The SEC heard oral argument in an appeal from an initial decision finding securities law violations by, and imposing sanctions against, the former chief compliance officer of Stanford Group Company (SGC). According to the respondent, the Commission staff failed to provide him with access to documents necessary to defend the action and, in any case, brought the action well after the limitations period had expired. In addition, he argued that his reliance on the opinions of other professionals was appropriate and that the SEC should avoid adoption of a policy extending liability for other executives’ malfeasance to CCOs. The Division of Enforcement continued to maintain that the proceeding was fair and proper and that the imposition of sanctions was appropriate in light of the CCO’s “unreasonable reliance” on questionable information (In the Matter of Bernerd E. Young, February 8, 2016).
Allegations and ALJ decision. In its order instituting proceedings, the Enforcement Division charged two SGC executives and the company’s CCO with violations of the antifraud provisions of the federal securities laws in connection with their conduct and/or complicity in the multi-billion dollar Ponzi scheme perpetrated by Robert Allen Stanford. Stanford’s scheme involved the sale of fraudulent certificates of deposit issued by a foreign bank. Stanford’s bank, Stanford International Bank (SIB), offered and sold its CDs to U.S. investors exclusively through SGC, and the company used a disclosure statement and a sales brochure emphasizing the safety and security of the CDs for investors to facilitate transactions. According to the division, the executives and the CCO mandated the use of misleading offering documents and incentivized sales of SIB’s CDs despite knowing that SIB refused to allow SGC to review the bank’s investment portfolio (and failing to reveal that fact) and becoming increasingly aware of potential misrepresentations and employee and investor concerns.
The ALJ found that the executives and the CCO were aware of numerous red flags concerning misleading statements and liquidity problems and aided and abetted, or caused, violations of the antifraud provisions of the federal securities laws through false and misleading statements and omissions and statements combating concerns raised about the CDs. In addition to cease-and-desist orders and industry bars, the ALJ ordered disgorgement from the three respondents totaling over $4.5 million and individual penalties of $260,000 each. The executives opted not to challenge the decision, but the CCO appealed to the full Commission and oral argument was scheduled.
Oral argument. The CCO challenged numerous aspects of the ALJ decisions and the proceeding overall, noting that he had not had access to his original documents and other materials since the receiver took over and expressing concern that he may not have been informed regarding possible exculpatory information. In addition, he contended that the time for bringing an action alleging a willful violation may have passed, given the timing of his employment with SGG. He also argued that the proceeding may have violated his due process rights and stressed that the ruling against may cause problems for other CCOs down the road—those that could potentially be held liable for their decision to rely on auditors’, attorneys’, executives’, and even regulators’ statements, even without the presence of red flags. A CCO should be able to rely on information provided and should not be held liable for the actions of other executives, the CCO stated.
The Enforcement Division countered that the case is “about his conduct, not his title” and noted that the focus was and continues to be on what he did or did not do in his compliance role. Further, the ALJ did, in fact, allow for the CCO to assume that certain statements and opinions of other professionals were fair and accurate, according to the division, and the ultimate decision reflected that what he knew made it at least unreasonable to continue doing what he did. He knew that that SGC was dependent on SIB’s CDs and knew they were marketed as supported by diversified portfolio but, as CCO, he never asked why he could not have access to the specific information regarding the holdings. The CCO blindly accepted SIB’s statements about the portfolio, despite awareness of transparency concerns. A reasonable person should have been asking some questions, the division stressed. Even if the CCO’s reliance on other professionals was reasonable at first, the division explained, he learned progressively more over time, and the level of culpability rose. If anything, the ALJ took a very conservative approach to sanctioning, the division concluded.
The Commission took the matter under advisement.
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