Feb. 18 (Bloomberg) -- U.S. brokerage regulators fined R. Allen Stanford’s firm more than a year ago for misleading investors while selling certificates of deposit, raising new questions about watchdogs already under scrutiny for missing Bernard Madoff’s alleged $50 billion Ponzi scheme.

Stanford Group Co. was fined $10,000 by the Financial Industry Regulatory Authority in November 2007 for distributing marketing material that “failed to present fair and balanced treatment” of the risks associated with CDs. The U.S. Securities and Exchange Commission yesterday filed a civil lawsuit calling the sales by the Houston-based firm a “massive, ongoing fraud.”

“From what we know, the problem that led to the fine was a red flag,” said Robert Hillman, a securities law professor at the University of California, Davis. “If you have a red flag of this nature, then you have to do something more than simply levy a fine and close the file.”

The SEC accused Stanford of touting “improbable, if not impossible” returns for more than a decade on CDs issued by an affiliated bank in Antigua. The case follows congressional scrutiny of the SEC and Finra, which is funded by the brokerage industry, for missing Madoff’s alleged scheme.

Finra spokeswoman Nancy Condon had no comment.

SEC Case

The SEC’s case stems from an investigation opened in October 2006 after a routine inspection of Stanford Group, the New York Times reported today, citing Stephen Korotash, an associate enforcement director in the SEC’s Fort Worth, Texas, office. The SEC “stood down” on its inquiry at the request of another federal agency that he declined to identify, the newspaper said. It resumed the investigation in December 2008.

He referred questions from Bloomberg News to the SEC’s press office.

Agency spokesman John Nester said inquiries like the Stanford case involve a number of jurisdictional issues such as whether products being sold are securities and investigators’ ability to access overseas records.

“We always cooperate with criminal authorities who have different techniques and tools at their disposal,” he said. “And we are careful to make sure that civil investigations are conducted in a way so that they do not impede potential criminal actions.”

‘Reinvigorate’ Enforcement

SEC Chairman Mary Schapiro last month said she would “reinvigorate” the agency’s enforcement unit after it failed for more than a decade to detect that Madoff was paying off old investors with money raised from new ones. Schapiro was chief executive officer of Finra when the private regulator fined Stanford’s firm in 2007.

Stanford Group had registered with the SEC as an investment adviser, making it subject to routine inspections. Finra had authority to examine Stanford because it was also registered as a brokerage firm.

Clients of Stanford Group were told their funds would be placed mainly in easily sellable financial instruments, monitored by more than 20 analysts and audited by Antiguan regulators, according to the SEC.

Instead, the “vast majority” of the portfolio was managed by Stanford himself and James Davis, the chief financial officer of the Antiguan subsidiary, the SEC said. A “substantial” portion of the portfolio may have been invested in assets such as private equity and real estate, according to the agency.

Whereabouts Unknown

The whereabouts of Stanford, 58, are unknown by U.S. regulators, according to Rose Romero, director of the SEC’s Fort Worth office. Investigators are trying to account for the $8 billion in investor funds.

In its 2007 claim, Finra said Stanford Group failed to tell clients it had a potential conflict of interest because an affiliated bank based in Antigua was issuing the CDs. The same bank, Stanford International Bank Ltd., was named in the SEC’s lawsuit.

Stanford Group Chief Compliance Officer Bernerd Young said in a letter to Finra that the company had revised its marketing material. He also said Finra and the SEC “conducted numerous examinations” of Stanford Group and its “solicitation” of Stanford International’s CDs.

‘Slap on Wrist’

“It goes to how deep” Finra looked, said Adam Pritchard, a former SEC lawyer who’s now a professor at the University of Michigan Law School in Ann Arbor. “That $10,000 fine would be the archetypical slap on the wrist.”

Probes of marketing material are often triggered by tips from consumers and competitors and are limited in scope, said Brian Rubin, a partner at Sutherland Asbill & Brennan LLP in Washington who was deputy chief counsel at NASD, a Finra predecessor. Examiners focus on the veracity of literature and don’t broaden reviews unless they suspect further wrongdoing, he said.

“There’s no reason that Finra would have dug deeper” unless there were indications of misrepresentation related to returns or evidence of the fraud alleged by the SEC, Rubin said. “The fine is relatively low, which suggests that they were looking at a limited number of pieces” of literature.

Stanford Group clients have wrested at least $687,288 from the firm since 2003 in arbitration settlements related to transactions involving stocks, mutual funds and government securities, according to Finra records. Finra itself has fined Stanford Group at least $70,000.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

Last Updated: February 18, 2009 20:48 EST