2008. Then, the SEC had a sudden sense 
of urgency for taking action against Stanford. We proceeded to 
work closely with the SEC, providing testimony and evidence 
that was crucial to the SEC's suit against Stanford. We helped 
the SEC craft its legal strategy, legal tactic to implicate the 
U.S. broker-dealer Stanford Group Company.
    Despite the significant contributions we made to the SEC's 
fight against Stanford, the SEC failed to deliver on its 
promises to protect us, and we were ultimately sued by the 
receiver the SEC put in place to administer the Stanford 
estate. The regulatory process had failed us a second time.
    It is very important to note that while we learned of many 
red flags and collected evidence of unethical and illegal 
business practices while working at Stanford Group, we did not 
know that Stanford was a Ponzi scheme when we resigned. It was 
only after an FBI agent told me he thought Stanford was a Ponzi 
scheme in August of 2008 that I considered that that might be 
true.
    We just knew there was fraud and that the investors were 
not being protected. We never imagined the magnitude of the 
fraud or the level of the devastation that resulted that all 
could have been prevented.
    In conclusion, I would like to say that the Stanford 
Financial Group scandal has left an enormous footprint in this 
country. The devastation it has caused has ruined lives. I have 
met victims who are literally on their deathbeds, who have lost 
their homes, who can't afford their medical care. By and large, 
these are middle class people who needed the protection of this 
country's regulators. The SEC and FINRA have failed them, and 
they continue to fail them.
    Chairman Neugebauer and members of the subcommittee, I 
thank you for allowing me to be here today, and I thank you for 
the attention you are giving the very serious regulatory issues 
that have come to light in the Stanford Financial Group fraud.
    [The prepared statement of Mr. Rawl can be found on page 
112 of the appendix.]
    Chairman Neugebauer. Thank you.
    And, Mr. Kauffman.

 STATEMENT OF STAN KAUFFMAN, VICTIM, STANFORD FINANCIAL GROUP 
                          PONZI SCHEME

    Mr. Kauffman. Good afternoon, ladies and gentlemen. I would 
like to thank Chairman Neugebauer, Vice Chairman Fitzpatrick, 
Ranking Member Capuano, and the honorable members of the House 
Financial Services Subcommittee on Oversight and Investigations 
for holding this hearing today and for looking deeper at what 
is surely one of the most inconceivable acts of financial 
regulatory failure in our Nation's history.
    I thank you also for allowing me the opportunity to tell my 
story.
    My name is Stan Kauffman. I live in Blue Bell, 
Pennsylvania, and I am 63 years old. In 2005, I retired from 
the Philadelphia Public School System where I taught science 
for 31 years. When I retired, I withdrew my retirement 
contributions from the Pennsylvania public school employee's 
retirement system, and my wife Linda and I sought a safe, 
conservative investment to protect our savings.
    Based on a referral, we met with the Stanford Group Company 
broker-dealer financial advisor. We saw that he had 30-plus 
years of experience with many of the large financial firms and 
was a member of FINRA. We explained to him that we did not want 
to take big risks with my teacher's retirement as well as our 
life savings.
    He told us about the Stanford International Bank CDs. He 
explained the bank was heavily regulated and that the deposits 
were insured. The rate we were offered was a mere 2 percent 
higher than other banks at the time and that the difference was 
justified and the details are in my submitted testimony. We 
were told that the Stanford CDs were safer than a U.S. bank, 
and we invested our savings of $500,000 in these safe CDs, 
including my teacher's retirement.
    Now, I am not a savvy investor, and I absolutely relied on 
the professional expertise of a FINRA-licensed and SEC-
registered representative who had a fiduciary duty to recommend 
the most appropriate investments for my needs.
    He explained to me the Stanford Financial Group was based 
in Houston, Texas, and that all the company's operations were 
managed in the United States. Knowing Stanford's operations 
were in the United States and subject to U.S. laws made me 
comfortable with my decision.
    And that is how I ended up with Stanford Group Company and 
investing in bogus CDs. From 2005 to 2009, we watched as the 
company grew exponentially with more than 30 offices in the 
United States. We saw Stanford international bank grow by 
billions of dollars in deposits. We saw photos of our Senators 
and Congressmen with Allen Stanford. We even received a copy of 
a letter from President George W. Bush applauding the Stanford 
Financial Group in 2008.
    My written testimony goes into further detail about my 
decision to invest with Stanford. But in short, we had zero 
reason to doubt the company's stability, but we did not know 
what the government regulators knew.
    On February 17, 2009, our world was turned upside down when 
we learned that Stanford had been accused of a massive ongoing 
fraud. Massive ongoing fraud. We watched the news coverage in 
shock as we realized our government regulators failed us in an 
unprecedented manner and that all of our life savings were 
gone.
    I would like to briefly share with you what my wife and I 
have faced in the last 2 years. My wife lost a job she had for 
over 11 years due to downsizing as a result of the economic 
downturn. We were forced to put our house up for sale, and I 
had to go back to work.
    And then we got the bad news: In 2009, my wife and I were 
both diagnosed with cancer and had to undergo multiple 
surgeries and treatments.
    Fortunately, we are survivors, but the stress of Stanford 
has taken its toll. The devastating reality that our government 
regulators have failed us has taken its toll as well. There are 
thousands of victims like myself. We are not wealthy people, 
but honest, hard-working Americans. These are everyday, middle-
class citizens who were preyed upon by a criminal enterprise 
with a sales force of 200 of the most qualified professionals 
in the industry. These are people who were looking for a safe 
place to protect their savings and should have been protected.
