How an SEC Official in Texas Worked Both Sides and Betrayed the Public Trust
A senior SEC official quashed an investigation in early 2005 of a $7 billion Ponzi scheme masterminded by Houston financier R. Allen Stanford after securing a lucrative partnership with a law firm of which Stanford was a client.
Convicted financier R. Allen Stanford arrives at the Bob Casey Federal Courthouse for sentencing in Houston, Texas, U.S., on Thursday, June 14, 2012. (Photo by Aaron M. Sprecher/Bloomberg via Getty Images)
A senior Securities and Exchange Commission official, Spencer C. Barasch, quashed an investigation in early 2005 of a $7 billion Ponzi scheme masterminded by Houston financier R. Allen Stanford—after securing a lucrative partnership with a law firm of which Stanford was a client.
Barasch, the top enforcement officer of the SEC’s Fort Worth regional office at the time, overruled SEC examiners who had warned him that Stanford was likely running “a massive Ponzi scheme” and had sought permission from him to open a formal investigation of Stanford and his bank. For several months prior to that decision, Barasch had been negotiating to become a partner with the Houston law firm of Andrews Kurth, which had had Stanford as a client, according to confidential Andrews Kurth emails obtained for this story. Andrews Kurth’s work for Stanford is detailed in the law firm’s confidential billing records.
Federal conflict-of-interest law prohibits a government employee from participating “personally and substantially” in an official capacity in any “particular matter” that would have a direct and predictable effect on the employee’s financial interests or on the financial interests of a "person or organization with whom he is negotiating or has any arrangement concerning prospective employment."
By making the decision to quash the investigation of Stanford, Barasch appears to have violated these ethics laws. Although Andrews Kurth was representing Stanford on matters unrelated to the SEC’s potential probe of Stanford at the time, the law firm clearly had a financial stake in the outcome of an investigation that would affect one of its major clients.
Federal regulations also bar government employees from “working on a particular matter if the employee is ‘seeking employment’ with a person or organization affected by that matter.” That appears to have occurred in this case as well: Barasch quashed the investigation while he was negotiating for a job with the firm.
Barasch’s work for the SEC on the Stanford case had earlier come under scathing attack by the SEC’s then inspector general, David Kotz, who in 2010 conducted a broader investigation of the SEC’s bungling of its oversight of Stanford. A report by Kotz disclosed that SEC examiners working in the Fort Worth regional office, of which Barasch was the chief enforcement official, first recommended that the agency investigate Stanford in 1998, but Barasch overruled them. The examiners were only able to convince the SEC to probe Stanford’s bank one day after Barasch left the SEC. By the time Stanford was arrested in 2009, $7 billion had disappeared—an amount which in the annals of American history is second only to that lost by Bernard Madoff’s Ponzi scheme.
After Barasch left the SEC and went to work for Andrews Kurth, he and the law firm briefly represented Stanford, defending him before the very agency where Barasch had earlier stymied probes of Stanford. In 2012, Barasch paid a $50,000 fine to settle Justice Department allegations that he had violated federal conflict-of-interest laws by representing Stanford as a partner at Andrews Kurth. The SEC also banned Barasch for a period of one year from practicing before the agency, contending that he engaged in “improper professional conduct” related to his legal work for Stanford. Federal law prohibits former SEC officials from representing anyone as a private attorney if they played a substantial or material role in overseeing the individual’s actions while in government.
Current and former federal officials close to the various SEC and Justice Department probes of Stanford told me that investigators were unaware that Barasch had quashed an investigation of Stanford’s financial empire while he was negotiating with a law firm that had Barasch as a client. Several said that the new disclosures made in this article broach issues that have the potential to be far more serious violations than Barasch’s legal representation of Stanford when he left the SEC, and that they merit further investigation by both the SEC and federal law enforcement agencies.
Barasch, through his attorney, Paul Coggins, declined to comment for this story. Likewise, despite multiple requests seeking comment, Andrews Kurth would not comment on the matters addressed in this story.
