Allen Stanford Ponzi Scheme: Fraudulent Activities And Regulatory Failure

Background of Allen Stanford

Discuss about the Allen Stanford Ponzi Scheme.

Ponzi scheme started back in 1919 when Charles Ponzi tried to take advantage of existing arbitrage in the price of International Postal Reply Coupon between Spain and the United States. Ponzi scheme is a type of investment fraud where the illusion is created for solvency of the company by paying off the early investors with the money collected from the fresh investors and the loop continues (Holder 2016). The organizers of Ponzi scheme attract the fresh investors by promising high returns with no or little risk (Frankel 2012).

The focus of Ponzi scheme is to keep creating new investors. This gives a loose end to the scheme. There must be a continuous flow of new investors and money to keep the trust of early investors by paying them off their expected return, and if it fails then the entire, Ponzi scheme collapses (Sheffrin 2013). The two main reasons can be identified for an unsuccessful Ponzi scheme: first if no new investors are created and second if large numbers of early investors ask for liquidation or back-out from the scheme (Will 2012).

The scheme is highlighted with the recent fraudulent activities in U.S.A., especially in case if Allen Stanford.

Allen Stanford was born in Mexia, Texas on 24 March 1950. He completed his BA degree in Finance from Baylor University in Waco, Texas. Allen’s father and grandfather together established the Stanford Financial in 1932, which was later on taken over by Allen himself. Allen got a bright opportunity in 1983 when there was a Texas oil bubble burst. There was a sudden decline in the house prices by approx. 22% in Houston (Rushe 2012). Allen took advantage of this situation and bought real estate at cheaper rates from the banks that needed liquidity. In fact, Stanford Financial was the only company to buy real estate during this declining phase. Over the period of 10 years, the economy recovered and Allen made huge money with those real estates. This gave a massive capital improvement to the company and from there Allen took on the path of fraudulent activities (Mullenix 2013).

Stanford Group Company, subsidiary of Stanford Financial Group was established in 1995 and was registered under Securities and Exchange Board (SEB) as a broker-dealer and investment advisor. The company pursued the investors to sell Certificate of Deposits (CDs) in Stanford International Bank with a guarantee that the U.S. securities have insured these CDs. However, none of the CDs was insured. The investors, if asked for any details, were manipulated and misguided by Stanford. He promised the investors of greater returns with no risk. The most astonishing part of this scheme is that despite several warnings the authorities did not take any major step and turned blindfolded (West 2014).

U.S. Regulatory and Allen Stanford

The $7 billion fraud by Allen Stanford has been hinted to the government much earlier than it was actually taken into account. Allen was able to survive so long without any interference from the regulatory authority as he had invested in the regulatory protection, thus, he was never questioned as to how he could pay such huge dividends, even though it raised high suspicion. The Securities and Exchange Commission (SEC) has been give four warning regarding the suspicious activity in the Stanford Financial Group; however, the investigation never took place (Deason, Rajgopal and Waymire 2015.). The SEC gave various reasons for not conducting the investigation. The main reasons are as- the complexity of the case, other cases that were of high priority and lack of experienced officials to conduct such big and time-consuming case (Andrew Alderson 2017).

The enforcement director of SEC, Spencer Barasch was in full support of Allen Stanford. He discouraged or terminated all the cases related to Stanford that came to SEC. In addition, he once asked Stanford if there is anything wrong and just relied on the verbal comment and closed the case without further investigation (Forbes.com 2017). However, he denies such accusations now, but the facts cannot be overlooked. These drawbacks in the regulatory system helped Stanford to carry on with huge fraudulent activities for such a long period. On 15 January 2012, U.S Justice Department charged Barasch for blocking the investigation of Stanford thrice and made him pay $50000 as fine (Forbes.com 2017).

SEC has accused Stanford of misguiding and manipulating investors by saying that the CDs are insured and is being invested in the risk free securities whereas the same has been invested in the real estate and non-liquid equity. The point to note is that the money was indeed invested. Stanford adopted the advertising policy where it was clearly mentioned that the investments made by the investors would be invested in an alternative investments. This advertisement is nowhere deceiving in nature (Ibrahim 2017). It may so happen that the liquid investment converts into the frozen one in few years. In addition, the higher rate of interest on CDs guaranteed by Allen Stanford cannot raise much suspicion as even banks as Citibank offers a guaranteed rate of interest on CDs. The only difference that exists is in case of decline in the investment, where the investors of Citibank get their guaranteed return from the government but investors of Stanford did not have such backup (Forbes.com 2017). These policies of Allen Stanford helped him run his fraudulent activities without any suspicion. Moreover, not just the investors, even the worker or employees of Stanford Financial Group were unaware of the fraud existing in the company (Adelmann 2017). Allen Stanford made them believe that the investment in genuine. This was his biggest victory as if the employees cannot sense the fraud, there was no scope for the investors would do so. In the interview with the Forbes, many employees agreed of their unawareness about the fraud practices. However, they believed that there was something secretive about Allen Stanford but that never raised a suspicion of fraud among the employees (Forbes.com 2017). Some of the illegal practices that were followed by the Stanford that kept him continue with the fraud are as:

Business culture of Allen Stanford

He prohibited the financial advisors from filing of the mandatory security form for those clients that had IRA accounts having the CDs of Stanford International Bank.

He never informed the IRA account holders about the criminal and civil penalties that can bestow on them for non-filling of of mandatory security form.

He violated the FINRA (Financial Industry Regulatory Authority) as he misleads the potential investors by purposely overstating the individual’s asset value.

He destroyed all the electronic data during the SEC investigation to cover his fraud.

Exposure of Allen Stanford

The following are the reasons for the detection of Stanford’s fraud

The failure of government to detect the Madoff’s Ponzi scheme created an alarming situation. The government was more alarmed towards any investment scheme that offered a good interest on a constant basis. The fact that Stanford was registered both as broker dealer and investment advisor with the Antiguan Bank offering high rate of interest without any significant risk was too good to believe for anyone. This was similar to the one of the biggest Ponzi scheme fraud by Madoff. Therefore, SEC finally conducted an investigation on Stanford and presented him before the court (Hauge 2014).

The four investigations that were manipulated by the enforcement officer of the SEC were held on 1997, 1998, 2002 and 2004. Even though the results were manipulated and hidden from the government, each of them concluded the same thing that in no circumstances the return offered by Stanford can be earned from normal investment scheme (Stecklow 2017). This was similar to the previous instances of Ponzi scheme and fraudulent activities. In 2005, the leadership of SEC changed and the investigation against Stanford was reopened. SEC challenged Stanford in court after the confession of Bernie Madoff and thus the Ponzi scheme collapsed (Sher 2016).

The case of Allen Stanford involves big scandal and fraud of $7 billion and thus there were many legal proceedings on the case. In 2012, Allen Stanford was convicted for practicing the Ponzi scheme since last 20 years. Stanford was sentenced for an imprisonment of 110 years. The court also claimed that the 29 financial accounts that was located abroad having total net worth of $330 million were fraud and were forfeited(Justice.gov 2017). Even though the sentence has been given, this case is an open case. Allen Stanford has filed a petition on the Supreme Court to challenge the decision. However, the Supreme Court has denied the petition of Stanford and the sentence of 2012 still beholds. Stanford has given a 299 pages brief description stating fifteen reasons to set him free. Stanford argues that the company did not do any fraud and it was because of the government that the prestige of Stanford Financial Group was destroyed and the value of company went down. The lawyers on behalf of Stanford claims that Stanford had been received the returns on the investment of the investors but the accusation of SEC had made the investors to lose faith on the company that resulted in the collapse of entire business (Justice.gov 2017).

Exposure of Allen Stanford

The claims made by Stanford are not considered true. All the victims who have invested in the company by having a good faith on Stanford have not received any thing in return and are facing severe losses. Thus, the appeals made by Stanford are in no ways justified. This is the reason even the Supreme Court denies the plea of Stanford to reconsider his sentence. Ever since the scandal of Stanford had been detected in the year 2009, approx 176 investors died due to the immense loss they suffered. It was disclosed that the CDs issued by Stanford was not secured and neither was it invested in any liquid securities as conveyed to the investors. The investor’s money were invested in the real estate for the own benefits of Stanford. The loss of investors have not yet been recovered and they have got only 1 penny for every 1 $ invested by the investors, that shows the intensity of the loss suffered due to Stanford’s fraudulent activities. Stanford’s victims are eagerly waiting for the court to finally close the case and take strict actions against Stanford and recovery of their investment. This grief of the investors is a proof of the fraud by Stanford and justifies the fact that the claims made by Stanford are baseless and cannot be hold good (Liptak 2017.