    The insult added to injury here is the reality we have been 
victimized a second time, as the SEC has seemingly gone out of 
its way to not order the protection we feel we legally 
qualified for from the Securities Investor Protection 
Corporation, SIPC. We were sold securities that never even 
existed, and the receiver's forensic accountant has provided 
testimony saying our money didn't even go to Stanford 
International Bank and that it certainly didn't go to purchase 
the CDs we were sold. Our money sat in U.S. bank accounts and 
was used to pay previous investors for bankrolling the Stanford 
Financial Group's expansion and Allen Stanford's lavish 
lifestyle.
    SIPC was created to protect investors from a broker-dealer 
stealing its customers' funds. The SEC has accused Stanford of 
stealing our funds in a massive Ponzi scheme. When it comes to 
repairing the damage of the SEC's aborted attempts to protect 
us in the first place, we are being told our money was stolen 
the wrong way.
    I think it is important to note we are not seeking SIPC 
protection for a foreign bank product. We are seeking SIPC 
protection from a registered broker-dealer and a SIPC member 
who stole our funds instead of buying the offshore bank CD.
    Our government regulators have abandoned thousands of 
America's seniors who have been struggling to get by as they 
wait month in and month out for the SEC to finally respond to 
an 18-month old request to initiate a SIPC liquidation of 
Stanford Group Company.
    Chairman Neugebauer, Vice Chairman Fitzpatrick, Ranking 
Member Capuano, and honorable members of the subcommittee, 
please do not allow the SEC and FINRA to get away with what has 
transpired in this case. We need your help to get our lives 
back. Stanford stole our savings, but the SEC and FINRA held 
the door wide open. Please don't stand for that door to now be 
slammed shut in our faces. Thank you for your time and your 
attention.
    [The prepared statement of Mr. Kauffman can be found on 
page 70 of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Kauffman.
    We have been joined by the chairman of the full committee, 
Mr. Bachus from Alabama. And I would yield 5 minutes to him for 
questions.
    Chairman Bachus. Thank you. We had many Members of Congress 
just in the past several months who brought this to our 
attention, that there were some--that this was truly a horror 
story, and when we decided to have this hearing, I had no idea 
until I saw the testimony how widespread this was and what a 
monumental failure of our regulators to catch this fraud.
    And obviously, there were many innocent victims, including 
SEC employees, and former Stanford employees, as well as 
thousands of people who invested. And it really is depressing 
even to hear about it. I cannot imagine what you have been 
through, and I am disappointed that you haven't been protected 
and that you have really been treated not only unjustly, but 
even after all of the facts were out, there has been no attempt 
to right those wrongs.
    You have been made so many promises that I hesitate to make 
another one because you have been let down so many times. But I 
can tell you that this won't be the end of this here. I know 
Mr. Posey asked one of the questions I was going to ask. And 
that is whether the SEC employee in Fort Worth who had taken 
actions since he has left which indicate a real conflict of 
interest and ethical misbehavior, whether that had been 
referred to the Justice Department. And Mr. Posey was told that 
it had.
    Do any of you have any knowledge as to where that 
investigation is? Has there been an indictment brought?
    Ms. Preuitt. Probably none of us would probably be privy to 
what is happening with that, but I understand there is 
currently no indictment.
    Chairman Bachus. Thank you.
    Obviously, our staff has investigated this in the past few 
weeks, but we want to continue to work with you to see that 
your actions, which are exemplary and ought to be encouraged by 
others, that what has happened to you, that we try in every way 
we can to right that wrong, because there is also a strong 
message if that doesn't happen, that others shouldn't step up.
    And a lot of the testimony by the first panel was, we know 
about this now, and we are going forward. I was encouraged by 
the Inspector General and some of the acknowledgements, but Ms. 
Preuitt, what is your present situation? Are you with the SEC?
    Ms. Preuitt. I am with the SEC. I am still in the Fort 
Worth office. I still don't have a staff. My duties are still 
vague. They have currently discussed with me working out some 
kind of an arrangement where I will report to somebody in 
another office, and they might let one or two people work with 
me. But that is subject to the enforcement--or not--the 
Associate Director who disciplined me in the first place as to 
whether or not she would let Stanford--
    Chairman Bachus. And they are still in charge of that 
office?
    Ms. Preuitt. The head of the office who was noted for 
retaliating against me just recently retired. The Associate 
Director for Examinations is still there.
    Chairman Bachus. Who disciplined you?
    Ms. Preuitt. And she has not been disciplined.
    Chairman Bachus. Has she apologized to you?
    Ms. Preuitt. She has not apologized to me. They still 
firmly believe that, apparently, that she has not done nothing 
wrong because not only has she not been disciplined, she was 
actually elevated. They talked about Mr. di Florio. There is a 
National Exam Program. They created an executive committee for 
that. And last summer, she was put on the executive committee 
for the National Exam Program.
    Chairman Bachus. Pretty incredible testimony. It is not 
often that we hear of such a devastating failure of regulation 
and no acknowledgement that they were wrong, that they had 
treated all three of you shabbily.
    I will yield back the balance of my time.
    Chairman Neugebauer. I thank the chairman.
    One of the things that we have been trying to do is ensure 
that we open up the ``People's House'' and the ``People's 
Congress'' to their participation.