US Marshal officers leave Stanford Financial Group's building at 5050 Westheimer Road and cross the street to the company's 5051 Westheimer location in Houston, Texas, on Tuesday, Feb. 17, 2009. (Photo by Craig Hartley/Bloomberg via Getty Images)
One of the central reasons for the longevity of R. Allen Stanford’s Ponzi scheme is that he ran it via his offshore bank in the Caribbean nation of Antigua. Because it was based in Antigua, the Stanford International Bank was able to deflect any meaningful oversight that would have uncovered his fraud. Stanford paid bribes to Antigua’s top banking regulator, according to court records, and he spent millions on political contributions there and covertly paid US political consultants to elect a corrupt Antiguan government that would protect him. He made hundreds of thousands of dollars in personal loans to Antiguan politicians with no expectation of repayment. He even loaned the country of Antigua itself $90 million.
In 2006, Stanford was rewarded by Antigua with knighthood—the Knight Commander of the Most Distinguished Order of the Nation by Antigua and Barbuda. Bank employees were instructed to only refer to Stanford as Sir Allen, and those who refused risked reprimand.
Stanford also spent considerable sums on buying political influence in the United States. Prior to the collapse of his financial empire, Stanford spent $4.8 million on US lobbyists. Employees of Stanford Financial Group also donated more than $2.4 million to political candidates of both political parties. And Stanford himself made an additional $900,000 in campaign contributions to various politicians.
According to former US State Department and federal law enforcement officials, the goal was to prevent passage of legislation and enactment of regulations that would have strengthened money-laundering laws related to offshore banking, such as his Antigua operation. In 2007 Barack Obama, then a United States senator from Illinois, cosponsored such legislation with four other senators. With an army of lobbyists and sympathetic congressmen, Stanford was able to kill the legislation.
The credulous financial press did its part. In September 2008 Stanford appeared on a CNBC program and was ebulliently asked if it was fun to be billionaire: “Well, ah… yes, yes, yes!” he said, and his face turned red, and then he smiled ear to ear, before adding: “I have to say it is fun being a billionaire.”
Stanford first drew the attention of SEC examiners in 1997, when they uncovered what they believed—and later confirmed—to be a massive Ponzi scheme. For eight years, the examiners investigating Stanford and his financial underpinnings were stymied at every turn. According to SEC Inspector General Kotz’s 2010 report on how and why the SEC bungled the Stanford matter, Spencer C. Barasch turned down requests to investigate Stanford no fewer than six times between 1998 and 2005.
In 1998, two tenacious examiners, Julie Preuitt and Victoria Prescott, succeeded for a brief while in initiating an investigation of Stanford’s activities. But within three months Barasch shut it down. A decade later, Preuitt told Inspector General Kotz that her reaction was one of “shock and disbelief and this incredible feeling of failure.” Still, year after year, Preuitt and Prescott pressed their case, only to be turned back. In the meantime, Stanford had stolen additional billions from investors in the US and around the world.
In his explanation to the inspector general as to why he had quashed the six investigations related to Stanford, Barasch said that he did not believe the SEC had proper jurisdiction to investigate, and that it would be difficult, if not impossible, to obtain the necessary records from overseas. Stanford could simply withhold any records the SEC sought and the SEC could do nothing, Barasch argued.
In other instances of explaining his reasoning, Barasch asserted that other government agencies might be more able and better equipped to take action against Stanford. In turning away Preuitt and Prescott in 2002, Barasch suggested that the relevant information uncovered by the examiners be forwarded to the Texas State Securities Board (TSSB), to prompt the board to open an investigation. Barasch apparently never made the referral. According to the TSSB, they never received such a referral and knew nothing about the potential malfeasance presented to Barasch by Preuitt and Prescott.
In any case, SEC officials other than Barasch saw little possibility that a state agency with few resources such as the TSSB could be very effective in an investigation with such far-reaching tendrils: One SEC official in the Fort Worth office derisively emailed a colleague after hearing of Barasch’s plan to have the Stanford case referred to the TSSB, writing, “I can’t wait to see Texas execute a warrant in Antigua!!”
Inspector General Kotz concluded in his report that the SEC’s bungling of the Stanford case was largely the result of a pervasive and systemic culture within the SEC at the time, in which investigations of complex financial crimes were set aside in favor of cases that were easy to win: “We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought, so-called ‘stats,’ and communicated to the Enforcement staff that novel or complex cases were disfavored,” Kotz’s report reads. “As a result, cases like Stanford, which were not considered ‘quick-hit’ or ‘slam-dunk’ cases, were not encouraged.”
