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The Stanford Ponzi Scheme: A Big, Black Eye for the SEC?

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With Madoff in our rearview mirror, we’ve finally gotten past the worst scandals of the 2008 financial meltdown, right? Not so fast. According to Securities attorney Andrew Stoltmann, the upcoming trial of Allen Stanford for financial improprieties, including a Ponzi scheme, could give the SEC and FINRA an even bigger black eye than Madoff.

I wish this was an early April Fool’s joke, but it’s not. According to Stoltmann, “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. 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.” 

The following are ten red flags Stoltmann has identified that the SEC either missed or ignored, regarding Allen Stanford and his looming trial.

  1. Several investigations:  Stanford’s businesses were inspected and investigated several times, starting in 2004 by the National Association of Securities Dealers (NASD), the brokerage industry’s self-policing group. 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.  
  2. Past Ponzi schemes:  A 2006 lawsuit by a former employee alleges that Stanford’s company ran a Ponzi scheme. An OIG investigation later found that the SEC’s Fort Worth office had been aware since 1997 that Stanford was likely operating a Ponzi scheme.
  3. Stanford’s company lacked capital: In June 2007, 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.
  4. Destroyed documentation: In January 2008, two ex-employees asserted that Stanford’s Antigua bank, Stanford International Bank Ltd., sold CDs based on inflated returns and had destroyed documents.
  5. All in the family: The board of directors included Stanford’s father, his college roommate and a family friend who remained on the board years after suffering a debilitating stroke.  Regulators could have easily learned this. 
     
  6. Unknown auditor: The Antigua-based accounting firm that audited the offshore bank was tiny and unknown.
  7. Treasury department advisory: A 1999 Treasury Department advisory warned U.S. banks to scrutinize transactions involving Antigua. It said a new regulator in Antigua was essentially a captive of offshore banks it was meant to supervise (the advisory was lifted in 2001). 
  8. False tradition: Company documents referred to a 70-year tradition of client relationships. Yet there is no record of his bank having existed before the 1980s. A simple background check would have uncovered this. 
  9. Misinterpreting performance: The bank had been misinterpreting its performance since at least 2004, according to court papers.
  10. Steady returns in a down economy: Stanford’s firm saw steady returns, year after year, even in down markets. For example, in 2008, a year when many stock market indexes lost around 40 percent, the company claimed losses of only 1.3 percent.