    So we have initiated a ``You Witness'' question program and 
people can go online, and they can submit questions for 
hearings. And I think this is going to be--this question that I 
am going to use this morning is our very first question. And it 
comes from Cassie Wilkerson in Austin, Texas. She said, ``My 
question is to Ms. Preuitt. As Allen Stanford's alleged Ponzi 
scheme began to rapidly grow and it was apparent that losses to 
the investors would be massive, was there ever any conversation 
with supervisors in your department about the impact that this 
was going to have on the investors' lives and what the SEC's 
responsibility is to the investors? If so, whom did you speak 
with and what was the outcome of that conversation?''
    Ms. Preuitt. I am thrilled to get to be the first recipient 
of a question that is a novel way. There were many 
conversations. That was a constant nonstop discussion both 
among the examination staff, who truly worried about it 
tremendously. Those conversations with enforcement staff 
obviously didn't go very well.
    I many times encouraged them, even if you don't think we 
can do this at this level, it needs to be elevated to the 
Commission, and let them decide if this is too difficult of a 
case to follow up on. Because so many investors are being 
affected, and it is just growing rapidly, and there appeared to 
be no end in sight.
    It was truly a stressful time. But I cannot say how much 
the examination staff truly cared, and we really tried to find 
ways to make it happen.
    Chairman Neugebauer. And so the culture there was, if we 
couldn't get a blue ribbon here pretty quick, we just don't 
mess with it.
    Ms. Preuitt. Yes. To me, I could never really find an 
acceptable reason or answer as to why we weren't going forward 
with it. There was no reason. There was a variety of different 
ways that we could approach it. And I was actually, I think, 
considered a pest in enforcement because I was constantly 
nagging them and pushing them forward. And many suggested, 
``Why don't you just drop it? This isn't going to fly.'' And in 
case you hadn't noticed, I am a rather tenacious person and 
didn't drop it.
    Chairman Neugebauer. Yes. It is extremely discouraging. I 
guess it begs the question, why have an examination force if 
you are not going to enforce it?
    Mr. Rawl, so, basically, you were in the business--how long 
have you been in the investment advisory business?
    Mr. Rawl. Since 1995.
    Chairman Neugebauer. What were you doing prior to that?
    Mr. Rawl. I was a commercial banker and lender.
    Chairman Neugebauer. I am sorry?
    Mr. Rawl. A commercial banker and lender. I have been in 
financial services since I got out of college in 1981.
    Chairman Neugebauer. Okay. And so you went to work. Were 
you recruited to come to Stanford? Did they actively recruit 
you?
    Mr. Rawl. Yes, sir, I was recruited to Stanford. That 
process started in December of 2004.
    Chairman Neugebauer. And what was the arrangement when you 
came to work for them? Did they pay you a bonus to come to work 
for them?
    Mr. Rawl. Yes, sir. As was common in the industry, a fairly 
standard recruiting deal, which included a bonus to come, would 
be given over a period of time, 5 years in my case. I earned 
different bonuses by achieving different levels of success as I 
brought my book of business to the company. This is common in 
the industry.
    Part of is to make up for what we left behind at the prior 
firm, deferred compensation, etc. And, unfortunately, part of 
it, in my opinion now, is to tie you to the gaining firm. And 
it creates an incredible conflict of interest for the advisor, 
particularly where, as in our situation, we saw that there was 
a lot wrong, and yet we had an employment contract and we owed 
money back if we were to leave prematurely.
    I hope that this type of practice and this methodology of 
recruiting advisors, that I said before is common, I hope that 
it is outlawed because it creates a conflict that is 
intolerable. That is why it was so difficult to leave. We knew 
we would be sued when we left, and we knew we would be sued by 
a deep-pocketed plaintiff.
    We tried to sit down and pay back a good portion of that 
money which we had saved for that purpose, but, in this case, 
we could never get to the bargaining table.
    Chairman Neugebauer. As I understand it, looking at your 
testimony, what brought something to your attention that 
something was awry? I think you testified a while ago that you 
didn't really think that there was a Ponzi scheme that was 
going on, but you were concerned about the returns that were 
being advertised and the returns that were being delivered to 
your clients, is that right?
    Mr. Rawl. Yes, sir. I was concerned about the advertised 
returns of the traditional managed account program at the 
broker-dealer. I never dreamed that the regulated managed 
account program, that the numbers would not be able to be 
substantiated. So that was one concern.
    But there were many other concerns. And it started, 
unfortunately, not long after I arrived at Stanford. The 
advisors were called into the manager's office to talk about 
these inquiry letters the SEC had sent to many new customers of 
the bank.
    That began a time, over the next couple of years, where I 
just continued, my partner and I as well as other advisors, 
continued to dig up things that didn't make sense. We didn't 
understand the way management would handle certain issues we 
brought to attention. Decisions were made not for good business 
reasons. We learned that certain Treasury regulations were not 
being followed with respect to the investments in the offshore 
CD. We accumulated a long list of what I call red flags, and 
these accumulated over time. We dug and we dug, and we were 
known for due diligence, and we didn't forget. We pressed 
management. Generally, we were dismissed, lied to, covered up.
