The Madoff and Stanford debacles seems to never fade away for the Commission. Madoff of course is in prison but the litigation goes on. The failures of the Commission and others such as FINRA continue to linger. The Stanford case appears to be finally heading for trial. Again however the memory of the Commission’s failure continues to linger, tarnishing its reputation despite much work to overcome the scandal.

Last week another chapter in the sad saga of these matters came to a partial end. Former SEC staff member Spencer Barasch, one time head of Enforcement for the SEC’s Forth Worth office, entered into a civil settlement of ethics and conflict of interest charges with the Department of Justice stemming from his supervisory role regarding Stanford matters while on the staff and his subsequent representation of Mr. Stanford’s company, Stanford Financial Group. No settlement was reached with the SEC.

The civil settlement with the DOJ is based on 18 U.S. C. § 207. That statute restricts the right of federal employees to handle certain matters following the termination of their government service. Under the terms of the settlement Mr. Barasch agreed to pay a $50,000 civil fine, the maximum permitted for a violation of the statute. Mr. Barasch did not admit the factual assertions on which the DOJ predicated its claim.

The positions of the DOJ and Mr. Barasch contrast sharply. According to the DOJ:

  • Mr. Barasch was the head of Enforcement for the SEC’s Fort Worth Office from 1998 through April 2005;
  • During that period the Stanford Financial Group made materially false statements to investors which caused significant injury;
  • In August 1998 Mr. Barasch directed that a preliminary investigation into the activities of Stanford Financial Group be closed;
  • In December 2002 Mr. Barasch declined a referral regarding Stanford Financial Group from the SEC examination staff;
  • In the Fall of 2003 Mr. Barasch declined to open an investigation into the Stanford Financial Group;
  • Once in private practice Mr. Barasch was orally advised by the Commission staff that he could not represent the Stanford Financial Group; and
  • Mr. Barasch represented the Stanford Financial Group from September 29, 2006 through December 18, 2006 and appeared before the Commission, communicating with the SEC in an effort to influence.

These facts constitute a violation of Section 207, according to the DOJ.

Mr. Barasch denies the claims asserted by the Department of Justice. He contends that:

  • His representation of the Stanford Financial Group did not constitute a violation of Section 207;
  • He never personally and/or substantially participated in the SEC’s investigation of Mr. Stanford and his company;
  • While the head of Enforcement for the SEC’s Forth Worth office he referred the Stanford matter to other agencies based on pressure from his superiors in Washington to devote the resources of the office to other matters;
  • He was not told that he was permanently barred from representing Stanford;
  • He only had a telephone call on November 27, 2006 with the SEC staff to determine whether he could work on the case; and
  • He only settled with the DOJ in an effort to bring the matter to an end.

Mr. Barasch reportedly attempted to settle the matter with the SEC, offering to be barred from practicing before the Commission for a period of six months. The proposal also provided for his automatic readmission to practice, in contrast to the usual time consuming readmission process. The Commission reportedly rejected the proposed settlement.

This is the second ethics case referred to the Justice Department by the SEC Inspector General in recent months. Earlier, the SEC IG made a criminal referred of a matter regarding a former SEC General Counsel arising out of his work as a staff member on matters related to Mr. Madoff. The Department of Justice declined to prosecute. The Commission did not take any action.

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