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:

Sir Allen Stanford gets life sentence

Well, the US Justice Department comes through on Ponzi schemer, Allen Stanford and sentenced him to 110 years for running his $7 billion Ponzi scheme. 

Unless you follow fraud like I do, you probably have never heard of Stanford. That is one bizarre effect of the Bernie Madoff fraud. If Madoff hadn't come to light about two months before the Stanford fraud came to light, everyone would know Sir Allen since his Ponzi scheme would have been known as the largest in history, by far. If you want to learn more about Sir Allen, including why I refer to him as "Sir" you can read the posts linked here.

Now, I just hope the Justice Department decides to prosecute some of the fraudsters who caused the mortgage meltdown and put the world economy in a the great recession...

Stanford Convicted on 13 of 14 Counts

Allen Stanford has been been convicted of fraud.

Catching up on fraud in the news

Olympus Scandal Leads to Arrests: Seven employees have been arrested in conjunction with the alleged financial statement fraud at Olympus.  Whether those arrests will lead to criminal punishment remains to be seen:

Under Japanese securities laws, the men arrested Thursday could each serve up to 10 years if found guilty. But convictions for white collar-crime have been rare in Japan, and courts have been known to hand down suspended sentences even in egregious cases.

Alan Stanford's Ties to Soc Gen Probed: Stanford is alleged to have used a Swiss bank account with Societe Generale as a slush fund through which he bribed regulators and auditors.  Soc Gen is also being accused of having had knowledge of Stanford's dealings and to have profited thereby.  From the article:

“SG Suisse had a special, extensive, symbiotic and nefarious relationship with Stanford from which it greatly benefited,” the lawsuit says, alleging that by December 2008, bank officials “realized the Stanford Entities were insolvent,” and the bank wanted its money bank. 

The SEC's Record with Large Ponzi Schemes: Not So Hot

I've been listening to Harry Markopolos's book, "No One Would Listen: A True Financial Thriller" (I recommend it by the way) and have been surprised at how much of the book is devoted to criticizing the SEC. From Harry's account, the SEC totally dropped the ball and was incompetent, corrupt or both in how it handled the Madoff case. I personally think he has a pretty good argument and that the SEC has managed to avoid serious consequences even though the Madoff case was a tragedy that they could have prevented.

Well, now that the Stanford Ponzi scheme is being tried, we are learning that the SEC also dropped the ball with Sir Charles. It may be that the SEC really doesn't understand Ponzi schemes or that they are underfunded, undereducated, understaffed and under-incentivized. All we know for sure is that they appear to be underperforming. Reuters has an article that talks about how Sir Charles was able to keep the SEC at bay for so many years while he built his Ponzi empire, complete with retail offices in the U.S. I recommend it for further insight.

One claim by Markopolos is that the SEC staff are all basically looking for a job in industry to make more money. As such, when they go to investigate a firm, they also ask for a job application. The Reuters article seems to add a second witness to this claim as it describes a former SEC investigator by the name of Barasch and his role in helping Stanford stay out of the SEC's crosshairs:

Barasch was told at the time by an SEC ethics officer that he was legally precluded from representing Stanford. Barasch went to work for Stanford anyway. In a later investigation of the failure to catch Stanford earlier, the SEC Inspector General asked Barasch why he did so. His reply, according to the Inspector General's report: "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines." 

FBI agents and prosecutors also uncovered evidence that on at least two occasions Barasch sought confidential information regarding the SEC's probe of Stanford during his brief representation of the banker, Justice Department officials said in court records and a press release. 

In agreeing to pay the fine, Barasch denied any misconduct, settling the matter "to avoid the expense and uncertainty of protracted litigation," his attorney, Paul Coggins said.