    Finally, these things became untolerable. My partner, Mark 
Tidwell, and I both decided that we had to figure out how to 
leave, because we were very concerned about the well-being of 
our clients. So we started--
    Chairman Neugebauer. So here is my final question. With a 
banking background--I was in the banking business for a while, 
and the CD business is a competitive way to attract funds for 
banks and financial institutions. And, the spread was--maybe 
bank ``X'' was 25 basis points more. Maybe if they were trying 
to really recruit some funds and manage--there might be a 35-, 
40-basis-points difference.
    But when you look at some of the numbers, how much were the 
spreads over what you could offer your clients a domestic U.S. 
CD?
    Mr. Rawl. That is a very good question, and it has been the 
subject of a lot of confusion.
    The CDs did not offer exorbitant returns, themselves. From 
my experience, the CDs were priced at typically 200 or 300 
basis points above what you could get in the United States. And 
Stanford had a very well-orchestrated answer to that, that did 
make sense: the bank being located in Antigua, domiciled in 
Antigua, where there is no corporate income tax. That is a huge 
multiplier to the bottom line.
    There were a lot of reasons. I feel gullible to some 
extent, of course, for ever going there. But it was a well-
orchestrated fraud that had been--the bank had been around 25 
years.
    And there have been media comments about the CDs and these 
exotic returns. It is not true that the returns were not 
exotic. It was the investments behind them that we have learned 
were--those were the fraudulent returns.
    Chairman Neugebauer. I see my time has expired.
    I yield to the vice chairman of the committee, Mr. 
Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I appreciate the testimony of all three witnesses. Your 
testimony is incredible, to say the least.
    Ms. Preuitt, I want to associate myself with the laudatory 
remarks of Mr. Posey earlier. You described yourself, in your 
opening testimony here, as just another examiner at the SEC. I 
think that is rather humble of you. I think that you have set 
the standard for public servants, not just in the Commission, 
but across all Federal agencies, I hope.
    Now, we were led to believe by the previous panel that the 
SEC is working very closely with you to put all of your talents 
to use at the SEC. Is that a fair description of what is going 
on right now in the Fort Worth office and your employment 
relationship with the Commission?
    Ms. Preuitt. They are trying to work with me to make things 
better. However, it seems to be based on the notion, still, 
that there is to be no--not to restore me to my full position 
that I was before and, also, under the notion that they still 
should not discipline the person who inappropriately retaliated 
against me.
    In doing so, although I may get partially better than where 
I was before, my talents are still very limited. It also sends 
an incredible message to the staff. It says, ``Don't speak 
up,'' and it says ``We will tolerate misbehavior on the part of 
senior management.'' And as long as that is the case, I don't 
think that the situation in Fort Worth is going to be resolved.
    Mr. Fitzpatrick. Is it true that you were one of the first, 
if not the first to identify the potential of a Ponzi scheme in 
connection with the Stanford investment program?
    Ms. Preuitt. Yes. I was just going through the annual 
filings, and I noticed that it looked impossible, their 
business model. And so I suspected that there had to be a 
fraudulent scheme.
    Mr. Fitzpatrick. And so you had referred to enforcement on 
a number of occasions, and those referrals were rebuffed, 
correct?
    Ms. Preuitt. That is correct.
    Mr. Fitzpatrick. Looking back on it, have you made 
recommendations about ways to better coordinate today and going 
forward between the exam group and the Enforcement Division, at 
least in the Fort Worth office? Have you made those 
recommendations? And, if so, what has happened?
    Ms. Preuitt. I have not made those recommendations because, 
in many ways, this was not a process issue. This was managers 
who were not being held accountable for poor decision-making. 
So, in that sense, I have grave concerns that a process will 
not be better. There has to be, instead, a system that holds 
managers accountable for poor decision-making and for placing 
their own interests above the needs of the investing public.
    Mr. Fitzpatrick. And was one of those managers, the one who 
retaliated, the same manager who was promoted?
    Ms. Preuitt. Yes.
    Mr. Fitzpatrick. Mr. Rawl, over the course of your 
employment with Stanford, when did you first suspect fraud at 
the organization? When was that in the timeline?
    Mr. Rawl. In mid-2006, I became suspicious of the 
literature that was designed to promote the registered managed 
account program at Stanford. It took 9 months to push and push 
and push management to do a study and come back and report on 
that. And on March 28, 2007, management admitted that they 
could not substantiate the numbers and that there was a 
problem. That was one of those red flags, so to speak.
    Mr. Fitzpatrick. And when did your FINRA arbitration occur?
    Mr. Rawl. We resigned from Stanford in December of 2007, 
and Stanford sued us immediately. And the FINRA arbitration 
process started in January of 2008.
    Mr. Fitzpatrick. And what was the result of your 
arbitration?
    Mr. Rawl. Unfortunately, there has been no result. We have 
a nice case with--most of our bullet points and charges have 
been proven out, but I think the technical term is that it has 
been ``abated.'' I can't proceed in our arbitration against 
Stanford--of course, there is nothing to proceed against--but 
the receiver can still proceed against me in the meantime.
    Mr. Fitzpatrick. Were you familiar with this fellow, 
Barasch, who was the head of enforcement at the Fort Worth 
office while you were at Stanford?
    Mr. Rawl. I was not. I certainly knew the name, but I did 
not know him.
    Mr. Fitzpatrick. You had not met him?
    Mr. Rawl. No, sir.
    Mr. Fitzpatrick. Mr. Kauffman, what did employees at the 
Stanford Investment Group, what kind of information or 
assurances did they give you, as an investor, that your 
investments would be safe?
