The start of the R. Allen Stanford trial on Monday in Houston for his alleged $7 billion Ponzi scheme involving certificates of deposit is likely to be a bigger black eye for the Securities and Exchange Commission and Financial Industry Regulatory Authority than was the Bernie Madoff fiasco, one attorney says.

“Fortunately for the SEC, Madoff pled guilty which thereby prevented a spotlight of a trial being shined on the SEC and all of their lapses,” says Andrew Stoltmann, of Stoltmann Law Offices in Chicago. “With Allen Stanford, the SEC is not so lucky. The likely message to come out at trial will be that Stanford was yet another politically connected financer who received preferential treatment from the SEC.”

Stanford, who was head of the now defunct Stanford Financial Group, based in Houston, was charged on Feb. 17, 2009, by the SEC with fraud and other violations of U.S. securities laws for his alleged $7 billion Ponzi scheme that involved supposedly “safe” certificates of deposit.

Stoltmann, who specializes in investment fraud, cites several “red flags” that were “missed or ignored” by the SEC that are likely to come out during the trial.

First was the fact Stanford’s businesses were inspected and investigated several times, starting in 2004 by the National Association of Securities Dealers, the brokerage industry’s self-policing group, which is now FINRA. “NASD’s scrutiny resulted in several disciplinary actions: the regulator fined his brokerage company four times, with penalties totaling $70,000, for violations that included misleading investors in sales materials about the risks of the CDs,” Stoltmann says.

Then there was a 2006 lawsuit by former employees alleging that Stanford’s company was running a Ponzi scheme. An SEC Office of Inspector General report later found that the SEC’s Fort Worth, Texas, office was aware since 1997 that Stanford was likely operating a Ponzi scheme, Stoltmann says.

Stanford’s company also lacked capital. In June 2007, Stoltmann says, “a finding by regulators stated that Stanford’s company lacked enough capital to function properly as a securities brokerage firm. The company paid $20,000 to settle charges by the NASD without admitting or denying them.”

The SEC and the Securities Investor Protection Corp. have been caught up in a brawl over reimbursing Stanford’s victims.

The SEC asked a federal court in Washington on Dec. 13 to order the SIPC to initiate a liquidation proceeding for investors who were victims of the Ponzi scheme carried out by Stanford, as SIPC has alleged that Stanford committed fraud, not theft, and therefore SIPC has no liability for damages.

“Because SIPC has declined to take steps to initiate the proceeding for the protection of Stanford customers, the Commission filed suit today asking a court to compel it to do so,” the SEC said in a statement.

SIPC maintains the circumstances specific to the Stanford case mean “that the law doesn’t provide for payouts to investors.” The SEC’s staff initially agreed, but on June 15, 2011, the SEC informed SIPC that the “Stanford matter was appropriate for a proceeding under the Securities Investor Protection Act,” or SIPA.

The liquidation proceeding would provide customers of the Stanford brokerage firm a chance to file claims seeking coverage under SIPA.