Selling the 'astute' investor

Houston Chronicle:

The seven charges filed last week against alleged conspirators in the Stanford financial scandal could place the case in white collar history books, but not in the top spots.

For one thing, legal experts said, the Ponzi scheme prosecutors allege involved $7 billion. That’s just not what it used to be since New York investment manager Bernard Madoff pleaded guilty to a scheme estimated to have bilked investors of $50 billion.

Second, though R. Allen Stanford and six others charged with him allegedly harmed more than 30,000 investors, the fall of Houston’s Enron Corp. hit more than a million shareholders and led 34 defendants through the federal courthouse.

...

“In one way this Stanford case is a lot scarier than even Madoff or Enron,” said Peter Henning, a Wayne State University law professor who specializes in white collar crime law. “If the allegations are true, this is a well thought-out scheme to use an offshore regulator to defraud people all over the region. The Antiguan angle makes this case very different.”

Central to the alleged Stanford fraud are certificates of deposit issued by Stanford International Bank on the Caribbean island of Antigua. Prosecutors allege, among other things, that early investors were paid with funds paid by later investors — a Ponzi scheme. Indicted along with Stanford is an Antiguan bank regulator who was supposed to monitor the Stanford bank but is accused of taking bribes to look the other way, and of warning Stanford about U.S. investigations.

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What the allegations have in common with the Madoff scam is that they both offered slightly better than market returns. The returns were not high enough to set off risk alarms among the victims who would have been wary if they were offered twice the market rate of return on their investment.

While the Caribbean angle is interesting it is not entirely unique. I remember a case I worked on where bonds were supposedly guaranteed by a non existent Caribbean insurance company. In that case though, no regulators were in on the deal. A Houston accountant did lose his licence over the deal.

Ponzi schemes are certainly not new either. In the late 60s Dare to be Great and Coscot Interplanetary used multilevel marketing to help sell their Ponzi schemes in Texas. Another scheme sold interests in an online banking venture.

The Stanford case should be interesting to follow. He has hired a good attorney and no one should take a guilty verdict for granted at this point. There has certainly been a lot of confusion about the evidence in the case to date judging by the inability of some of its officers to explain things.