    Mr. Kauffman. We were told that the investments were 
insured by Lloyd's of London. We were told that their expenses 
were less since they didn't have a brick-and-mortar presence in 
the United States, and that made the investment a good 
investment.
    Mr. Fitzpatrick. Can you describe for the committee how 
this incredible financial loss has affected you and your 
family?
    Mr. Kauffman. It has been difficult psychologically knowing 
what we have lost, knowing all of the hours I put in. I always 
worked a second job for 31 years. Being a schoolteacher, I had 
the time. And I was proud of the fact that I could put away the 
funds for retirement.
    I didn't anticipate getting sick, and neither did my wife, 
but when we were slammed with that, as I like to say, the funds 
that would have been there to make it a little bit easier for 
us were just not there. So we have had to cut back, in our 
expenses and such. We don't eat out that much anymore.
    Mr. Fitzpatrick. Okay. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Posey.
    Mr. Posey. Mr. Chairman, my microphone doesn't work. May I 
move down?
    It seems like the SEC has been doing some maintenance on 
the microphone over there.
    Mr. Chairman, I am really sad to say that I expected to get 
some better answers here today. After we heard the last panel, 
I thought we would hear from this panel and it would be 
encouraging that we are on the right track and seeing things 
going in the right direction. But this is really appalling, to 
hear what we have heard today. The more we hear, the worse it 
gets.
    And, first of all, on behalf of all my constituents and the 
others who were victimized, before you leave today, I would 
like to shake your hand, Ms. Preuitt.
    And, Mr. Brubaker and Ms. McClure, would you raise your 
hand?
    I want you to get with them, please, before you leave today 
and give them your contact information, because I would like to 
stay in touch with you, just have some idea of what kind of 
reality goes on down in the real world.
    Mr. Chairman, I assume that is okay? With your permission, 
I would like her to feel free to communicate with us--actually, 
request that she communicate with us, maybe give us a monthly 
status report, an inside view of what is going on down there.
    I could not possibly have understood your answer correctly. 
It seemed like you said, in response to somebody's question, 
that the person who trashed you before for trying to do your 
job is still your boss. Tell me that isn't so.
    Ms. Preuitt. She is not technically my boss. There have 
been times when they have--the person who did retaliate--there 
were two who retaliated against me, the head of the office and 
the Associate Director. And I was reporting to the head of the 
office who had retaliated against me for the last several years 
until she retired just last month.
    To get any sort of staff to work with me, to work on 
projects, they are going to have go get the staff from the 
person who retaliated against me who is still with the 
Commission. So I am still, in some way, subject--
    Mr. Posey. That is just incredibly hard for me to accept 
and to understand. So, excuse me for being a little bit at a 
loss for words. It seems that SEC management is more interested 
in protecting rotten employees, or too interested in that, at 
the expense of recognizing or rewarding good behavior. And it 
seems like it is backward, from this perspective. I don't know 
how you could see it otherwise.
    In the real world, people perceive justice is that if 
somebody steals a television set and sells it to somebody else, 
that when a thief is caught, the thief goes to jail. If there 
were any other bad people involved in the process who were 
culpable, then they have some kind of punishment. And then they 
go recover the TV set, or what is left of it, and they give 
that back to the rightful owner.
    That is just a rough illustration of how I think the public 
generally perceives justice in the case of a theft. And none of 
that, Mr. Chairman, seems to be working here. None of that 
seems to translate to this little bit more complex issue we 
have before us.
    What I wanted to talk about more--and I realize we have 
time constraints, and I am not going to be able to do that--
and, at some point, maybe if you would like to respond in 
writing, any of you or all of you, what you think would help in 
the reorganization of the SEC, any idea that any of you may 
have for the reason it has taken years to determine whether or 
not the victims qualify under SIPA--I mean the Securities 
Investor Protection Act.
    I think the investors deserve a timely ``yes'' or ``no'' 
answer: yes, to anticipate something good might happen; no, to 
be able to come to grips with the reality that nothing good is 
going to happen or get some closure or to have a grounds 
challenge the decision, either one. But I think just keeping 
them in the dark year after year is just adding insult to 
injury and totally inexcusable.
    If any of you know--and I would have liked to have heard 
from your panel before the last one--how aggressively we are 
pursuing the recovery of assets and why we are not utilizing 
the clawback efforts that we did with Madoff?
    And, when there are no consequences for bad behavior, it 
encourages bad behavior. We had a similar case with a life 
insurance company called TRG in Florida. They wrote policies in 
49 States, Mr. Chairman. They were based in Indiana. They wrote 
policies in every State but their own State because nobody had 
ever crossed State lines to prosecute white-collar insurance 
fraud before.
    We did that. And to make a long story short, 13 different 
agencies collaborated over State lines, and those two guys went 
to prison. And we went from having two dozen companies doing 
that in our State to having none of them doing it. When there 
are consequences, people behave better. And there is just no 
evidence that there is any consequences for all the bad 
behavior in the agency.
    So any insight that the three of you may have on that 
issue, I would appreciate that, as well.
    And I thank all of you for appearing here today and sharing 
your insight with us. I am truly sorry for the hardships you 
have suffered for doing the right thing.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Canseco, is 
recognized for 5 minutes.
    Mr. Canseco. Thank you, Mr. Chairman.
    Mr. Kauffman, I gather you represent the group who is here, 
some of my constituents too. And I congratulate your courage, 
coming here before this committee. We don't bite, but we are 
here to listen with you and sympathize with your situation and, 
hopefully, help to solve it.