Although Barasch declined to comment for this article, he gave his most detailed response to the Justice Department’s allegations that he’d mishandled the SEC’s oversight of Stanford in papers his attorneys filed in federal court. Barasch asserted that he’d made his decisions based in large part upon “directives and pressure from his superiors in Washington, DC, to devote his office’s limited resources to financial and accounting fraud (as opposed to Ponzi schemes and off-market fraud).”
Barasch also noted that in two instances he referred information uncovered by examiners that Stanford was engaging in a massive Ponzi scheme to “other law enforcement and regulatory agencies.” Yet several of Barasch’s former colleagues at the SEC told me in interviews—and, earlier, also told Inspector General Kotz—that only the SEC had the breadth, expertise, manpower, and resources to effectively investigate the financial malfeasance that Stanford was eventually found guilty of. And while Barasch claimed to have referred evidence of Stanford’s Ponzi scheme to the TSSB, Barasch in fact never did that, according to evidence uncovered by Kotz.
More broadly, Barasch’s attorneys said this in his defense: “Moreover, Barasch lacked the authority to unilaterally close these investigations, and any determination in this regard would have been made with the participation, knowledge, and consent of his superiors.” Four former and current SEC officials who had worked with Barasch at the SEC told me that indeed Barasch did not alone have the oversight to quash any investigation of Stanford. But these same people said—and internal SEC records appear to bear out their allegations—that once Barasch had made decisions to quash multiple investigations of Stanford, no official below him had any power to question these decisions, and nobody above him was likely to second-guess him, let alone overrule him.
The headquarters of Stanford International Bank stand in St. John's, Antigua, on Friday, Feb. 20, 2009. (Photo by Gemma Hazelwood/Bloomberg via Getty Images)
In May 2004, Andrews Kurth and Barasch began a mutual courtship that led to Barasch’s leaving the SEC and going to work for the law firm. It is unclear from various records how exactly those discussions began. One document indicates that Barasch made a cold call to the firm. Another suggests that an Andrews Kurth partner first sounded out Barasch.
Whatever the case, less than three months before Andrews Kurth and Barasch began feeling each other about working together, Barasch settled a foreign bribery case with an oil-and-gas services-and-equipment company, BJ Services, which was being represented by Andrews Kurth. Barasch had supervised the SEC’s investigation of BJ Services, negotiated directly with Andrews Kurth partners to settle the case, and then settled on terms favorable to the company, according to confidential Andrews Kurth and SEC records. Significantly, the penalty handed down to BJ Services did not require them to pay a fine or to have to admit to any wrongdoing. “I like him and as I mentioned had some really good dealings with him in connection with resolving BJ Services FCPA [Foreign Corrupt Practices Act] problems,” one Andrews Kurth partner emailed another in reference to the firm considering hiring Barasch in December 2004.
“I don’t think we finished that conversation re your view on him (what to do, how to approach, whether to punt). Are you around late Monday afternoon to discuss,” Dave Runnels, a partner at Andrews Kurth emailed Howard Ayers, the firm’s managing partner, on May 1, 2004.
Barasch and Andrews Kurth negotiated with each other for 11 months, between May 2004 and March 2005. Government regulations require that SEC officials disclose to their superiors if they are negotiating for a job with a private law firm.
Barasch, through his attorney, declined to tell me whether or when he disclosed any other details to his superiors about the increasing likelihood he would go to work for Andrews Kurth. SEC attorneys are also required to assess any potential conflicts of interest and report those to the SEC’s ethics counsel. It could not be learned for this story whether or when Barasch disclosed his potential involvement with Andrews Kurth, or the law firm’s representation of R. Allen Stanford, to the ethics counsel.
Three SEC officials who worked with Barasch in the Fort Worth regional office recalled in interviews that it had not become well known within their office that Barasch was leaving the SEC until just immediately before an official SEC press release announcing his retirement in March 2005. One of these people told me: “As far as I know, people did not have much of an idea until very late in the process.”
Six current and former SEC officials queried for this article said that irrespective of whenever Barasch formally informed the SEC ethics counsel that he was in negotiations with Andrews Kurth for his employment, it was highly unusual—”virtually unprecedented,” as one told me—for an enforcement official to stay as long as Barasch did at the SEC while simultaneously negotiating with an outside employer. “It creates an appearance of impropriety at a certain point—even if everyone has been notified, if they have recused in the right instances,” one official told me.
