Thursday, July 12, 2012

Revisiting Allen Stanford's Ponzi Scheme

While Bernie Madoff has claimed the bulk of the spotlight in fraud related news over the past few years, Allan Stanford's fraud isn't just another Ponzi scheme, as highlighted in this interesting article by DailyFinance.  Here are some of the highlights:
On the status of Stanford's victims:
If any one statement sums up the gut-wrenching experience of Stanford Financial's victims, it's Angela Shaw's lament: "It's sad as a Stanford investor to wake up each day and think today I hope I can be as lucky as a Madoff victim."
Looking simply at the raw numbers of potential recoveries reported by the trustees of both receiverships compared to the actual losses, Madoff victims could be looking at recouping as much as $0.50 on the dollar, while it could be more like $0.15 for those taken by Stanford.
On the design of the fraud:

If there was any twist of genius in Stanford's execution, it was planting the heart of his international fraud in lightly regulated Antigua. Leroy King, the former head of Antigua and Barbuda's Financial Services Regulatory Commission, may have been of particular help in keeping Stanford International Bank out of hot water by turning a blind eye to management's misdeeds. He is currently fighting extradition to the U.S. over bribery accusations. 
However, it's a wonder that bribery was even necessary. 
Stanford was so powerful and well regarded that when Antigua wanted to reform its banking laws in the 1990s it put him in the driver's seat. When the new rules were written, Stanford was named to the very regulatory body charged with overseeing his bank. By 2004, the Antiguan government had loans outstanding from Stanford Financial to the tune of $87 million and it had helped bankroll a new hospital complex for the island. More broadly, Stanford's presence in Antigua was singlehandedly changing the economic trajectory of the small island.
On the failure of the SEC and the power of performance-related incentives:
We found evidence ... that SECwide institutional influence within Enforcement did factor into its repeated decisions not to undertake a full and thorough investigation of Stanford, notwithstanding staff awareness that the potential fraud was growing. We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought... As a result, cases like Stanford, which were not considered "quick-hit" or "slam-dunk" cases, were not encouraged. 
And some big-picture takeaways:

It'd be great at the end of this to say that we're now smarter, wiser, or better regulated to head off the next Allen Stanford. But we're not. From Charles Ponzi himself to Bernie Madoff and Stanford, history has proven over and again that slippery conmen will find ways to get their greedy hands on other people's money. 
Regulators clearly failed spectacularly here. They can, should, and need to be better and we need to encourage that by shining light on botched cases like this one. Unfortunately, though, there will always be those scammers who manage to slip through and so it will always be imperative that investors temper their faith in regulators with healthy doses of incredulity and caveat emptor.

I think that this last line brings up a point that bears repeating.  That is, we are kidding ourselves if we think we will ever have a system that will keep investors from needing to exercise sound judgment and/or common sense.

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