    Now, if this SIPA were to come across with some funds, is 
that going to help your situation out?
    Mr. Kauffman. Congressman, if SIPA would come to fruition, 
approximately 80 percent of the victims of the Ponzi fraud 
would be made whole. And we would be one of them, yes.
    Mr. Canseco. Okay. Are you in line in any way with regards 
to the trustee who is handling right now the assets of 
Stanford?
    Mr. Kauffman. The receiver has about $70 million today. He 
had $80 million when this started, and he has billed for $70 
million.
    Mr. Canseco. All right. So a lot of that is going into 
administrative costs of the receivership or trustee, whatever 
that is.
    Mr. Kauffman. Yes, sir.
    Mr. Canseco. When it should be really going towards paying 
all of the victims of the Ponzi scheme. Is that correct?
    Mr. Kauffman. Unfortunately, that is true.
    Mr. Canseco. And do you know the name of the receiver?
    Mr. Kauffman. I believe it is Ralph Janvey.
    Mr. Canseco. Okay. And do you keep contact with the 
receiver's office?
    Mr. Kauffman. Not on a personal level. There is a Web site 
you can go to see what is happening. But, no.
    Mr. Canseco. Is there a procedure in place for making your 
claim with a receiver?
    Mr. Kauffman. There is a procedure, but we haven't gotten 
back any information. We submitted it originally when this all 
took place. It is so long ago, we just haven't heard anything.
    Mr. Canseco. Again, I sympathize with your losses, all of 
you. And I would also welcome you to be in touch with my office 
and see how we can help you.
    Brian O'Shea, would you raise your hand?
    I represent Texas, but I represent all of you too. So 
please make sure and contact us on that.
    Mr. Rawl and Ms. Preuitt, I congratulate you for your 
bravery. I know that you all stuck your necks out, and, to a 
certain extent, it has been chopped. And I regret that 
happened, and it shouldn't happen.
    Mr. Rawl, you have mentioned that your cases with Stanford 
and the arbitrator have been held in abeyance. Is there a 
reason for that?
    Mr. Rawl. I guess it is kind of pointless to prove Stanford 
wrong in my case. It is already a foregone conclusion. There is 
much bigger, exciting, more newsworthy cases, namely the 
Ponzi--the unfortunate Ponzi scheme, than whether I am to 
prevail in my allegations of fraud against the company.
    But it is still open, and we have had a very valid 
counterclaim and claim. And that is, of course, never to be 
heard. We would never want to take money from the pool of money 
that would go to the victims, in any case. So we would like it 
to go away.
    Mr. Canseco. Do you have an opinion as to why FINRA ruled 
the way they did against you?
    Mr. Rawl. Against the previous folks?
    Mr. Canseco. No, against you.
    Mr. Rawl. FINRA hasn't ruled.
    Mr. Canseco. Why they sided with you in this--
    Mr. Rawl. The arbitration process is unfair, and it is 
biased toward the broker-dealer. The entire process favors the 
broker-dealer, and there is no doubt about it.
    The private nature should be questioned. And, certainly, if 
there is an arbitration between a registered rep or advisor 
like me in the firm, why should that be kept private? That can 
be a good red flag to the public and give warnings and be a 
good view into the firm to see if there is an inordinate amount 
of potentially fraudulent business practices going on. I think 
that would be a great way to warn the public.
    But we sued in State court. That court case got remanded 
back to the arbitration. And, unfortunately, all that did was 
keep this hushed for a long time.
    Mr. Canseco. Thank you very much for your bravery.
    Mr. Rawl. Thank you.
    Mr. Canseco. Ms. Preuitt, is there a reason why you think 
that you are being shut off there in your department?
    Ms. Preuitt. I think that management wants to support 
management. She was more senior than I.
    Nobody has really, from the Commission, discussed with me 
what all happened, all the events leading up to my removal from 
my position. And if they are basing their decisions mostly on 
the person who retaliated against me, as to whether or not I 
deserved it, it just strikes me as shortsighted, obviously.
    Mr. Canseco. Again, thank you very much for your bravery, 
and for being a whistleblower.
    I yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Louisiana, Mr. Cassidy.
    Mr. Cassidy. Again, as you all heard me say, first, I 
congratulate you all and I commiserate with you all, on behalf 
of all those in Louisiana who have either benefited or have 
been penalized, such as you, Mr. Kauffman.
    And, again, the theme of our office has been to have an 
effective, transparent, compassionate response. I continue to 
hear from each of you that none of those three measures have 
been achieved.
    Ms. Preuitt, you sent an investigator down to Houston, and, 
in a half a day, that investigator can sense that this is a 
Ponzi scheme. You are looking at their business model and the 
stuff that they have publicly submitted, and you are saying, 
this is not for real.
    Why was it so complex that the office could not take it?
    Ms. Preuitt. I have never really gotten a good answer to 
that. Many different things were brought up to me, but none of 
them seemed like a really good reason. So I think that the best 
answer we ever could come up with was just that it was going to 
be difficult.
    Part of the reason that it was going to be difficult was, 
if you wanted to pursue it only as a Ponzi scheme, that would 
mean actually being able to prove where the money is going. 
Since much of the money went to, supposedly, Antigua and the 
Antiguan bank refused to give us the records, it was very 
difficult to track all the money. We simply could get no 
response from them regarding it.
