The Ethical and Regulatory Morass of the Stanford Scandal

I didn’t start out looking for trouble.

But like the camera shots in a Sergio Leone western, every time the camera pulls back for perspective in the Stanford Investment Bank story, the plot changes.

But let’s begin at the beginning. You of course know Madoff–the man with the minus touch.

Now we have "Sir" Allen Stanford–let’s call him mini-Madoff. He’s head of the Stanford International Bank (SIB), now accused by the SEC of bilking about $1.8 billion through, what else, a Ponzi scheme. Based in Antigua, operated out of Mississippi and Texas, a very private management team.

SIB had an outside lawyer from the prestigious firm Proskauer, Rose. His name is Thomas Sjoblum. On February 10, in the SEC offices in Fort Worth, Texas, Mr. Sjoblum accompanied his client, SIB’s Chief Investment Officer Laura Pendergest-Holt, to a 4-hour deposition by her.

The next day, Mr. Sjoblum told the SIB folks he was resigning from the case.

Musta been one helluva testimony Ms. Pendergest-Holt gave, eh? So it would sound.

In a blackberry email to an SEC lawyer two days later, Sjoblum clarified:

"I disaffirm all prior oral and written representations made by me and my associates … to the SEC staff regarding Stanford Financial Group and its affiliates.”

For me, it all started with that funny word–“disaffirm.” In a blogpost on February 20 I said “disaffirm” was a tortured linguistic construct aimed at putting distance between telling the truth and technically not lying.

But then the real fun started. Pull the camera back a few feet.

I then separately heard from two lawyers for whom I have very high regard, suggesting I had been too hard on Sjoblom. They suggested Sjoblom was a whistle blower whose actions were principled, difficult and courageous.

They were not alone. The blog AmLaw Daily had written the day before:

…Sjoblom…sniffed out the fraud, withdrew his representation, and told federal investigators he essentially took back everything he had told to them in recent weeks…

Am Law Daily contacted a number of legal ethics experts to discuss Sjoblom’s decision to come clean about a client’s alleged frauds–especially given the possibility that in doing so, he disclosed confidential client information to the government…

Experts said Sjoblom did precisely the right thing–and, more importantly, that the federal Sarbanes-Oxley Act likely made his decision much easier than it otherwise might have been.

"He [Sjoblom] did the right thing here," says Stephen Gillers, a legal ethics expert at New York University School of Law.

I started looking for crow to eat. Until, that is, I read the Memphis Daily News account of what actually happened at that February 10 SEC deposition.

By the SEC’s own notes, Sjoblom came out swinging—asking if the SEC had yet referred the case to Justice, arguing that the SEC didn’t have geographic jurisdiction, arguing that the (allegedly) bogus CDs Stanford sold were not “securities” under the relevant legal definition.


Suddenly the aspiring Hollywood screenwriter in my head switched stereotypes: this was not the plot for the courageous whistle blower movie. This was the script for the B "mob lawyer" movie. Could he really have had a Saul on the road to Damascus conversion in one afternoon?

So–what happened in that room? Did Ms. Pendergest-Holt really drop a bombshell that blindsided Sjoblom? Or did Sjoblom do a Claude Raines (“I am shocked, shocked! to discover my client has lied to me for years about billions of dollars!”)? Incidentally, Ms. Pendergest-Holt was arrested by the FBI a few days later.

Let’s pull the camera way back.

Attorney Sjoblom is an ex-assistant chief litigation counsel in the SEC’s Division of Enforcement. On February 10 he aggressively explores defenses for SIB just before Pendergest-Holt comes on and says things that get her arrested. The next day he resigns.