Conclusion

Allen Stanford has given the second biggest Ponzi scheme fraud by making 30000 investors to invest in the CDs offered by him and involving a fraud of $7 billion. This fraud is considered one of the worst till date as it includes so many investors and the recovery of each investors has only been a penny of every dollar invested. The cash crunch and decline in asset value of Stanford Financial Group has affected the ultimate recovery of investor’s money. This loss suffered could have been control had this fraud been detected early.  The Ponzi scheme has a very similar nature is all situations so there must be a strict regulations to check any suspicious activities that hints toward such fraudulent activities. This huge fraud has shown the position of regulatory authority and created an alarming situation for them to stop any such upcoming fraud. It has become important to have s strict check on any kind of suspicious investment scheme and take appropriate actions. It is also important to take a fast decisions in matter related to such big frauds. The proceeding of Stanford has been going on since long time and the case is still open. The judiciary system should be stronger to take necessary actions on a fast track basis to prevent loss of economy in the future. Not only this, but also the awareness is to be created among the investors so that they do not make investment in such fraudulent scheme and are much more careful regarding any other investment plans. 

References

Adelmann, B. (2017). Allen Stanford’s Ponzi Scheme a Study on Regulatory Capture. [online] Thenewamerican.com. Available at: https://www.thenewamerican.com/usnews/crime/item/7595-allen-stanford-s-ponzi-scheme-a-study-on-regulatory-capture [Accessed 10 Jan. 2017].

Andrew Alderson, a. (2017). Sir Allen Stanford: how the small-town Texas boy evaded scrutiny to become a big-time 'fraudster'. [online] Telegraph.co.uk. Available at: https://www.telegraph.co.uk/finance/financetopics/sir-allen-stanford/4742924/Sir-Allen-Stanford-how-the-small-town-Texas-boy-evaded-scrutiny-to-become-a-big-time-fraudster.html [Accessed 10 Jan. 2017].

Deason, S., Rajgopal, S. and Waymire, G.B., 2015. Who gets swindled in Ponzi schemes?. Available at SSRN 2586490.

Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/johnwasik/2012/03/07/stanfords-ponzi-scam-the-system-is-still-broken/#52d3bb4b14c9 [Accessed 10 Jan. 2017].

Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/nathanvardi/2012/06/15/allen-stanford-spain-jamie-dimon-and-the-power-of-deposit-insurance/#22e842e473a [Accessed 10 Jan. 2017].

Forbes.com. (2017). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/nathanvardi/2012/03/06/allen-stanford-convicted-in-7-billion-ponzi-scheme/#5e17d6ba2b08 [Accessed 10 Jan. 2017].

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Hague, D.R., 2014. Expanding the Ponzi Scheme Presumption. DePaul L. Rev., 64, p.867.

Holder, F., 2016. Integrity in Business: Developing Ethical Behavior Across Cultures and Jurisdictions. CRC Press.

Ibrahim, J. (2017). Allen Stanford: Descent from Billionaire to Inmate # 35017-183. [online] CNBC. Available at: https://www.cnbc.com/id/49276842 [Accessed 10 Jan. 2017].

Justice.gov. (2017). PENDING CRIMINAL DIVISION CASES | CRIMINAL-VNS | Department of Justice. [online] Available at: https://www.justice.gov/criminal-vns/case/stanfordr  [Accessed 10 Jan. 2017].

Liptak, A. (2017). Supreme Court Permits Investor Lawsuits in Stanford Fraud. [online] Nytimes.com. Available at: https://www.nytimes.com/2014/02/27/us/politics/supreme-court-permits-investor-lawsuits-in-stanford-fraud.html?rref=collection%2Ftimestopic%2FStanford%2C%20Robert%20Allen&_r=0 [Accessed 14 Jan. 2017].

Mullenix, L.S., 2013. The $7 Billion Stanford Ponzi Scheme: Class Litigation Against Third-Party Actors Under the Securities Litigation Uniform Standards Act.

Rushe, D., 2012. Allen Stanford guilty of $7 bn Ponzi scheme. The Guardian.

Sheffrin, S.M., 2013. Restitution for Ponzi Scheme Victims: The Symbiotic Relationship of Tax and Securities Laws.

Sher, Y., 2016. Branding in Ponzi investment schemes (Doctoral dissertation, The IIE).

Stecklow, S. (2017). Hard Sell Drove Stanford's Rise and Fall. [online] WSJ. Available at: https://www.wsj.com/articles/SB123871796188984821 [Accessed 10 Jan. 2017].

West, H., 2014. Ponzi Scheme.

Will, S., 2012. America’s ponzi culture. How they got away with it: White collar criminals and the financial meltdown, pp.45-67.