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Stanford and Madoff-Who’s to Blame?

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Thursday, May 21, 2009

Baton Rouge, Louisiana

STANFORD AND MADOFF HAD ACCOMPLICES:

THEIR VICTIMS!

There are three things you should learn early in life. Don’t play poker with a guy named Slim. Don’t buy a Rolex form a guy on the street who’s out of breath. And don’t put your money in some exotic investment where the returns are just “too good to be true.” And to see who didn’t follow these rules, just take a look at the Stanford Group and Bernie Madoff.

The Stanford Group, headed up by higher roller Sir Robert Stanford, was a major investment player in Louisiana. Of the $9 billion raided by Stanford in the U.S. and more than 100 other countries, $2 Billion came from Baton Rouge and Lafayette alone. But when all was said and done, the whole financial portfolio was nothing more than a Ponzi scheme, where early investors get paid with the proceeds of later investors.

According to Bloomberg News, Stanford financial advisers told potential clients they were selling CDs in the Bank of Antigua. `The money, according to the sales pitch, was that the funds would be placed in “mainly easily sellable financial instruments,” all to be monitored by a team of “more than 20 analysts and audited by regulators” on this exotic Caribbean island. Instead, the knighted boss “black boxed” the portfolio, shielding it from independent oversight, and steering a major portion of the funds into hard to sell “real estate investments and private equity funds.”

Financial advisers, being paid by individuals to manage their money, were tempted with a direct conflict By Stanford. These advisers could pocket 1% yearly commissions on all funds directed to Stanford. So who was looking out for the client?

Surprisingly, Both Stanford and Bernie Madoff were able to carry on their schemes longer because of the downturn in the economy. Many investors liquidated their stocks and bonds but stayed with Stanford and Madoff because these investments were, in many cases, the only performing assets.

And here is what’s really surprising. Many investors had no idea they were even invested with Madoff and Stanford. Their financial advisors didn’t bother to tell them.

Old Bernie wowed his clients by patiently explaining his financial theory of a “split-strike option conversion” trading strategy. The idea, according to Madoff, was to buy a few dozen blue-chip stocks and hedge them by selling out-of-the-money put options. Sure, this has a hint of incomprehensibility that maybe you want in an investment methodology. But that’s just the point. If you don’t understand all this financial gobbledygook, you have no business investing in the first place.

But how could Stanford and Madoff sucker so many investors into their schemes? Many investors were seeking them out, with little hard sell involved. Well it was easy. They just needed the right environment. And the right environment is us-you and me. It’s the same reason why so many Louisianans buy lottery tickets. (As this column is being written, the Powerball jackpot stands at $170 million.) We all want a sense of elation at the possibility that lots of money will come fast. Right away. Not a slow and steady process, but through luck or connections or financial nimbleness.

The Stanfords and the Madoffs know from experience that even “sophisticated” investors take shortcuts. Quantitative analysis? Not necessary. “Hey, we know folks who have been with Bernie for years and done quite well. That’s good enough for us.” Here is what Barron’s Financial News wrote about Madoff in 2001. “Madoff’s investors rave about his performance-even though they don’t understand how he does it.”

One important lesson learned from both the Stanford and Madoff scandals is that you cannot trust the financial regulators to protect you. There have been rumors about both of these guys for years, with specifics being given to the SEC. Yet nothing was done. You have to look out for yourself. That means assuming the responsibility of carrying out several important checks. I leaned these lessons well as an insurance regulator.

First, know who you are dealing with. How long has the company or individual been in business? Ask them candidly about any SEC or other regulatory violations and whether they were sanctioned or fined. You can check this yourself by going to the website of the Financial Industry Regulatory Authority (FINRA) to check on any black mark on your advisor’s record.

What is their track record of investment returns? How can you be sure that your money is protected from fraud? If investments are to go out of the country, who does the monitoring? What about insurance? Is your investment advisor bonded to cover any fraud or misspending? (The same goes for your insurance agent by the way). And you know those monthly and yearly reports you receive in the mail summarizing you r investments. Don’t just toss them away. Look them over, and then keep them in an organized file so you can track by month and year just what kind of performance you are receiving.

It may be smart not to lump all your investments with just one firm or financial adviser. The problem here is that you have to “get involved” in your personal financial decisions so that you have the proper mix in your investments. Your best defense may be a healthy dose of skepticism. In any business decision, rarely does a smart person just take anybody’s word. You check it out. Unfortunately, many of the financial losers did not follow this simply premise when picking a financial adviser.

The good news is that Stanford and Madoff are aberrations. Madoff allegedly defrauded his own family, close friends and a number of charities he was supposed to be supporting. The vast majority of financial investors look out for their clients. The lesson here is to be less trusting and a bit more cautious. And keep your financial goals reasonable. Be a bit more respectful of simple and long-term success.

There is rarely any reasonable chance to make a quick buck. Probably the quickest way to double your money is to fold it in half and put it back in your pocket. Even Slim will agree with that strategy.

********

I’m tired of hearing about money, money, money, money, money. I just want to play the game, drink Pepsi, wear Reebok.