The obvious question becomes, ‘What did Sjoblom know, and when did he know it?’ Of course I don’t know, but let’s consider what Sjoblom might have known:

  1. In 2003, a whistle blower case against Stanford was brought in front of the NASD (FINRA’s predecessor).
  2. In fact, according to Henry Blodget, "at least five former Stanford employees told the SEC they thought Stanford was running a Ponzi scheme, from 2003 on."
  3. A January 2008 lawsuit was filed against Stanford alleging endemic lack of compliance.
  4. A Venezuelan analyst wrote a report called Duck Tales in January 2009 which did for Stanford what Markopolis did for Madoff–blew the conceptual lid off.
  5. But the nail in the "shocked, shocked!" coffin is in the FBI arrest claim for Stanford’s Pendergest-Holt:

..the complaint alleges there were stormy preparation sessions for Pendergest-Holt in January and February “during which the bank’s shaky asset base became apparent to a wider circle of officials and to the lawyer — ‘Attorney A’ — who later quit.”

Um, who might ‘Attorney A’ be? Whoever it was, he knew something was up back in January.

So–just when did Sjoblom "sniff out the fraud?" The day after he heard testimony in Dallas? Or way before?

If he knew anything in advance–then why the aggressive denial-of-jurisdiction rant at the outset of the hearing? How much charade does a lawyer have to go through before he can speak some truth? I know legal ethics is much concerned with maintaining client confidences. But how much pretzel-twisting is required to serve that particular god?

The legal experts said Sjoblom did “exactly the right thing.” They also say that Sarbanes-Oxley made it far easier for lawyers to reveal confidences in certain situations. Let’s assume both statements are true. How horrible it must have been pre-Sarbanes–how many would-be whistle-blowing lawyers went to the grave mute?

How much in-your-face evidence of massive fraud does it take before a lawyer can say "my client is a crook and a liar" in a legally acceptable manner?

May I suggest the right answer should be–"less than this."

If this was a praiseworthy, ethical act consistent with the highest standards of the law, then something is very wrong–either with a lawyer, with legal ethics, or with the law itself. The law owes society more than citing last-minute tortured "disaffirmations" in the face of egregious criminal wrongdoing as examples of ethical behavior.

Note: It’s possible that Professor Gillers was not aware of all this background when he called Sjoblom’s actions "exactly the right thing." For all I know, given the background, he might even agree with me. I’d welcome his perspective here, and I’d welcome any correction from anyone about matters of law or fact.

13 replies
  1. Stephen Gillers
    Stephen Gillers says:

    This is a complex subject. The word "disaffirm" is actually a term of art in New York legal ethics (Sjoborn is admitted in NY) and in the history of the ABA Model Rules, which I imagine is why  it appears in Sjoborn’s SEC statement. In NY, Sjoblom had to disaffirm (sometimes called a "noisy withdrawal"). 

    Under SOX rules he could have but did not have to go further and reveal confidences. When I was interviewed, we did not yet have the criminal complaint. I still give Sjoblom the benefit of the doubt — turning on a client is an excruciatingly difficult decision for a lawyer, as you can imagine.

    But the SEC testimony of Pendergest-Holt and the text of the complaint against her, revealed since my interview, do raise one issue: why did Sjoborn not act sooner? There may be good explanations for why he did not. We do not yet have all the facts. The time frame is not long in any event.  But the question lingers.  However, Sjoborn’s strong advocacy at the SEC appearance of Pendergest-Holt — challenging jurisdiction — is not at all a problem.

  2. Charlie (Green)
    Charlie (Green) says:

    Thanks to Prof. Gillers for the thoughtful reply.  I didn’t know "disaffirm" was a commonly used term.  (Of course, being commonly used doesn’t mean it isn’t still ‘tortured’).

    Indeed, the question of timing does linger.  What did Sjoblom know, and when did he know it?  The more he knew, and the earlier he knew it, the more important is the question I’m trying to raise.

    The issue I’m trying to raise is not a legal question, but a question abut the law itself.  It’s a meta-issue.  When Prof. Gillers says "Sjoborn’s strong advocacy…is not at all a problem," I take him to mean it is "not at all illegal."  And I accept his view; I’m hardly about to argue the law with a lawyer.

    But that’s not my point.  The more he knew and the earlier he knew it, the bigger the social issue that his actions are "not at all a problem."  If he knew a lot early, and the state of legal ethics is such that he still had to go through this kind of charade before blowing the whistle, then something is wrong with the law or the law’s code of ethics.

