Tag: Stanford

Stanford Arrested

stanford

We saw it coming. It was like OJ in the Bronco. Last night, Sir R. Allen Stanford stepped out of his girlfriend’s house in Virginia, walked over the the FBI car parked out front and asked if they had an arrest warrant. They did. The grand jury had released its indictment.

The surprise was who else is included in the charges. I expected Laura Pendergest-Holt, chief investment officer of Stanford Financial. We knew about her problems as part of her Lawyer’s Noisy Withdrawal from Stanford Case. (He wasn’t her lawyer, which led to all kinds of trouble.)

Prosecutors also alleged that the fraud was aided by Leroy King, administrator of the Financial Services Regulatory Commission in the island nation of Antigua and Barbuda, where the Stanford firms were headquartered. Mr. King is charged with accepting $100,000 in bribes. They claim Leroy King facilitated the Ponzi scheme by ensuring that the FSRC “looked the other way” and conducted sham audits and examinations of Stanford’s books. Mr. King also provided Stanford with access to the FSRC’s confidential regulatory files, including requests by the SEC for assistance in investigating a possible Ponzi scheme.

The complaints also targeted Gilberto Lopez and Mark Kuhrt, accountants for Stanford-affiliated companies. It claims that they fabricated financial statements. Using a pre-determined return on investment number, Lopez and Kuhrt reverse-engineered the bank’s financial statements to report investment income that the bank did not actually earn. Information in Stanford’s financial statements and annual reports to investors about the bank’s investment portfolio bore no relationship to the actual performance of the bank investments.

We also learned that James Davis, chief financial officer of Stanford Financial, is cooperating with the investigation. He was named as a co-conspirator, but was not charged.

Vijay-Singh-StanfordIn other Stanford news, Vijay Singh walked out on the ninth green this morning sporting his sponsor’s logo and attire. The sponsor? Stanford Financial Group. I guess they are still sending him endorsement checks.

References:

SEC Settlements in Ponzi Scheme Cases: Putting Madoff and Stanford in Context

Charles Ponzi
Charles Ponzi

In the last six and half years the Securities and Exchange Commission has reached settlements with over 300 defendants in cases related to alleged Ponzi schemes. NERA Consulting has been tracking these SEC settlements since the Sarbanes-Oxley Act was enacted in July 2002.

In that time frame there have been 12 Ponzi scheme settlements that involved alleged fraud in excess of $50 million. Jan Larsen and Paul Hinton of NERA Consulting put together an overview of those 12 cases and their SEC Settlements: SEC Settlements in Ponzi Scheme Cases: Putting Madoff and Stanford in Context (.pdf).

Based on the settlement amounts shown in this report, things don’t look good for the Madoff investors. The settlement amounts are small, averaging less than 10% of the fraud size. Most of the total settlement amount is tied to the Private Capital Management, Inc. case where $112 million of the $145 was recovered.

nera_table

Thanks to Bruce Carton of Securities Docket for pointing out this report (via Twitter).

Lawyer’s Noisy Withdrawal from Stanford Case

sjoblomLawyers must protect their clients’ confidence, but they can’t aid in the commission of a potential crime. The Wall Street Journal covered some of the facts leading up to the “noisy withdrawal” of Thomas Sjoblom of Proskauer Rose LLP from their representation of the Stanford Financial Group: Top Lawyer’s Withdrawal From Stanford Case Waves a Flag.

There was much consternation over the idea of an attorney whistle-blowing on her client back when Sarbanes-Oxley was adopted. Legal ethics, business ethics and ethics were at odds. An attorney is divided between doing what is right for society at large, for her client and her own income.

Lawyers represent guilty people. They are there to help them through the legal system and ensure the government did not overstep its constitutional limitations. Stanford was in trouble and needed the help of lawyers. In this time of crisis Stanford’s lawyer ended his representation.

Charlie Green finds much fault with the approach and found the use of “disaffirm” to be a bit trivial for the magnitude of the underlying scandal.  Stephen Gillers in his comment points out that “the word ‘disaffirm’ is actually a term of art in New York legal ethics.”

I am giving Mr. Sjoblom the benefit of the doubt that he did not find out about the fraud at Stanford until sometime in late January or early February when they had to respond to the SEC subpoena. It certainly sounds like the February 10 testimony of Laura Pendergest-Holt, a Stanford executive, in front SEC investigators did not go well. She got arrested and Mr. Sjoblom made his noisy withdrawal.

There is a lot of work ahead for Stanford’s lawyers in sorting out the facts, defending the company and defending the executives. Sjoblom stepped away from this representation and turned down hundreds of thousands if not millions of dollars or revenue to be made from the representation.

There is a big difference between defending a criminal and being a witness to a crime. It sounds like Mr. Sjoblom realized that he had become a witness to a crime and incapable of defense.

Someday we may hear the true story of what happened. As with the Madoff scandal, I am very interested in finding out the underlying facts. Did they start out bad? If they originally had good intentions, what made these people go bad?

See also:

The Law:

17 CFR 205.3(b) provides:

Duty to report evidence of a material violation. (1) If an attorney, appearing and practicing before the [Securites and Exchange] Commission in the representation of an issuer, becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report such evidence to the issuer’s chief legal officer (or the equivalent thereof) or to both the issuer’s chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. By communicating such information to the issuer’s officers or directors, an attorney does not reveal client confidences or secrets or privileged or otherwise protected information related to the attorney’s representation of an issuer.

This regulation was promulgated under Section 307 of Sarbanes Oxley Act of 2002.

The Stanford Fraud

stanford logo

Yesterday, the SEC filed a complaint against R. Allen Stanford and three of his companies: Antiguan-based Stanford International Bank, Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management.

Tuesday morning, the Wall Street Journal reported on Stanford Depositors head to Antigua or Redemptions. Word had gotten out that the authorities were investigating the Stanford International Bank and depositors were nervous.

They should have been nervous when they first made the investments. According to item 31 in the SEC complaint, SIB was offering very high rates of return on CDs. On November 28, 2008 SIB was offering a 5.375% rate on a 3 year CD, while other US banks were offering rates under 3.2%. At the same time, SIB was saying the investments were safe and invested in very liquid assets. [Investing 101. The greater the risk the greater the rate of return you should expect.]

Unfortunately it looks like the problem has been in place for years. According to the SEC complaint [item 4] , SIB had identical returns in 1995 and 1996.

Bruce Carton points out that one of Stanford’s own lawyers has emerged as a key figure in the matter: Attorney for Stanford’s “Disaffirmation” of Prior Statements Was Red Flag for SEC. Bruce cites a Bloomberg report that Thomas Sjoblom, a partner at law firm Proskauer Rose doing work for Stanford’s company’s Antigua affiliate, told authorities that he “disaffirmed” everything he had told them to date.

Felix Salmon, of Portfolio.com, first pointed the problems with Stanford International Bank on February 10: What’s Going On at Stanford International Bank? Felix noted that Stanford had very consistent returns that seemed to not be impacted by any of the gyrations of the market over the last few years. Feliz also dug up a report by Alex Dalmady that highlighted the problems.

I see many similarities to the Madoff scheme. The principal was well respected. (Antigua even bestowed knighthood on him.) Investors were promised safety. Investors were shown reasonable, consistent returns. The investment technique was obscure.

Unlike Mr. Madoff, it looks like Mr. Stanford took off in one of his private jets and authorities are still looking for him.

See also: