The Stanford Fraud: 7% CD Yields Raising Eyebrows

CD yields at 7% and higher, more than double the national average, are enough to raise eyebrows anywhere. This weekend, I read this Business Week article with interest and had my own commentary and skeptical opinion ready to post, but the SEC beat me to it. The timing is impeccable. Following the Bernie Madoff scandal, if the SEC failed to act on the numerous red flags and recent press focus on Stanford Financial, they would have lost what little credibility they still had. So, this week, the SEC announced that it was seizing assets in the US and going after Allen Stanford (no affiliation with the university - they previously had to sue to prevent him from attempting to feign some sort of affiliation).

Red Flags Galore

In retrospect, pundits always look back and say, “You should have seen it coming” and sometimes they are overzealous in their assertions. Madoff was a prior head of Nasdaq and he was using “sophisticated” options to hedge market perturbations after all, right? But Stanford’s firm had red flags galore. To name a few:

• Rather than FDIC coverage, Stanford claimed to have “privately purchased insurance that covers its CD investors”. Hmmm; sounds worse than a credit default swap with a defunct monoline insurer on the other end.
• The financials are audited by a tiny local firm, not a legitimate larger firm.
• Board is primarily composed of insiders including friends and family
• Some disgruntled employees quit or wee pushed out when they questioned the firm’s business and high commissions. In one case, Stanford actually won a settlement against the employee and took back his signing bonus! These complaints didn’t draw SEC scrutiny?

At its most basic level though, the mere notion of a business model that claimed to be able to deliver 7% CD returns to investors because of “tax benefits” is ludicrous. An investment that paid 0% in taxes each year could not achieve risk-free returns of 7% in a zero percent environment coupled with a half-off sale on equities and commodities around the world. Besides selling short, there was no asset class capable of such returns, especially with no volatility to ensure a risk-free return.

Allen Stanford Political Contributions

Interested in which of your favorite politicians received contributions from Stanford? This ABCNews article highlights that the majority of his contributions went to Democrats, but he did share the wealth with both aisles. It’s also alleged that he may have been involved in money laundering for a Mexican Drug cartel. This is probably just the beginning.

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