AMLAW DAILY ARTICLE

April 19, 2010 4:14 PM

Report Rips SEC, Andrews Kurth Partner

Posted by Zach Lowe

It has been a very bad year for the Securities and Exchange Commission, and it got even worse Friday with the release of a report from the agency’s inspector general’s office which concludes the SEC bungled its investigation into Allen Stanford’s alleged $8 billion Ponzi scheme. The 159-page report, available here, says that on four occasions starting in 1997, examiners in the SEC’s Fort Worth, Texas, offices recommended the agency investigate Stanford for what some examiners characterized as an obvious fraud, according to Reuters. More interesting from our perspective is the report’s recommendation that an Andrews Kurth partner face possible sanctions for doing legal work on Stanford’s behalf just months after leaving the same SEC office that was investigating Stanford for possible fraud.

The report lays much of the blame on Spencer Barasch, a former Assistant Director of the SEC’s Forth Worth enforcement office and now a partner at Andrews Kurth. (Barasch did not respond to a message seeking comment.) Other SEC employees who wanted to pursue Stanford told the inspector general that Barasch and Harold Degenhardt, another top SEC official in Fort Worth who left in 2005 for a job at Fulbright & Jaworski, preferred smaller cases that were easier to prove and resolve quickly. The Stanford case would take a lot of time, and the two men made their lack of interest in it clear, the report states. “[Degenhardt] came from a big law firm, and he quickly decided the way to impress people was to come up with lots of numbers,” one SEC staffer told the inspector general’s office. “And [Barasch], of course, was part of that.” Degenhardt was at Gibson, Dunn & Crutcher before joining the SEC, according to his current firm bio, which remains on Fulbright’s Web page even though the firm claims Degenhardt retired in 2007. The firm’s Web site lists him as a special consultant.

Still, the central figure who takes the bulk of the blame in the report is undoubtedly Barasch. He left the SEC in the middle of 2005, and within weeks of leaving, he had already asked the agency for permission to represent Stanford in matters before it, the report says. Agency officials denied the request, saying Barasch would be violating federal rules that ban top federal employees from doing work on a matters they previously investigated at a federal agency, the report states. Barasch responded in 2006  by saying he could not remember investigating Stanford even though records show he attended meetings about the possible Ponzi scheme throughout his tenure at the SEC.

When the SEC finally charged Stanford in 2009, Barasch once again asked if he could get involved with the case. “Every lawyer in Texas and beyond is going to get rich over this case,” Barasch reportedly told the inspector general in explaining his continued requests to work on the Stanford case, according to the inspector general’sreport. “Okay? And I hated being on the sidelines.”

The report includes testimony and e-mail records indicating Barasch had performed at least 12 hours of billable work for Stanford even though the SEC denied him permission to do so. Barasch claimed he had merely reviewed a draft of one letter, but e-mails and other records show he was in close contact with Thomas Sjoblom, the former Proskauer Rose partner who was once Stanford’s go-to lawyer. (You may recall that Sjoblom himself is the target of legal action for his alleged conduct in representing Stanford, as we have previously reported.) The inspector general has referred Barasch to ethics committees in Washington, D.C. and Texas for possible action, the report states.

The report also shows that internal SEC employees complained that Barasch showed little interest in pursuing Stanford while at the SEC. The agency dropped one early investigation when Stanford did not comply with a voluntary request for documents. They dropped another in 1998 when Wayne Secore, one of Stanford’s early lawyers, assured Barasch that Stanford was legit, the report says. The decisions surprised other SEC employees, and one of those employees recalled that the 1998 decision came up again when she, Barasch, and others dined out in New Orleans last year. Barasch again mentioned at dinner that the assurances of Stanford’s lawyer were good enough for him, the employee told the inspector general. Barasch has denied ever saying that, calling the employee’s account “absurd,” the report says. “I would never accept an attorney’s representation about anything,” he told the inspector general.

According to the report, things improved at the SEC when Katherine Addleman took over Barasch’s position in the Fort Worth enforcement office at the SEC. Addleman, now a partner at Haynes and Boone, was less obsessed with what critics called “slam dunk” cases and more willing to take on bigger projects such as the Stanford investigation, the report says. Addleman did not return a call seeking comment.

One other note: The report gives further ammunition to critics who suggest the SEC is more likely to go easy on entities who hire ex-SEC lawyers to represent them during the early phases of an investigation. Remarks from an anonymous SEC enforcement attorney included in the inspector general’s report indicate Stanford’s hiring of Sjoblom, a former higher-up at the SEC, helped stave off an aggressive investigation of Stanford in 2005. “Here we had this kind of legitimate looking operation with a lawyer [Thomas Sjoblom] that used to be with the SEC, and he’s making these representations to us, and there was just so much that we didn’t have,” the lawyer told the inspector general. “So what kind of case could we bring?”

Critics have recently raised questions about the SEC’s revolving door in the context of the agency’s prolonged failure to sniff out alleged fraud at the fund Allied Capital. In the early stages of the investigation in 2004, Allied retained a former SEC lawyer who joined Venable and registered as a lobbyist for Allied within weeks of leaving the SEC, according to our prior reporting. Later, Allied retained Wilmer Cutler Pickering Hale and Dorr’s William McLucas, former director of enforcement at the SEC, who appeared to intimidate SEC staffers, according to a separate inspector general’s report released last month.

That’s right—two really bad inspector general’s reports in the last few weeks alone. Like we said: It has been a very bad few months for the SEC.

Contact Zach Lowe at zlowe@alm.com.

RELATED STORIES FROM THE WEB

SEC Engages in High-Risk Game Financial Times

Report Finds SEC Dropped the Ball in Stanford Case Austin American Statesman
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