Shaquille O’Neal

Peace and Justice

Jim Brown Jim Brown’s syndicated column appears each week in numerous newspapers and websites throughout the South. You can read all is past columns and see continuing updates at www.jimbrownla.com.

10 Responses
  1. Jean Anne

    Dear Mr. Brown
    While I appreciate your attempt at giving advice, I proportionately resent your title insinuating that I was an accomplice to Allen Stanford in his fraudulent scheme. I, my children, and my business are victims of this fraud. Therefore I ask that you, if you are interested, look into what really went on here. And as far as learning early in life “not to play Poker with Slim”, I learned not to play poker at all. And somewhere along the line I also learned that “you don’t mess around with Jim”. Please do a good service for the thousands of victims in Louisiana and get the other side of the story before you presume to know what really happened.

    Thank you for your interest.
    Jean Anne Mayhall

  2. Joe Reynolds

    Not knowing much about the content of the article, I did not see the connection between it and the above comment of Mahyall. Possibly a follow up of explanation might be inorder.

  3. I wil be glad to hear from Ms. Mayhall and hear anything she might share regarding the Stanford firm. If there are two sides to this story, my readers want to have a balanced overview. My information abut Stanford has appeared in hundreds of news articles worldwide. I hope Ms. Mayhall will contact me.
    Jim

  4. Debbie Dougherty

    Mr. Brown,
    I am a Stanford “Investor” since 2005. We DID investigate The Stanford Group and our Broker. All showed that Stanford Companies were sound, liquid, and established for over 70 years, a claim made by Stanford himself. My broker was and is today a registered FINRA broker, and by all accounts a man of integrity.We have since found out the real truth about these misrepresentations.
    We were privy to numerous investment seminars for 5 years before my husband retired from ExxonMobil. I resent the fact that you have implied that we were not intellegent enough to make a decision for our retirement. I am sure that you are aware that there are masters of FRAUD in this world and Mr. Stanford and his co-hearts are among the best. We worked for 37 years, put 3 daughters through college and retired to enjoy the fruits of our labor. To say our investment company misrepresented itself is an absolute understatement. This fraud has devastated thousands of Louisiana families. There are elderly people going without their medication, cancer treatment and looking at having to sell their homes to pay for a crime we had no way of knowing was happening. Although the SEC and DEA apparently did. Their knowlege of this crime was never announced or published, from 1999 to 2009. If you are truly interested in getting the REAL Stanford Victim’s story, feel free to contact me and I can put you in touch with MANY victims that I am sure you will find intelligent, cognizant decisioin makers. Please, do not ASSUME you know this story until you have done
    due dilligence as we have.
    There is a tremendous amount of information you are lacking. I challenge you to
    FINISH your investigation and rewrite this story,

    Awaiting your reply,
    Debbie Dougherty
    City of Central, La.

  5. Troy Lillie

    Mr. Brown, in defense of JeanAnne, there are a few comments that are inaccurate in your blog. One is that the Stanford CD’s were not “too good to be true”. The actual difference in the interest rates of the “exotic investments” (CD’s) was about 2% and was well explained by the Stanford advisors in a carefully prepared explanation, that made sense if it had not been a lie. Another of your comments “that lots of money will come fast” is exactly opposite from what most Stanford CD owners were looking for. They/I were looking for security of the investment and a fair return. This was promised by all of the financial advisors. As far as checking with FINRA or any of the other regulatory agencies, Stanford investors did this, but the problems we now know existed were hidden. As far as “lumping investments”, these were CD’s (that is certificates of deposit) not stock or other risky investments. Again we were told these were the safest place to have our retirement/savings in these uncertain economic times. In closing, the Stanford depositors were not trying to make a quick buck, just a safe buck. In the final analysis, there is not much people can do to defend against a well concealed lie.
    Thanks,
    Troy Lillie

  6. Jean Anne

    Hi Jim,
    Regarding your subtitle …

    STANFORD AND MADOFF HAD ACCOMPLICES: THEIR VICTIMS!

    I suppose I am oversensitive, because I am a victim. To me Allen Stanford is the perpetrator. It is like being raped and then being told I egged him on.

    I am just a small business owner in Louisiana. I am 57 years old; a single mother of two grown sons. My company pension plan, all of it, has vanished in the Stanford fraud case. 25 years of savings for me, my sons, and my employees. I cannot tell you what that feels like. Your article struck a chord with me, because as I read it, I realized that I did follow your rules. I did do my homework, repeatedly.

    However, I was not privy to the information that the SEC had, which will become apparent as this fiasco unfolds. Additionally, to mention just a few points misconstrued in the media: the investors in this case were not wealthy island hoppers. They were retirees, middle class hard working types whose IRA’s were ‘targeted’, for lack of a better word. Our system (until recently) taught these folks to trust financial institutions, to trust those licensed by FINRA, and to count on watch dogs such as the Louisiana Office of Financial Institutions and the SEC.

    We are a nation of rules and guidelines. Citizens are asked to follow those rules and guidelines. Yet, if those entities set in place to enforce them do not do their job, then what have we? Additionally if you take a man like Allen Stanford who can ‘game’ the system, you end up with victims. Not accomplices.