Another claim by Markopolos is that the SEC seemed to avoid taking on the Madoff case because it was too large and complex. Instead, they went after cases that Harry describes as fleas while the elephant (Madoff) was running free. This Reuters article also seems to bear this out in the following quote:

In 1997, 1998, 2002, 2004, and 2005, according to internal agency records seen by Reuters, examiners for the SEC recommended that the agency investigate Stanford. In three of those instances, Barasch, at the time an SEC official in Ft. Worth, personally overruled the examiners' recommendations, according to those records. Those decisions helped the Ponzi scheme to continue unabated for several additional years, costing investors additional billions of dollars, according to a report by the SEC's Inspector General. 

Barasch told the SEC Inspector General that he made those decisions because he was not sure the SEC had the statutory authority or jurisdiction to investigate. He blamed his superiors and a broader culture within the SEC for pressuring the staff not to pursue complex and difficult cases, according to the Inspector General report. 

Apparently, Barasch was able to help Stanford both while he worked for the SEC and after he went to work for Sir Allen (i.e. Stanford) himself. Sounds like a bad case of a corrupted fraud investigator. I have a feeling I will be reading another book in the future about how the SEC dropped the ball in the Stanford Ponzi scheme too, costing thousands of people billions of dollars.

Stanford Trial: Two Friends Become Enemies

The NY Times discusses how the trial regarding the alleged Ponzi scheme run by R. Allen Stanford will pit Stanford against his long-time friend and CFO of Stanford Financial Group before it collapsed, James M. Davis. It's a classic example of the Prisoner's Dilemma. Here are some excerpts:

Another Link Dump

Here are a few more links to keep you up to date on the latest fraud-related news:

Happy New Year and A Few Links

Happy New Year! While I've never really been one for New Year's resolutions, I do intend to post more often over the next year. In the meantime, I've been collecting links to write about on FraudBytes and I've fallen a bit behind. In an effort to purge my queue, here are a few articles worth reading: 

Sir Allen Stanford: Prison Beating and Drug Treatment

Allen Stanford--Accused of $7 billion Ponzi Scheme

Although it's been some time since I've posted anything on Sir Allen Stanford and his $7 billion Ponzi scheme investigation (see this link for prior posts mentioning Stanford), I've been following his case and thought I'd share the latest news on the Knight from Antiqua or the Scammer from Texas, depending on who you talk to.

Stanford was supposed to go to trial last month. However, it appears now that his trial will be postponed for several months. The reason is because he's recovering from his cushy life in prison (not). Just yesterday, in my fraud class, I talked about the myth that white collar criminals have a cushy life in prison. I showed my class what Mark Morze, the former ZZZZ Best fraudster, said about white-collar-prison life.

In an interview several years ago, Morze explained his five years in prison in Lompoc, California. Here are some quotes from an article describing Morze's experience:

Dodd-Frank and Whistle-blowing to the SEC

I just read an interesting post in the NY Times about how the new Dodd-Frank financial regulations bill will provide an incentive for whistle-blowers to give information about various frauds to the SEC. Apparently, deep in the bowels of the 2,500 page Dodd-Frank bill that overhauls our financial regulatory system is a provision that requires the SEC to award whistle-blowers 10-30% of monetary sanctions collected by the SEC that exceed $1 million.

 The NY Times post also said that while the amount of the award must range from 10-30% of the sanctions, the exact amount awarded is up to the discretion of the SEC. Also, the whistle-blower must meet certain conditions in order to collect under Dodd-Frank.  Here is what the post said about the requirements:

SEC to require disclosures on global warming risks

Yes, that's right, the SEC has announced that it wants public companies to try to estimate the risk that global warming poses for their assets or operations! No, I didn't get this off The Onion News Network either! Just do a Google Search and you will see articles in The NY Times and elsewhere.

So what does this mean? I suppose, for example, if the company believes it is too close to the rising oceans and could be under water sometime in the next millennium then it needs to disclose that risk! Also, if a company believes legislation on global warming could negatively impact future earnings then the company needs to disclose that risk.

