March 9, 2009

The Downhill Danger of the Stanford Scandal

The demise of the Stanford Group has caused quite a whirlwind in the Baton Rouge area, where I practice, since ithad a significant presence here. As a result, there will be many clients searching for a new advisor. To this end, I have purchased 32 local radio advertising spots and am holding two seminars with the intention of helping clients through this situation. I will also discuss the current economy and financial markets.

The fraud involved here has indeed created a very sad situation for those who had invested their money in Stanford's high-yielding CDs. It has also altered the lives of the Stanford employees. I suspect when it's all said and done, clients will end up losing most, if not all, of their investments.

To make matters worse, these clients paid income taxes on the interest the CDs earned over the years. The problem is, if it turns out to be a Ponzi Scheme, then it was not a CD, and since no interest was paid, no taxes would have been due. It would be classified as a return of their investment which is not taxable. To further complicate matters, you can only go back three years to amend an income tax return. So it would seem that investors who paid taxes on the interest before that are out of luck.

Getting back to this week, an interesting event occurred. I received a call from someone in New York who works with a company called NHK. What's NHK, you ask? NHK is also known as the Japan Broadcasting Corporation and is second in size only to the BBC. The representative said NHK was filming a documentary about the Stanford Group fraud case and had a film crew in town seeking an interview. We spent about two hours together on Friday.

There is one other thing I'd like to say for the record. I worked for the Stanford Group from October 1998 until May 2001. During my time there, I got to know, and became friends with, the other advisors. I have a high respect for them and would have a hard time believing they had any knowledge about the fraud being perpetrated by Allen Stanford. I am not casting any aspersions on them. That said, I do think they should have been suspicious of the extraordinarily high interest being paid on the CDs.

With the markets in such disarray, the last thing investors need is a fault line in the foundation of trust.

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