Ex-SEC Attorney Saw Riches In Ponzi Defendant

The tale of Dallas attorney Spencer Barasch has two versions.

The official government version: As head of the Fort Worth regional office of the Securities and Exchange Commission from 1998 to 2005, Barasch declined to investigate the alleged Ponzi scheme of R. Allen Stanford and his Stanford Financial Group. Then, when Barasch finally left the SEC, he violated federal conflict-of-interest laws by going to work for Stanford.

The Barasch version: His bosses at the SEC had little interest in the Stanford case, preferring to focus on accounting fraud and other financial capers instead of Ponzi schemes. Barasch simply referred the matter to other authorities. And now he's a scapegoat for the SEC's embarrassing failure to stop Stanford until his alleged Ponzi scheme grew into an international, $7.2 billion fraud.

It doesn't matter which version you choose to believe. They both illustrate how alleged Ponzi schemers are usually never even investigated until they can no longer make the promised payments to their investors.

On Friday, the Justice Department announced it had reached a $50,000 settlement with Barasch. As part of the settlement, Barasch denies any wrongdoing. His attorney has said he agreed to the fine merely to avoid "protracted litigation."

The SEC is now deciding how long Barasch should be banned from representing clients before the agency. Hmm .. What's wrong with forever?

A 2010 inspector general's report highlighted Barasch in the SEC's failure to investigate Stanford. It also produced an email from Barasch, explaining why he longed to represent Stanford.

"Every lawyer in Texas and beyond is going to get rich over this case. Okay?" Barasch wrote.

Reminds me of the time an SEC attorney decided to marry Shana Madoff, the beloved niece and chief compliance officer of the man who made Charlie Ponzi look like a petty thief.

In 2006, Eric Swanson received an email informing him that SEC's New York office was investigating a complaint from a whistle-blower named Harry Markopolos, who claimed Bernie Madoff was running "the biggest Ponzi scheme ever." When Swanson's boss found out about Swanson's affair with Shana Madoff, he wrote in an April 6, 2006, email: "I guess we won't be investigating Madoff anytime soon." Swanson and Madoff's niece married in 2007.

If the SEC wasn't interested in Madoff's $65 billion fraud, Stanford's $7.2 billion fraud--mostly targeting investors in other countries--must have looked paltry.

The inspector general's report says SEC officials had suspicions about Stanford as far back as 1997, but did nothing about them until 2005. Stanford wasn't arrested until 2009, after his offshore banking empire imploded. He's been jailed ever since, but he's managed to delay his trial, claiming a jailhouse beating left him incompetent.

Stanford's trial is now slated for Jan. 23, but now there's another glitch. His lawyers have told the judge they want off his case, citing time and budgetary constraints. The man who once claimed to be a billionaire now claims to be indigent. So much for Barasch's notion that "every lawyer in Texas" would get rich from the Stanford case. Soon Stanford may be looking for any lawyer in Texas.

"Barasch's misguided attempt to represent Stanford Financial Group had no lasting consequence," said U.S. Attorney Bales in announcing the settlement. "Even so, there must be zero tolerance for ethical missteps."

This is the version of the story that's the most difficult to believe: Going to work for an alleged Ponzi schemer, who you should have been investigating, is merely an "ethical misstep." Just pay a fine and move on with your legal career. There will be plenty of other Ponzis to defend in the future.

(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. Contact Al at al.lewis@dowjones.com or tellittoal.com)