The jury found Stanford not guilty on one count of wire fraud,
- one count of conspiracy to commit wire and mail fraud,
- four counts of wire fraud,
- five counts of mail fraud,
- one count of conspiracy to obstruct a U.S. Securities and Exchange Commission ("SEC") investigation,
- one count of obstruction of an SEC investigation and
- one count of conspiracy to commit money laundering.
At sentencing, Stanford faces a maximum prison sentence of
- 20 years for the count of conspiracy to commit wire and mail fraud, each count of wire and mail fraud, and the count of conspiracy to commit money laundering; and
- 5 years for the count of conspiracy to obstruct an SEC investigation and the count of obstruction of an SEC investigation.
Clearly, Stanford faces a long, long time in federal prison.
Excuse me for not applauding.
Permit me a quiet moment to puke in disgust.
While some may view today's jury verdict as a final bit of overdue justice and a vindication of Wall Street's regulatory system, I recall far too much of the history that brought us here. This is a hollow celebration, if even that.
A Daughter's Warning
As I wrote a while back, the Securities and Exchange Commission (the "SEC") received a letter dated October 28, 2002 ("the Letter"), from, a citizen of Mexico, who raised concerns about Robert Allen Stanford, his companies ( collectively "Stanford"), and the Certificates of Deposit in which the foreign citizen's mother had invested. This is how an SEC Report of Investigation prepared by the SEC's Inspector General presented the facts:
C. During the 2002 Examination, the FWDO Enforcement Staff Received a Letter From the Daughter of an Elderly Stanford Investor Concerned That the Stanford CDs Were Fraudulent
On December 5, 2002, Degenhardt received a letter dated October 28, 2002, from a citizen of Mexico who raised concerns about Stanford similar to those raised by the Examination staff. See October 28, 2002 Letter from to SEC Complaint Center, copying Harold Degenhardt (the "Letter"), attached as Exhibit 76. The Letter stated:
My mother is an old woman with more than 75 years of age and she has all her money my father inherited to her for his life work in CDs of Stanford Bank. This is the only money my mother has, and it is necessary for my mother, my sisters and me for living. My mother put it in the United States because of the bad situation in Mexico and because the most important thing is to look for security. …
I am an accountant by profession and work for a large bank in Mexico. I know some banking regulations of my country that are very different from practices in Stanford Bank and for that reason I am very nervous. Please look at this bank and investigate if everything is honest and correct. There are many investors from Mexico in this bank. My questions and doubts are listed here.
1. Stanford says the CDs have insurance. My mother receives two statements of accounts. One from Stanford bank in Antigua with the CDs and another one from Stanford and Bear Stearns in New York. I know Bear Stearns is a very good company, but the statement of Bear Stearns only has cash that my mother uses to take out checks. This cash is the interest that the CD pays. Is the bank in Antigua truly covered by insurance of the United States Government?
2. The CD has a higher than 9% interest and I know other big banks like Citibank pay interest of 4%. Is this possible and secure?
4. In December of 1999 the bank had a lot of investments in foreign currencies and in stocks. In all the world many stocks and foreign currencies came down in 2000. If a lot of money was in investments that came down, how did the bank make money to pay the interest and all of the very high expenses I imagine it has. …
5. The accounting company that makes the audit (C.A.S. Hewlett & Co) is in Antigua and [no]body knows. I saw the case of ENRON with bad accounting and I am preoccupied with another case of fraud accounting. Why is the auditor a company of Antigua that [no]body knows and not a good United States accounting company?
I know some investors that lost money in a United States company named InverWorld in San Antonio. Please review very well Stanford to make sure that many investors do not get cheated. These investors are simple people of Mexico and maybe many other places and have their faith in the United States financial system.
The Eyes of Texas
After the SEC got the Letter, its staff forwarded it to the Texas State Securities Board ("TSSB") on December 10, 2002. You'd sort of think - hope - that before sending the tip on its way that the SEC staff would have communicated with the writer but, sadly, that never happened.
Based on subsequent interviews with TSSB Commissioner Denise Crawford, and with a TSSB employee, the SEC's Inspector General was told that TSSB had searched its files and found no record of receiving the letter. Crawford apparently asserted that she was confident that the TSSB had not received the letter from the SEC because the TSSB's internal tracking system for such correspondence would have evidenced its receipt. Further, the Crawford and the unidentified TSSB employee all stated in interviews that they had never seen the letter.
On April 16, 2010, some eight years after the Letter was sent to the SEC and then sent to TSSB (or not), TSSB's Crawford called the SEC's Inspector General and stated that while the information provided about the Letter was accurate at the time she and her staff were interviewed, a copy of the Letter had subsequently been located in TSSB files. Supposedly, a TSSB administrative assistant was cleaning out a file cabinet that contained "miscellaneous information" that TSSB staff had kept for potential use in future examinations and found a copy of the Letter. That file cabinet had not been searched when TSSB was first asked about the whereabouts of the Letter. TSSB also noted that the Letter should not have been filed in the cabinet where it was found and that it clearly had not been handled properly or in accordance with TSSB's procedures for handling such correspondence.
Eight years of lost time. The SEC barely seems to have read the Letter before forwarding it on to the TSSB. Upon receipt, TSSB lost it, filed it - whatever. Ultimately, wasted time and investors would pay a crippling price.
FINRA Joins the Pack
Not to be outdone by its federal or state cousins, Wall Street's self-regulatory organization NASD/Financial Industry Regulatory Authority ("FINRA") issued its own Stanford Financial report, which, not unsurprisingly showed a similar lackluster regulatory performance. FINRA's report stated:
A. The Stanford Case
Between 2003 and 2005, the National Association of Securities Dealers-FINRA's predecessor entity-received credible information from at least five different sources claiming that the Stanford CDs were a potential fraud. The most striking was a July 2005 five-page referral letter from the SEC's Fort Worth office that explained in detail why the purported investment strategy of the offshore bank could not have produced the consistently high returns being paid by the CDs. The letter stated that the CD program was a "possible fraudulent scheme" and that the returns were "too good to be true." According to this letter, "as of October 2004, [the Stanford firm's] customers held approximately $1.5 billion of CDs." Despite the existence of this "red flag" and others described in the body of this report, FINRA did not launch an investigation of whether the Stanford CD program was a fraud until January 2008. By the time the CD program was shut down by the SEC in February 2009, the alleged amount of investor funds had grown to approximately $7.2 billion. According to the court appointed receiver in the Stanford matter, the vast majority of these funds will never be recovered.
Lacking from the FINRA report was a simple recognition that there was a systemic failure at NASD and FINRA, and that the failure was largely attributable to a culture of bureaucracy and cronyism that perpetuates itself. In reading through the report, I was much taken with the absence of named names and fingers pointed at specific regulators. Oh, that's clever - let's point a finger at "FINRA's predecessor entity." As if, what - you folks cleaned house and fired all the staff that was at your, how did you phrase it, oh, yes, your predecessor entity.
But hey, that's all in the past, right? Ancient history. Old regime. Predecessor entity. Hooray for the federal prosecutors and federal juries. They nailed the sucker! Nonetheless, like I said at the beginning, excuse me for not joining in the festivities.
- Stanford Financial Indictment (June 18, 2009)
- Report of Investigation, Case No. 01G-526 Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme (April 22, 2010)
- Report Of Investigation, United States Securities And Exchange Commission, Office Of Inspector General,Case No. OIG-526, Investigation Of The SEC's Response To Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme (March 31, 2010)
- Report Of The 2009 Special Review Committee On Finra's Examination Program In Light Of The Stanford And Madoff Schemes, (September 2009)
- Allen Stanford Convicted in Houston for Orchestrating $7 Billion Investment Fraud Scheme (Department of Justice Press Release, March 6, 2012)