I personally think that the effects of global warming are so hard to predict that companies could comply with this requirement in one sentence: "The effects of global warming or legislation related to global warming on the Company's assets or operations are not estimable in any reliable way." Seems like some wasted ink to me. Maybe the SEC wants companies to say something like: "The impact on the environment from the extra paper necessary to disclose the possible effects of global warming will not lead to any serious litigation since the company is required by the SEC to go through this silly exercise!"

We can only assume that the SEC will be spending time and money reviewing these disclosures to determine if companies are sufficiently complying. Never mind that they had their hands full and failed to regulate some huge Ponzi schemes such as those operated by Bernie Madoff and R. Allen Stanford before investors lost tens of billions in these schemes! Is this really a priority?!

It seems that investors have serious risks of fraud in this world. Scammers such as Madoff, Pang, Stanford, and companies such as Enron, Worldcom and Satyam need to be regulated and shut down. The SEC needs adequate resources to do these jobs and it has appeared to lack the necessary funding for decades. However, if this is their focus in the future then I question whether voters will sympathize with their calls for additional funding!

Sir Allen: Proof that what goes up must come down!

Here are a few quotes from a recent NY Times article reporting the woes of Sir Allen:

(T)he Texas financier accused of a $7 billion fraud, has no money to pay a lawyer so a federal judge on Tuesday ordered a public defender to take over his defense.

...

Mr. Stanford, who once traveled by private jet and owned yachts and luxury homes in Texas, the Caribbean and Florida, has been in jail since June, when criminal charges were filed.

For some reason I don't feel too sorry for him...However, I do have compassion on the people who thought they had $7 billion in legitimate certificates of deposit and found out they had nothing but a share of a Ponzi scheme...

Stanford CFO Pleads Guilty

As expected, Stanford Financial Group's CFO, James Davis, pleaded guilty today to fraud and conspiracy, admitting that "he and others had knowingly bilked Stanford investors for nearly two decades." (via WSJ) Mr. Davis's plea agreement included something curious:

In Mr. Davis's signed plea agreement, federal prosecutors allege that Mr. Stanford performed a "'blood oath' brotherhood ceremony" with a Caribbean banking regulator. The oath sealed an agreement that the regulator, Leroy King, would accept cash bribes and in return ensure that the Antigua Financial Services Regulatory Commission wouldn't "kill the business.

Although we already knew that Leroy King has been accused of accepting bribes to keep Stanford's alleged fraud alive, a "'blood oath' brotherhood ceremony" seems like a pretty extreme way to formalize an agreement to defraud others. It seems like most schemes to conceal a fraud have "good" intentions--something like, "If we don't fudge these numbers, we may have to lay off workers; besides, next quarter will be better and nobody will know," as opposed to an overt, "Let's work together to defraud these people." Framing the scheme with "good" intentions makes it easier for participants to rationalize the fraud. However, assuming this story is true, Stanford, King, Davis, and whoever else knew about his ceremony didn't seem to have any problems rationalizing their overt decision to defraud others...

A minor $700 million Ponzi scheme

Last week, Mark S. Dreier was sentenced to 20 years in prison for running a $700 million Ponzi scheme. Since Bernie Madoff and Sir Allen Stanford have stolen the fraud spotlight in the news, we hardly take notice of these frauds amounting to less than several billions of dollars. It seems that our sense of awe has been permanently warped.

As for Mr. Dreier, he explained his pressure to commit the fraud came because those that he associated with were doing “better financially and seemingly enjoying more status,” and that he felt “crushed by a sense of underachievement.”

He continued: “I was desperate for some measure of the success that I felt had eluded me,” he wrote, adding: “I lost my perspective and my moral grounding, and really, in a sense, I just lost my mind.”

I guess this is a lesson to be careful about how those you associate with may be warping your sense of reality and your priorities. Maybe Mr. Dreier is a reflection of many Americans who got caught up in the real estate boom that has come crashing down of late.

Catching Up

I know what everyone must have been thinking over the past few days: the Zimbelmans must have been busted for running a ponzi scheme and it hasn't been in the news because it has been overshadowed by the Madoff and Stanford frauds...