    As Prof. Gillers says, whether this is a theoretical or a real debate remains to be seen.

  3. peter vajda
    peter vajda says:

    I’m struck by the wording Prof. Gillers uses in one statement he makes and that is, " …turning on a client is an excruciatingly difficult decision for a lawyer…" I  – personally, subjectively and judgmentally – find that an interesting choice of words.

    I’m curious what a paraphrase might mean in that same context of the scenario, the paraphrasing being, "Owning up and telling the truth to a client and the public as soon as the truth is known is a moral imperative for an honest , trustworthy and self-responsible individual, and for society."  

    Interesting, to me, if there is a cognitive dissonance between truth-telling and experiencing something excruciating. If so, I’m curious why.


  4. Doug Cornelius
    Doug Cornelius says:

    Charlie –

    A devilish situation. You are right to point out that timing of the withdrawal may be an issue. Clearly, the Feb 10th deposition did not go well since it resulted in the attorney withdrawing and his client being arrested.

    How much did he know before that day? What did he know? What was obviously bad? What appeared legitimate later to be uncovered as a fraud? There are many unanswered questions.

    What really interests me about Stanford and Madoff is how they went bad. I assume that both started off legitimate but something set them down a dark path. For a complaince guy like me, I am very interested in finding out these early mis-deeds so we can deter future ones.

  5. Charlie (Green)
    Charlie (Green) says:


    Thanks for the thoughts.  Yes, the motivations behind folks like this are fascinating to speculate about.  And we don’t seem to know much yet.

    Like you, my first assumption is of a gradual descent into the dark side.  It starts with borrowing from petty cash to cover weekend expenses, and goes downhill from there.

    Although in Madoff’s case, there seems to be some early evidence of sociopathy.  New York Magazine has a recollection of a childhood riend with a chilling story of swimming out too far in ocean water, and Madoff’s icy reaction.  Perhaps more telling, it seems that he made not even the pretense of trades for at least 13 years. 

    Finally, even a factory worker "gone postal" who kills his co-workers, wife and family has the socialization to them kill himself.  Not so for sociopaths, who lack that moral compass. 

    So where it was sociopathic or simply endgame for a poor sinner, he clearly inhabited the amoral state for well over a decade. 

    Beats me what it was.  And I’m not even sure we can learn much from it, depending on the answer. 

    Fascinating.  Like a train wreck, or a snake, but still fascinating. 

  6. peter vajda
    peter vajda says:

    Hi Charlie,

    You write, "…And I’m not even sure we can learn much from it, depending on the answer."  

    I’m thinking, "Isn’t this much of what our collective, higher-level curiosity and inquiry into these affairs and events is all about?" – learning from them?

    On another note, you’re right as 99% of sociopathic and psychopathic behavior begins in childhood…it does not begin at 9:00 monday morning at the age of 50 when we begin stealing petty cash…it starts between birth and the age of 7, as does all narcissistic behavior, and then unfolds and manifests in different forms as we grow into adolescence and adulthood. 


  7. Charlie (Green)
    Charlie (Green) says:

    Thanks for the link, Doug. 

    I have been blogging and commenting on others’ blogs on this subject for a bit over a week now, and the silence has generally been deafening–you excepted.

    I think there are at least two big issues here. 

    One is whether Sjoblom erred in waiting too long to disclose some direct knowledge of a crime.  As the WSJ article notes, his responsesin the week (if not longer) that he allegedly knew of a crime included "let’s pray," and "the party’s over."  Not the comments of an outraged would-be whistle-blower.

    Time and more facts will reveal the truth.  In the meantime, the ocean of "no comments" from all concerned raises my eybrows.

    But that’s the legal issue.  The other one is the social issue, and it’s broader.  It’s how society thinks of the law.  Because most of the press so far (lawyers) tend to see this case as legal in nature, the media spin has been all about the tension a lawyer faces walking the thin line between ethical duties to client, and ethical duties to society.  Hence Sjoblom has been painted as a "whistle-blower" who painfully had to execute a most difficult task.