A former Andrews Kurth employee recalls: “There were nervous jokes going around our office that Spence was our mole at the SEC. He was still at the SEC, but it was a preordained conclusion he was going to work for us. He was ours as much as he was theirs.”
A recent article I wrote for VICE detailed instances in which Andrews Kurth may have sought restricted information from Barasch about a potential lawsuit the SEC was considering against the law firm and the now defunct energy and commodities company Enron, and how a client of Andrews Kurth may have received favorable treatment from Barasch while he was negotiating his employment with the law firm.
After examining the new information and previously undisclosed documents uncovered for that story, former SEC Inspector General Kotz told me: “Based upon the documents and information you provided me, and given the record of Barasch’s previous actions, I would say that there are questions about several matters in which Barasch had conversations about while he was at the SEC—during the same time that he was engaged in discussions for prospective employment—that should be scrutinized further to determine whether there were violations of conflict-of-interest statutes and regulations.”
By the fall of 2004, negotiations between Barasch and Andrews Kurth became more serious. On November 29, Andrews Kurth partner Jerry Beane sent an email to his managing partner Harold Ayers and another partner with the subject line “Spencer Barasch of Ft. Worth SEC.” It read, in part: “I talked this morning with Barasch. He is interested in visiting about making a move from the government to private practice. He will be checking the SEC ethical rules and said he would call me within the next few days.”
A deal between Barasch and Andrews Kurth seemed to be almost done in late January 2005. On January 26, 2005, Barasch sent an email from his SEC account to Beane, writing, “I would like to visit with you on the phone for about 15–30 minutes to run some questions by you. These will generally focus on benefits, ranging from the most important such as health and medical insurance and retirement contributions, to malpractice insurance, bar dues, parking, how and when compensation is paid…”
On January 31, 2005, Ayers emailed his partners that negotiations with Barasch were continuing but that Barasch was playing hardball. Ayers detailed a lucrative compensation package for Barasch, but relayed that Barasch’s reaction was “not even close… After a straight talk discussion, during which he recovered nicely from his shock at the market ignorance reflected in our initial proposal, it looks like it’ll take $350,000 plus Keogh to get this deal done.”
On February 4 Ayers emailed his partners to say it looked like they had a deal: “I’m pleased to report that we have an accord with him on compensation. When we issue the first distribution check, the lights will dim and our computers will slow, but only briefly.”
On February 27, 2005, Ayers triumphantly emailed his partners: “I talked to Spence this evening. All systems are go for him leaving the SEC and joining AK.”
On March 9, 2005, the SEC sent out a press release announcing Barasch’s departure.
Andrews Kurth LLP, 450 Lexington Ave, New York. (Photo via Google Street View)
Meanwhile, SEC examiners continued to push on the Stanford matter.
On March 22, 2005, Prescott, at Preuitt’s request, made a presentation of her staff investigation of Stanford to a quarterly summit meeting that the SEC had with other area federal and state agencies to share intelligence and information about possible cases. Barasch was at that meeting as well.
Preuitt later told the SEC’s inspector general that Barasch “looked… annoyed” throughout the presentation.
Right after she was done—“still standing in the room where the presentation was made,” Prescott said—she was “blindsided” when Barasch and his superior, Harold Degenhardt, approached to tell her in a “very perfunctory conversation” that “it was not something that they were interested in” or wanted to pursue. Prescott said neither Degenhardt nor Barasch offered any further explanation.
In anticipation of Barasch’s resignation, Preuitt and Prescott and others had prepared yet another memo asking the SEC to finally open a formal investigation of R. Allen Stanford and his bank. On April 15, the very next day after Barasch had left the SEC formally, the agency finally gave them a green light. In fact, the examiners originally wrote the memo to Barasch, but after being stymied by him for eight years and then turned down again after the summit, they held it back until Barasch was leaving and others would now make the final decision.
“Your memo was fantastic,” one of Prescott’s superiors emailed her. “Will be very helpful going forward.” The official also said that the SEC was opening a formal investigation “with [the] hope of bringing a case quickly.”
The SEC, however, continued to bungle the case. It took almost four more years for authorities to arrest Stanford or seize his assets.
