Stanford Financial's Ponzi Scheme: New Fraud, Old Lessons

Stanford Free - Does Crime Pay?

On February 17, 2009 Stanford Financial was accused by the SEC of defrauding investors and engaging in a “massive, ongoing fraud”. The fraud was perpetrated by seducing investors with “improbable if not impossible” returns on their investments, according to the SEC. The amount swindled from investors is estimated at $7 billion.

The head of Stanford Financial, Allen Stanford, was finally arrested on June 18th and has been in federal custody since that time. During a court hearing yesterday in Houston, Mr Stanford entered the standard “not guilty” plea and his attorneys argued for his release on bail.

During the course of the court proceedings it was revealed that:

• Texas financier R. Allen Stanford controlled a secret Swiss bank account from which he withdrew roughly $100 million last year, and also tapped the account to pay bribes to the firm auditing his Antigua-based bank, federal prosecutors alleged Thursday during a hearing in federal court.
• The billionaire and the executives are accused of orchestrating a massive fraud by misusing most of the $7 billion they advised clients to invest in certificates of deposit from the Stanford International Bank, based on the Caribbean island of Antigua.
• Also indicted is Leroy King, the former chief executive officer of Antigua’s Financial Services Regulatory Commission. He was taken into custody by island authorities and will now face extradition proceedings, according to a government official who spoke on condition of anonymity because she was not authorized to discuss the case. King is accused of accepting more than $100,000 in bribes to turn a blind eye to irregularities.
• Investigators say even as Stanford claimed healthy returns for those investors, he was secretly diverting more than $1.6 billion in personal loans to himself.
• The indictment also says Stanford and the other executives misrepresented the Antigua island bank’s financial condition, its investment strategy and how it was regulated.

Prosecutors argued that Mr Stanford should not be granted bail.

At Stanford’s bond hearing, prosecutors argued he should be held without bond because he might have access to billions of dollars in secret funds.

In court documents filed Thursday, prosecutors also said Stanford faces a potential life sentence, has access to a private jet and has an international network of wealthy acquaintances who would help him, including one who recently agreed to give him $36,000 to pay his lease on a Houston apartment for a year.

Each of the most serious counts that Stanford faces carry prison terms of up to 20 years. But prosecutors say sentencing guidelines could increase his total sentence to life in prison.

Despite the huge financial suffering caused by Stanford Financial to 30,000 investors, as well as the flight of risk, the court set bond at a small $500,000 and gave prosecutors until Friday to appeal the decision. How likely is it that anyone with a secret $100 million bank account and facing a life sentence would be concerned about forfeiting a half million bond by fleeing the US to escape justice? This is no doubt a question that defrauded investors are asking.

Is This Man Smiling?

Picture Courtesy: Reuters

Other remarkable aspects of the Stanford Financial fraud are:

• How long will it take for investors to be suspicious of firms offering guaranteed rates of return far in excess of what is available elsewhere? No Ponzi scheme would work without the suspension of prudent judgment by investors blinded by ridiculous claims. Has no one ever heard of “the higher the return the higher the risk”?

• This is another case that should have caught the attention of the SEC long before Stanford could defraud thousands of people. Just as with the Madoff fraud, Stanford blatantly and publicly advertised untenable returns, a classic sign of a Ponzi scheme. The SEC blithely ignored or was oblivious to the obvious warning signs.

• It took 4 months to arrest Mr Stanford and he is now on bail, free to enjoy his life. At this rate of justice, Mr Stanford may get to spend the rest of his life immune from punishment and living a lavish life style courtesy of his secret bank accounts. Defrauded investors, dolefully seeking for perspective on this matter may consider the remarks of William Gladstone who stated that “justice delayed is justice denied”.

Comments

[Ray Winter:]

Stanford Free - Does crime pay?

If Stanford manages to abscond, he will be joining many others that have escaped justice, including many of the Insurance Company Directors that caused the "names" at Lloyds catastrophic losses to their personal wealth in the 80's.

Surely the SEC and all government appointed anti-fraud agencies should immediately investigate any financial organisation that advertises exceptional rates of return. It's all very well the agencies telling everyone after the event that they should be careful but they have a duty of care to us all. After all, we pay these useless agencies to govern and police the financial industry and if they fall down on the job, the Government should reimburse all those that lost money. Maybe we will then get the protection we all need from the increasingly sophisticated fraudsters.

Jun 26 08:56 AM

[wg:]

Too true. all they have to do is manage to get to Switzerland or someplace and hang on long enough for someone like the Clinton's to pardon them.

Jun 26 09:17 AM

[Swashbuckler:]

The rest of Stanford's life in Switzerland with $100 mil, or the rest of his life in prison with a couple of jars of vaseline---I wonder which of the two choices the swindled investors would vote for. As tragic as it is for those who were defrauded out of their life savings, I can't help but think they could have avoided it with even a tiny bit of research or due diligence. Based on the recent damning documentary of "Sir" Allen Stanford on CNBC, you would have to have been nearly blind or in total denial not to have seen that this guy is a crook.

Jun 26 10:09 AM

[Neil459:]

Seems there is no comment on why the SEC conveniently did not find these violations until after the financial crisis exposed the lies. In spite of the propaganda coming out of the SEC the real problem here is the SEC not Stanford. He was one company, the SEC is responsible for all companies and has inherent credibility problems that are not being addressed.

Where are the grand juries?

Jun 26 10:12 AM

[john s. gordon:]

'failure to investigate' has been standard practice @ the SEC.
> jack

Jun 26 01:17 PM

[notsosmart:]

all wall st is a ponzi scheme.this selective arrest among others is crazy. all ponzi schemes should be legal.if you are dumb enough & greedy enough to fall for these people you deserve to lose.made-off is a piker compared to the crooks & scoundrels that will never be charged or jailed.the sec has been & will be useless.the same is true of congress.so manage your own money to the best of your ability in facing a corrupt financial system that has no shame or ethics.i dont think the world has quite the view of capitalism it once had.who do you trust? nobody on this site has ever answered this question.

Jun 26 02:01 PM

[johnbee:]

It seems to me that Stanford, if you are correct in the way you describe his activities, is no better or worse than pretty much most of the US investment houses and hedge funds some of whom promise even higher returns and none with any meaningful guarantee of safety. Without US support for the US banks they would all have gone bust, and all depositors' money lost to some degree, so where's the difference? Why leave Stanford out?
There is too much pretence going on and a need to find scapegoats in order to take the spotlight off others just as irresponsible.
Frankly I would jail the lot of them and confiscate their assets but then who would run the banks? It seems the Government believes only crooks know how when actually its about as simple a job going so long as you don't get up to fancy tricks.

Jun 27 05:33 AM

[EttU:]

The SEC under Bush did all it could to avoid going after fraud and corruption. Their attitude let them do what whatever they could get away with.

Remember, it is Texas which gave us ENRON, Stanford and BUSH, need we say more.

Jun 27 05:54 PM