    In this case, when fraud was exposed, the media decided that the CD’s were ‘too good to be true’. The truth is that almost all of the CDs were 5-year CD’s and the interest they paid, while naturally higher due to the time frame, was not outrageous at all. Maybe a point or two higher, for a committed long term. No, it was not the rate of return that lured most of these investors. It was the lure of safety and security that lured them in. That was the pitch. And it was expertly delivered.

    The truth is also that the victims in this case were not greedy tax dodging rich people. They were average people who trusted the United States licensed brokers who lived, worked and went to church in their communities.

    While it is easy in hindsight to criticize these folks, there is a huge lack of accountability and of ongoing regulatory oversight in this case. Because that job was not done, it left even the most careful investors with nothing but “the good stuff” when they inquired.

    My Stanford financial advisor was presented to me as a financial expert with an impeccable record and years of experience. Did I check him out? Yes. Did I ask a few questions? No. I asked a litany of questions and continued to throughout the years I worked with him. Did I trust him? Yes. Did I pay him a fee for managing my money while I ran my business? Yes.

    Additionally as you probably know, the Stanford Trust Company was headquartered in Baton Rouge. It was a state chartered Trust. Their website directed any and all complaints to the Louisiana Office of Financial Institutions. Did I check that out? Yes. Did I feel like I did my homework? Yes. Had I asked the SEC, FINRA, OFI, and any other agency you can name, if Stanford was a fraud, the answer would have been NO.

    Did these entities have evidence to the contrary (for years)? Yes. Did they announce it or share it? No

    Stanford Financial Group itself also had offices here (and in many other states). The company had a very high profile in the social, arts, and sports worlds in Baton Rouge. They were heavy donors to all sorts of popular entities and causes. Many of their brokers sat on boards such as Capital United Way and countless others. Allen Stanford was St. Jude’s Man of the Year….a heavy political contributor and a supporter of many local and national charities. Stanford Group was visible on all fronts and featured on CNBC and written about in many national magazines, including Forbes….all saying it was Ok, if not superb.

    Yet, how was the average investor to see through such apparent community partnership and endorsement? How did we know that Mr. Stanford had a 225,000,000 tax lien from the IRS? Were we to assume that the Reg D’s filed for the sale of these securities in the Untied States were any different from those sold at Chase or Charles Schwab. Insured. Of course. We all have documents flaunting the FDIC and SIPC logos. Did we know the bank was in Antigua? Of course. Did we feel we were dealing with just another arm of our American held Stanford brokerage accounts? Of course. And that is what we were told.

    So while I agree that a certain amount of due diligence is required for any investor, even those choosing CD’s, there is also a certain amount of dependence upon the rules and financial structure in our country. It is a fact that the Stanford group expertly used their FDIC and SIPC United States brokerage infrastructure and their US custodial brokers such as Pershing, LLC and Bear Stearns to give legitimacy to all of their financial offerings and suite of products.

    The Stanford Trust Company in Baton Rouge was the legal custodian of countless Exxon Mobil retirement accounts. These folks did not fly to Antigua with their money in a brown bag and hand it to Allen Stanford. They used United States licensed brokers, made their checks out to a US company and got statements from a United States legitimate entity in their state. I ask you, who were the accomplices here? The victims who have lost every dime of their life savings? Or the government entities charged with the guardianship of its tax-paying citizens?

    Thank you for taking the time to explore the truth.
    Sincerely,
    Jean Anne Mayhall

    Co-Founder
    Louisiana Stanford Victims Group

  7. Debbie Dougherty

    Mr. Brown,

    Are you comparing our business decision skills to that ridiculous, juvenile quote from Shaquille O’Neal?

  8. Terry Tullis

    Mr. Brown,
    I find it amazing that you are calling the victims of this fraud,accomplices. We did our homework. We asked,we read and nowhere was there anything bad said about the Stanford Financial Group. Also, nothing was said about the investigations by the SEC from 1999 to 2009 which stopped abruptly each time. This information was not published or announced.
    So explain, how was a retiree or investor was supposed know?
    My husband retired after 36 1/2 years at ExxonMobil. Our Stanford advisor assured us that these CDs were “safe,secure and insured”. We were not out to make a quick buck. This was our life savings and it had to last. It is insulting that you would blame us for any of this.

    Terry Tullis
    Central, Louisiana

  9. J Minor

    Mr. Brown,
    The company I work for invested in a Stanford International Bank CD. We did not invest out of greed. We invested as a way to help our company grow and provide possiblities for future business ventures for the investors in our company. We invested in a long-term (5 yr CD) that we were assured was a safe investment. We were working with what we thought was a reputable brokerage firm with solid financing behind it. As stated in one of the earlier responses, Stanford was a huge part of the Baton Rouge community. Many people respected and looked up to Alan Stanford. We had no reason to doubt our brokers or Alan Stanford. If anyone is an accomplice, then it is the US Government who hid pertinent information from the public. We have lost, along with many others, a significant amount of money. For you to insinuate that we were an accomplice is ludicrous and hurtful. You have just added insult to injury. Shame on YOU!

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