In June 2005, Barasch, who was now a partner at Andrews Kurth, attempted to directly profit from the SEC’s investigation of Stanford in a case that had been under his jurisdiction and that he had stalled for eight years. Stanford sought Barasch’s help to represent him and his bank before the SEC, and Barasch was amicable. The SEC’s ethics counsel, however, advised Barasch that by taking on Stanford as a client he would be violating federal conflict-of-interest laws.
Under federal statute, the ethics counsel concluded, Barasch was banned for life from representing Stanford in connection with the fraud investigation.
Around the same time that Barasch attempted to represent Stanford, Andrews Kurth had been seeking additional legal business from Stanford, according to the law firm’s confidential billing records. Previously, Stanford had been a modest client of the law firm. Andrews Kurth had represented him on separate legal matters in 1996 and 2003, the billing records show. And shortly after Barasch unsuccessfully attempted to represent Stanford before the SEC in 2005, Stanford paid Andrews Kurth hundreds of thousands of dollars to assist him in a real estate transaction.
In 2006, as the SEC’s investigation intensified, Stanford grew more anxious. He became convinced that Barasch’s access and influence with his former colleagues at the SEC might be the difference between remaining a billionaire or possibly getting caught and going to jail, according to documents and interviews. On September 29, 2006, Stanford emailed Mauricio Alvarado, his bank’s general counsel, and James Davis, the bank’s chief financial officer: “The former sec [D]allas lawyer we spoke about in [S]t croix. Get him on board asap.”
Alvarado approached Barasch again and asked him to defend Stanford against the SEC. This time Barasch did not hesitate. He instantly agreed to the representation—without consulting with the SEC’s ethics counsel, as he was required to do. Barasch flew to Miami to meet with Alvarado and other deputies of Stanford’s. Barasch also made plans to go to Antigua and meet Stanford himself, records indicate.
Then Barasch called a former colleague in the SEC’s Fort Worth office seeking information about the Stanford case.
The phone call caused an uproar among Barasch’s former colleagues. Several emailed others that they believed that Barasch’s representation of Stanford violated the law, records indicate. Eventually, the SEC ethics counsel got involved—and advised Barasch that for him to continue representing Stanford before the SEC would be flat-out illegal. Only then did Barasch’s legal work for Stanford come to an end.
Barasch had told his new law partners in 2005 that for the first year alone they were likely to earn at least $2 million from their representation of Stanford before the SEC. But because the SEC’s ethics counsel had discovered Barasch’s blatant interference into the matter, Barasch and Andrews Kurth had to prematurely end their representation of Stanford. Barasch ended up billing Stanford for only 12.3 hours of legal work, for which worth Andrews Kurth was paid $5,842.50, according to the law firm’s billing records. Andrews Kurth also sought to be reimbursed $745.43 for expenses Barasch had incurred for his Stanford-related work, according to the same records.
Two attorneys with firsthand knowledge of Barasch’s settlement deals with the Justice Department and SEC told me that he was treated leniently because Barasch had represented Stanford very briefly, and Andrews Kurth had made such a nominal amount of money for that work.
Federal investigators who settled the case with Barasch never knew, however, that Barasch’s legal work for Stanford led to a financial windfall for Andrews Kurth—and indirectly for Barasch, as an equity partner of the firm, according to sources close to the case.
Ironically, being turned in by his former colleagues to the SEC’s ethics counsel proved to be Barasch’s saving grace. On January 10, 2012, Barasch agreed to pay a $50,000 fine mandated by the United States Department of Justice to settle civil charges that he had violated federal conflict-of-interest laws. In May of that same year, Barasch also agreed to a one-year ban on practicing before the SEC as additional punishment for his representation of Stanford. In agreeing to settle matters with the Justice Department and SEC, Barasch was not required to admit to any wrongdoing.
A former Andrews Kurth employee told me that Andrews Kurth leveraged Stanford and his deputies to give them other lucrative legal work in exchange for Barasch’s help with the SEC. Confidential Andrews Kurth records appear to bear this out.
The law firm’s billing records show that in 2006, as Stanford was pushing Barasch and Andrews Kurth to represent him before the SEC, Stanford lavished additional and entirely separate legal business on the firm. The records show that Stanford and his bank retained Andrews Kurth to represent them on seven new legal matters, followed by a eighth in 2007.
Read part one of our investigation of the derailment of the SEC here.