Eight years ago, Stanford Financial Group collapsed and was labeled a Ponzi scheme. The Securities and Exchange Commission is continuing to seek penalties for those involved. One of those is Bernerd Young, who served as the Chief Compliance Officer at Stanford Group Company, the Texas-based registered investment adviser and broker dealer that promoted the Stanford CDs to US investors.
The SEC claims that Young approved Stanford’s false and misleading disclosures despite red flags about the products. An SEC Administrative Law Judge found that Young was
“at least negligent in allowing the use of marketing material that promised depositor security on the basis of facts about SIB’s portfolio that could not be verified and on the basis of a discussion of insurance that [he] knew had no relevance to depositor security but that might confuse a potential investor into thinking that it did.”
Young did not challenge most of the relevant facts about the underlying fraud at Stanford. He just disputes his liability by claiming that he reasonably carried out his compliance and due diligence responsibilities in good-faith reliance on Stanford officials, outside professionals, and regulators.
The ALJ found him subject to liability and barred Young from the industry, ordered almost $600 thousand in disgorgement and a civil penalty of $260,000. The disgorgement was for about half of his salary since half of Stanford’s income was fraudulent.
The Commission upheld the holding of the ALJ.
Young is appealing the decision to the US Circuit of Appeals for the DC Circuit. Mr. Young’s challenge is an attack on the ALJ proceeding in line with Lucia and Bandimere.
I also noted in the SEC order that Mr. Young had challenged the proceedings based on the statute of limitations. Although I don’t think it gets him in the clear, yesterday’s Kokesh puts a hard cap on the disgorgement to five years and opens the possibility of limiting the disgorgement remedy even more. In this case, Young’s salary is being disgorged based on some abstract ratio of fraud to legitimate activity at Stanford. I think it would interesting to see how this disgorgement held up to court scrutiny.
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