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CNBC ON DIGG

Stanford Regulators Admit Not Pursuing '03 Fraud Claim

Published: Monday, 17 Aug 2009 | 7:50 PM ET

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By: Scott Cohn
Senior Correspondent, CNBC

The industry self-regulatory organization that was supposed to police the brokers at the Stanford Financial Group acknowledges that a Stanford employee alleged in 2003 that the company was running a Ponzi scheme, but the organization did not follow up on the claim based of its own policy, which has since been changed.

AP
Allen Stanford

The disclosure comes in testimony from Daniel Sibears, Executive Vice President of the Financial Industry Regulatory Authority, FINRA, prepared for a Senate Banking Committee hearing on Monday.

In 2003, Stanford advisor Leyla Wydler alleged in an arbitration case that the company was "engaged in a Ponzi scheme to defraud its clients."

Wydler lost the arbitration case, and FINRA is now acknowledging that her allegations of fraud were never passed on to investigators by the FINRA arbitration panel. Sibears' testimony said that prior to this year, FINRA procedure was to review fraud claims in arbitrations involving customers, but not those that involved employment disputes like Leyla Wydler's.

"This was based on an assessment that customer claims were most likely to evidence misconduct leading to investor harm," the testimony says.

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Sibears insists in the testimony that "FINRA reviews every customer complaint and regulatory tip it receives." Nontheless, he acknowledged, the procedure involving employment disputes was changed in March of this year. The change came less than a month after the Securities and Exchange Commission sued Stanford, alleging an $8 billion Ponzi scheme.

Sibears' testimony claimed that even if the agency had followed up on Wydler's allegations, it likely would have run into barriers from regulators in Antigua, home of Stanford's offshore bank, where he says officials were less than cooperative in investigating subsequent tips.

After she lost the arbitration in 2004, Wydler brought her concerns to the Securities and Exchange Commission, which launched a formal investigation the following year. But the SEC did not sue Stanford until this year. The agency says it, too, was thwarted by Antiguan regulators, and added the nation's chief financial regulator to its complaint in June.

Hundreds of people attended the Banking Committee hearing, which was held in Baton Rouge, LA, home to a large concentration of Stanford investors. They have complained that regulators were slow to catch the alleged fraud, which affected some 28,000 investors.