    Mr. Cassidy. But Mr. Kauffman--and I have heard this 
before--said that a lot of the banks--was it a Memphis bank, 
Mr. Kauffman?
    Mr. Kauffman. Houston.
    Mr. Cassidy. A lot of the money never left the United 
States. Did the SEC not know that?
    Where was the bank, Mr. Kauffman?
    Mr. Kauffman. Houston.
    Mr. Cassidy. Houston? I also thought there was also a 
Tennessee bank.
    But, anyway, that said, apparently a lot of the money 
didn't--I should have asked before the other panel left, but 
the SEC was clueless, or they ignored that, or that seemed 
incidental?
    Ms. Preuitt. No, the SEC was not aware, because the SEC did 
not get a subpoena to take all the actions that it needed to 
look to see what was happening at the firm.
    Mr. Cassidy. Okay. What is kind of hanging out there is 
whether Mr. Barasch engaged in criminal activity, whether he 
was--let's just put it out there. It may not be true, but, 
certainly, in my mind, I am wondering, did Stanford have a 
protector?
    Mr. Rawl, you got one heck of a resourced, researched 
statement. Now, you mention that Stanford had employed as 
general counsel a former head of the Fort Worth SEC office, 
Wayne something. Oh, looking through the IG's report, I didn't 
see that. I am thinking, ``Man, Rawl has done a great job.''
    And I don't have his name down here, but, I am sorry, 
Wayne--
    Mr. Rawl. Wayne Secore.
    Mr. Cassidy. Did Secore and Barasch have a personal 
relationship? Do they play golf every Sunday?
    Mr. Rawl. I do not know.
    Mr. Cassidy. Okay. I just thought I would ask because, 
again, I am sitting here thinking, it appears that Stanford was 
being protected. Was there something beyond a fear of taking on 
a complex case, which apparently an accountant can figure out 
in a half an hour was something fishy? So I am looking for 
another reason.
    Mr. Rawl. In my written testimony, you will see that, at 
the latest days, even weeks before the SEC filed suit, they had 
problems--their problem was jurisdiction over a bank in 
Antigua. That was one of the excuses that they used.
    But, to be more responsive to your question, there are 
different entities, and the U.S. Government had been 
investigating different things over different periods of time. 
There are a lot of questions as to what might be being covered 
up.
    Mr. Cassidy. Okay. And I don't mean to interrupt, but I 
don't have much time. So I am going to--again, I have such 
admiration for you.
    The other agents--you mentioned there were about 30 folks 
over time who complained and filed complaints against Stanford. 
I think a lot of people want to know, should their agent have 
known? Did you have a particular position that allowed you to 
see that the business structure was not right? Or should 
anybody working for Stanford have known that?
    And I address that both to you, Ms. Preuitt, and to Mr. 
Rawl.
    Mr. Rawl. I was a financial advisor. I was not in 
management. I was, once upon a time, fairly well-liked amongst 
management and a lot of people at the firm, so I had friends in 
all different departments. And those were the folks I gathered 
intel from over time.
    Mr. Cassidy. So you were a connector. So the person in the 
front office, as in the retail office--somebody walks in and 
says, ``Hello, how are you?'' I say, ``I am Mr. Smith; I am 
going to help you today''--that person may not have known, but, 
rather, your position as a connector kind of gave you that 
ability. Is that you are saying?
    Mr. Rawl. I gained a lot of information because of 
friendships, more than most other advisors.
    Mr. Cassidy. Okay.
    Now, Ms. Preuitt, again, just to repeat, we heard from the 
first panel a real effort to change the culture of the SEC. 
What we are hearing from you, at least in your experience, is 
that those efforts may not be bearing fruit.
    Ms. Preuitt. I think that many of the efforts they are 
making are certainly of value. But if you really want to get 
the trust of the staff and the trust of the public that you are 
making changes, then you have to make some tough decisions, and 
one of those is actually holding people accountable for 
inappropriate behavior. And that has not happened in this 
situation. So, although I applaud many of the changes they are 
trying to make, none of those will be of value.
    Mr. Cassidy. Is it a question of due process? Is the person 
on administrative leave, or are they, frankly, going scot-free 
so far?
    Ms. Preuitt. They are not only going scot-free, like I 
said, they have been promoted. Additionally, right after the 
report came out that there was retaliation against me, I 
understand that both the people who retaliated against me 
received a large bonus.
    Mr. Cassidy. And can I have one more question, please?
    Mr. Kauffman, I mentioned to the first panel--you are not 
an attorney, but you are obviously a smart man. You know a heck 
of a lot more about this than I do. So if you can answer this, 
it is fine, but if not, that is okay.
    The Commission is trying to decide whether or not there 
will be SIPA coverage. And you pointed out that, as regards the 
CD, the argument against giving SIPA coverage is that there was 
an underlying asset, and so it is just that the asset was 
overvalued, and that makes it different than the Madoff case, 
where there actually were no assets.
    But you have pointed out that there was a group of folks 
who sold CDs for whom there was no underlying asset. If you 
will, that is exactly the same as in the Madoff case.
    Is the Commission treating those two sets of ``CD holders'' 
differently, i.e., those who had an asset with a fictitious 
value versus those for whom there actually was no underlying 
asset?
    Mr. Kauffman. There is absolutely a difference in how they 
are treating the two victims. We are being denied the coverage.