Actually, although some have suggested that either my dad or I commit fraud to give our blog more credibility (see Sam Antar or Barry Minkow), neither of us are quite ready to take that step.

During our 10 day hiatus, the fraud world has kept busy. A few interesting stories:

1. An elaborate scheme to defraud state auditors and other vendors is unraveling (source):

North Carolina records show that "Christina Ann Clay" set up three corporations on Jan. 6: Deloite Consulting, Unisyss Corp. and Acenture Corp. The Clay identity was employed again March 16 to register a fourth name, Electronic Data System Corp.

Each name is similar to that of legitimate companies that West Virginia has done business with, to the tune of $202 million since the 1990s, the auditor's records show.

West Virginia isn't the only state to be hit by this scheme--the scammers are also being investigated in Utah and may have defrauded numerous other states. Looks like an epidemic of poor internal controls.

2. Madoff's auditor pleads not guilty

3. Stanford is still complaining about having to account for his assets before the judge will release funds to pay for his defense. Stanford claims that such an accounting would violate his Fifth Amendment privilege against self-incrimination. Sounds pretty sketchy to me...

Dodging the Regulators

Not only did Allen Stanford get help from Antiguan regulators, he also found ways to escape oversight in the US. The Miami Herald reports:

Years before his banking empire was shut down in a massive fraud case, Allen Stanford swept into Florida with a bold plan: entice Latin Americans to pour millions into his ventures -- in secrecy.

From a bayfront office in Miami in 1998, he planned to sell investments to customers and send their money to Antigua.

But to pull it off, he needed unprecedented help from an unlikely ally: The state of Florida would have to grant him the right to move vast amounts of money offshore -- without reporting a penny to regulators.

He got it.

Over objections by the state's chief banking lawyer -- including concerns that Stanford was laundering money -- regulators granted sweeping powers never given to a private company.

The new company was also allowed to sell hundreds of millions in bank notes without allowing regulators to check for fraud.

What good are regulations if companies can be granted exemption from regulatory oversight?

Behind Stanford's Back?

Stanford's number two man, former CFO James Davis, will plead guilty to the charges leveled against him. Stanford's lawyers respond by claiming that Mr. Davis acted without Mr. Stanford's knowledge (via Houston Chronicle):

“If Mr. Davis committed crimes, it was without the knowledge or approval of Allen Stanford, and Mr. Davis will have to answer for those crimes,” DeGuerin said. “It is human nature for a criminal to try to shift the blame for his own conduct in order to make a deal with the prosecution for a lesser sentence and to escape full responsibility for his crimes.”

Let’s assume for a second that Stanford had no knowledge of any wrongdoing by Mr. Davis (which, in my opinion, is highly doubtful). In such a situation, wouldn't it be grossly negligent of Stanford to have no knowledge of activities related to the core business of Stanford Financial Group?

Multimillion Dollar Legal Defense?

Before Allan Stanford can spend millions of dollars on his legal defense, he must prove that those funds are clean (via the Houston Chronicle):

A Dallas federal judge won’t release millions of dollars for R. Allen Stanford to pay his legal team unless Stanford can account for his assets and show that money he wants unfrozen isn’t tainted by the $7 billion fraud he is accused of running.

While Stanford deserves fair legal representation, I think this is a great move by the judge--Stanford shouldn't be able to spend a fortune on his defense with funds that may have been obtained through a Ponzi scheme.

Sir Allen Stanford to stay jailed

The WSJ reported that the courts have decided that Allen Stanford needs to remain in jail until his court case is completed. The judge said:

"Stanford is a serious flight risk and there is no condition or combination of conditions of pretrial release that will reasonably assure his appearance as required for trial."

Apparently, evidence was presented to the judge that Stanford had a friend get his Antigua passport and bring it to him in Houston and that he had withdrawn $100 million from a Swiss bank account.

Judge to decide if $500 k bail bond is enough to stop Stanford from fleeing

If he really is the mastermind behind a $7 billion Ponzi scheme, do you think he would be worried about losing $500k?