The Stanford Financial fraud that cost investors billions has produced an unusual defendant — twice. Stanford sued the SEC for “unfair, abusive law-enforcement methods and tactics,” but withdraw the claim in March. Investors have sued the SEC under the Federal Tort Claims Act claiming that former SEC attorney Spencer Barasch ignored red flags in failing to take action against Stanford.

Barasch was the enforcement director of the SEC’s Dallas office that examined Stanford four times between 1997 and 2004 and, according the SEC’s inspector general, concluded each time that Stanford’s CD program was a Ponzi scheme or similar operation. The IG found that, after leaving the SEC, Barasch briefly represented Stanford until told by the SEC that this violated ethics rules. Pursuant to section 968 of the Dodd-Frank Act, the GAO is conducting a study on the revolving door at the SEC that is due before July 21 (see below). A “pal” of Barasch’s at the Dallas office was later convicted of penny stock fraud is serving an 8-yer sentence in federal prison.

How is the investors’ claim against the SEC likely to fair? Under what circumstances have private claims against regulators succeeded and are most likely to succeed?

Stanford Investors Sue SEC for Losses

Update: GAO Report: Existing Post-Employment Controls Could be Further Strengthened (7/12/11)Critics slam Finra panel ban plan (7/12/11)

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