    Mr. Cassidy. You are one of those guys who had no 
underlying asset. Are you also being denied coverage?
    Mr. Kauffman. Yes.
    Mr. Cassidy. And what is the legal rationale for that?
    Mr. Kauffman. We are waiting for an answer.
    Mr. Cassidy. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    I just have one follow-up question with Ms. Preuitt.
    So you are in the Fort Worth office, and I believe your 
title is--
    Ms. Preuitt. My title is Assistant Regional Director.
    Chairman Neugebauer. Where is your boss?
    Ms. Preuitt. In the last couple of weeks, they have now 
assigned me to a supervisor in Denver.
    Chairman Neugebauer. So how is that working?
    Ms. Preuitt. I am obviously--I don't feel like this is a 
good resolution.
    Chairman Neugebauer. So, you are in the Fort Worth office, 
but they have just kind of fenced you off. Basically, you don't 
have any responsibilities in the Fort Worth region at this 
point in time.
    Ms. Preuitt. Nothing that is defined. I have been searching 
for work and finding projects that I can pitch in on, but, no, 
I don't have any clearly defined--
    Chairman Neugebauer. And so, what would you say that--how 
do the other employees in that Fort Worth office relate to you?
    Ms. Preuitt. Some have been afraid to relate to me. At 
least one, in particular, after she was noted speaking with me, 
she then was harangued for an hour about, in part, her 
association with me. So some staffers are afraid to deal with 
me.
    I have had another very dear friend who was--we were so 
close, she was actually there with me when my husband died, 
some years back. We had a very close relationship. And she told 
me that she felt like she was getting pushback for our 
friendship and has essentially withdrawn her friendship because 
she felt like it would place her in an uncomfortable position 
at work.
    It has been very difficult, very stressful.
    I do have many supporters, though, and many examiners who 
still seek me out for counsel and who would like to work with 
me if I had supervisory authority and responsibilities again.
    Chairman Neugebauer. Obviously, it doesn't send a signal 
that, when you find an inequity in the organization, there is 
reward in that, does it?
    Ms. Preuitt. No. No, it doesn't. And I am proud of what I 
have done. So it is very, very difficult to be treated this 
way.
    Chairman Neugebauer. This is a great panel.
    I want to just ask any Members--oh, Mr. Cassidy.
    Mr. Cassidy. Ms. Preuitt, while I was talking, my staff was 
researching something and just handed this to me, and I just 
want to speak with you.
    This says that you testified at one point--let me see, I am 
going to read this. This is from a blog, and blogs are a little 
bit, they may be true, they may not be true, kind of like 
Democratic Party press releases.
    This says that the first referral by an SEC examiner was 
sent to Barasch in 1998. According to the testimony of Julie 
Preuitt, who authored the request, Barasch declined to 
investigate after discussing the matter with Stanford's legal 
counsel at the time, former SEC Fort Worth District 
Administrator Wayne Secore.
    Is that true?
    Ms. Preuitt. I asked Mr. Barasch in--I think it was the 
summer of 2009 why he had never pursued the case, because it 
was never clear to me. And he told me it was that Wayne Secore, 
who was representing Stanford at the time, and had told him 
that there was nothing there.
    Mr. Cassidy. I did not see that in the IG report. Now, I am 
not criticizing the IG report--
    Ms. Preuitt. It is in the IG report.
    Mr. Cassidy. It is in the IG report. So I just missed that. 
Okay.
    Thank you again.
    Chairman Neugebauer. Mr. Canseco?
    Mr. Canseco. If I may just follow up with one question?
    Chairman Neugebauer. Sure.
    Mr. Canseco. Ms. Preuitt, was there ever any doubt in your 
mind that the product sold by Stanford was a security?
    Ms. Preuitt. No, I never doubted at all it was a security. 
I would like to say Mr. Stanford liked to just misname things. 
Because he called it a CD didn't mean it was a CD. Because he 
called it a bank didn't mean it was a bank. It is sort of like, 
I have a doghouse in the backyard, and instead I believed it 
was a Ferrari. It doesn't matter how often I went out there, I 
would never find the ignition switch, so--
    Mr. Canseco. Why was there so much handwringing by FINRA, 
for years, before they actually got involved in this?
    Ms. Preuitt. I have never understood it. I had written up a 
fair amount of information related to why I believed it was a 
security and shared it with the SEC. I don't know that I ever 
shared that information with FINRA.
    But the reality was, it was not a bank. By Stanford's own 
admission, the bank was not behaving any banking activities. 
So, therefore, it would not meet the definition of a bank under 
the 1940 Act. I also don't think it would have qualified as a 
bank underneath Federal court cases that had come out that had 
discussed when a CD was a CD or not, and one of them was it had 
to be from a bank under a regulatory regime.
    But the bank was not engaged in any banking activities, so 
it was just--I never understood. It was a play on words. He 
also said they didn't pay Commissions; he said it was just 
referral fees.
    Again, it was a nonsensical statement that he was making. 
And why it would cause so much consternation, to me, seemed a 
small interest in pursuing it. It is potential, maybe, that a 
court would take a different view, but that should not stop you 
from pursuing the case.
    Mr. Canseco. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the panel. It has been a great 
panel.
    I thank the members.
    And the Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    This hearing is now adjourned.
    [Whereupon, at 2:20 p.m., the hearing was adjourned.]























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                              May 13, 2011

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