Corporate Scandal Stanford

Topics: Allen Stanford, Stanford Financial Group, Pyramid and Ponzi schemes Pages: 7 (2590 words) Published: April 20, 2012
What Went Wrong: Case Study of a Selected Corporate Scandal “In Texas, Robert Allen Stanford appeared to be yet another flamboyant billionaire. But in the breezy Caribbean money haven of Antigua, he was lord of an influential financial fief, decorated with a knighthood, courted by government officials and basking in the spotlight of sports and charity events on which he generously showered his fortune.” This quote from an article in The New York Times portrays the life of Mr. Stanford, owner of the Stanford Financial Group that was shut down in 2009 for what regulators describe as “massive ongoing fraud”. Stanford Financial Group, with headquarters in Houston, Texas, was a privately held international group of companies that provided financial services including investment, banking and research. It was said to hold “$8.5 billion in deposits at its bank and […] about $50 billion in assets in its wealth management affiliate”. Stanford International Bank, based in Antigua, offered its clients astonishingly high interest rates on credit deposits that were sometimes more than double the rates offered by other banks. It was said to have 30 000 clients in 131 countries with significant presence in Colombia, Ecuador, Mexico, Panama, Peru and Venezuela, as well as the Caribbean. “Stanford's CDs, which require a minimum investment of $50,000, offer tantalizing interest rates. The current rate on a one-year CD is roughly 4.5%, according to the bank's Web site. The average at U.S. banks is about 2%, notes research firm (RATE). A year ago, the offshore bank sold five-year CDs that yielded 7.03%; the industry average hovered around 3.9%.” The corporation was shut down and accused by the U.S. Securities and Exchange Commission (SEC) of defrauding investors in what is called a Ponzi scheme of $7 billion. A Ponzi scheme, as defined by the SEC is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. […] In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.” The Stanford Financial Group was engaged in a Ponzi scheme that spanned two decades, which allowed investors to receive incredibly high returns at the expense of other investors’ money. The SEC went after the company and froze its assets and also went after Mr. Stanford’s personal assets, pressing criminal charges against him and arresting him in 2009, with his jury trial to be held on January 2012 in Houston. Ponzi schemes are more likely to succeed in small, closed companies, as they are easier to control. However, since there is a constant need in Ponzi structures to seek new investors to finance the returns of the other investors, as the business grows a point is reached where expansion to other areas is necessary. In the case of Stanford International Bank, the business started in Antigua, yet it had to expand to other countries mainly in the Caribbean and Latin America. The Stanford case involved failure from the firm’s officers to exercise proper corporate governance and due diligence. “A due diligence exercise is not a simple standardized pro-forma exercise in balance sheet analysis. It involves also testing the credibility of the reported performance of an enterprise in every important dimension, including for financial institutions, its corporate governance as well as the character, probity, and confidence deposed by others in the principals of that institution”. Thus, if a trust company gets carried away by greed and loses other people’s money, it cannot claim to have practiced ‘due diligence’. The Stanford case can be compared to the case of Bernard Madoff, which has been Wall Street’s biggest scandal for financial fraud in recent years, with repercussions in other International Markets. Madoff is currently serving a 150-year...
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