    Quite apart from whether Sjoblom bent the law, I’d suggest the law is wrong.  This should not be as hard a call as it has been.  This should not be the ethical dilemma it has been painted.  The obligations to client should be drawn more tightly when faced with not turning in perpetrators of multi-billion dollar frauds.  It’s simply out of joint.  Wrong.

    And if it’s wrong, then Sjoblom’s hand-wringing, and lawyers’ positioning him as a noble whistle-blower, is just so much misplaced noise.

    Where’s a good legislator or bar ethics code writer when you need one?

    I think we haven’t heard the end of this story.

  8. Doug Cornelius
    Doug Cornelius says:

    Charlie –

    Lawyers represent criminals. But is very different beetween defending someone from charges and assisting in a crime. I assume that Stanford asked Sjoblom to step over the line or facts came out that his past acts had someone assisted in a crime. Otherwise, he would have continued represented Stanford and defending them against the increasingly more severe crimes and punishment.

    I would argue that lawyers are living up to their ethical duties of society by making the government prove its case. Our judicial and constitutional systems are built on government prosecution. Clients need to know if the investigations are civil or criminal. They are entitled to a competent legal defense.

    Legal ethics and societal ethics are sometimes at odds. Personally, I did not have the stomach for criminal defense.

    I think the facts are too sparse to cast judgment or find lessons from the situation.



  9. Charlie (Green)
    Charlie (Green) says:


    Which goes to my point: this smells like bad law.  If doing the right thing is likely to get you sued, then to that extent the law doesn’t correlate with doing the right thing.

    As I said above, "The issue I’m trying to raise is not a legal question, but a question about the law itself."   Not whether Sjoblom bent the law, but whether the law is bent.  Not about ethics as compliance with a law, but ethics as laws that shouldn’t merit compliance.

    I’m trying very hard here to make a point not about a lawyer’s adherence to the law, but about the law itself.  Any law that makes a lawyer that afraid about doing the right thing is a law that is itself suspect.  They say tough cases make bad law; bad law also makes tough cases. 





  10. Charlie (Green)
    Charlie (Green) says:

    The Sjoblom story has legs; I always thought there was enough smoke here to suggest the possibility of fire.

    The WSJ Law Blog reports that Sjoblom is now being implicated in the guilty plea of Stanford’s former CFO as having been complicit in a conspiracy to prevent SEC investigation.

    Obviously Sjoblom should be considered innocent until proven guilty, etc. etc.  As noted above, I have no interest in arguing the law with lawyers.  But I was struck, since day one, by the gut instinct reaction of those in the business of legal ethics and compliance: basically, as reported by AmLaw, that Sjoblom had done the right thing, that it was a very difficult decision to turn whistleblower for a client, etc.

    In other words: a strong bias in favor of the ethicality of Sjoblom.  Ethicality is not the same as innocence, and I would like to suggest the bias should not be so automatically entitled.

    The Sjoblom case reminds me of the story of the man who suspected his young wife of philandering, and hired a private eye to track her whereabouts.  After a few days, the detective reports back.

    "I followed her away from your house.  She drove straight to a motel, where she pulled out a key from her handbag.  I set up cameras outside the window in some shrubbery; I observed her meeeting with a man in the room.  They kissed, then proceeded to slowly undress each other, kissing all the while.  Once down to their undergarments, they pulled the curtains, and I had to terminate the observation."

    "Oh, no," said the client, "I could take anything but that–that nagging doubt about what really happened after they pulled the shade!"

    Something like that ‘nagging doubt," I suggest, afflicts those whose first instinct was to characterize Sjoblom’s actions as noble, courageous and principled. 

    When a married woman disappears, cops know very well to suspect the distraught husband who advertises the pain of his loss to the media. When Sjoblom appears to have had a sudden conversion experience, why should the collective reaction be to praise his ethics, rather than to suspiciously examine the circumstances?

    Again, I’m not questioning his guilt or innocence; I’m questioning the absolutist view of the client-attorney relationship, which renders whistle-blowing so rare that we can only presume angels would invoke it.

    Whistle-blowing shouldn’t be viewed as de facto qualification for sainthood. It depends.


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