So, today the day we all thought was coming for a few years happened, as the SEC accused Allen Stanford and James Davis of massive, ongoing fraud and asked the judge to freeze their assets as well as the appointment of a receiver for them.
The announcement ends two whirlwind weeks in which the blogosphere questioned the activities of Stanford International Bank (SIB), the Antigua based affiliate of Houston’s Stanford Group, after Venezuelan analyst Alex Dalmady wrote a piece called Duck Tales in English and El Pato in Spanish.
To me this is not a surprise, for years we have been questioning Stanfords claims and high yields and as the bank revealed more and more of its supposed investment strategy, we would warn our friends about it. Then Alex Dalmady, who we knew well from the time he was the best analyst in the Caracas Stock Exchange through his monthly InvestAnalisis, wrote Duck Tales for Veneconomia Monthly, which is one of a variety of publications Veneconomia publishes regularly on the country. We published a post on it on February 9th. and little did we know the speed that it would gather until the SEC’s announcements today.
And the SEC document has incredibly strong language, charging Stanford, Davies and others with “massive fraud” and its Chief Investment Officer with “helping to preserve the appearance of safety fabricated by Stanford and by training others to mislead investors”.
As in the Madoff case, the SEC charges that only two people, Stanford and Davies, knew the details of the portfolio and that they went out of their way to to block any examination of its record. The SEC also accuses both men of not cooperating with the Commissions efforts to account for the more than US$ 8 billion in assets, the same question Alex Dalmady has been openly asking the media in his own colorful way: “Show me the money!”. In fact, the SEC calls the portfolio a “black box”, shielded from oversight.
In trying to defend itself, Stanford has not addressed the important issues over the last few weeks, hiding behind irreleveant facts, such as not having received any of the aid from the US Government for banks in problems or not having invested with Bernard Madoff. While the first one was true, simply because it was an Antigua-based bank, the SEC actually charges that Stanford didhave money invested with Madoff.
And while Stanford always assured its customers that the bank invested a substantial portion of the banks portfolio in liquid assets, the SEC charges that a large part was invested in “illiquid investments, such as real estate and private equity”. The SEC states that 90% of the portfolio was invested in such assets and 23% in private equity. SIB was in the end a hedge fund that paid improved fixed income rates, but advertised itself as a bank.
The SEC charges that fraudulent behavior may have been going on as far back as 1995, as the Bank’s portfolio’s returns were claimed to be above the 12% level year after year, paying investors always 5% above those returns (But, of course, the deposit rate was fixed before the returns were achieved). And if this was tough to believe, Stanford claimed to have lost barely 1.3% with its diversified portfolio in 2008, in a year that the S&P 500 dropped 39% and the European Dow Jones Stock Index lost 41%, while claiming to have over half the assets in stocks.
The whole fee structure of SIB was simply impossible to sustain. According to the SEC, SIB would pay Stanford Group in the US a 3% fee for the sale of the CD, financial advisers would be paid a 1% for the sale of the CD’s and would receive an additional 1% per anum in “trail” commission for the CD’s after the first year.
These are all very strong words from the SEC. The defendants are called “reckless’ repeatedly and accused of “misrepresenting” products all the time.
This is indeed a sad and tragic ending to something a lot of people have suspected for many years. In Venezuela, Stanford was extremely aggressive, with fancy offices of their “advisory” service in at least three cities and fourteen other offices through a local bank owned by Stanford Group which was supervised by the local Superintendent of Banks and thus was managed as a bank should be. In fact, many of us have suspected for a long time that this local bank was only acquired in order to give legal presence to SIB’s activities in Venezuela.
It is estimated that Venezuelans had US$ 3 billion at SIB, but today I was told that a US consulting group told a large US bank two years ago that Venezuelans had 80% of the deposits at SIB. This would imply that US$ 5-6 billion were owned by Venezuelans. Sounds large, but given that SIB pioneered its CD’s in Venezuela and began copying the structure and model elsewhere only recently, I would not be surprised if this is true. This is comparable to the size of the assets of two Florida based banks which are owned by Venezuelan financial institutions, which were not as aggressive in gathering assets or in paying high interest rates as SIB was.
And this is the tragic part. This money does not belong to very wealthy Venezuelans. Stanford targeted the middle class, the professional, those that despite the crisis have managed to save some money in hard currency in the last few years. These deposits were looked for aggressively and without registering with local authorities. The sale of such products is simply illegal in Venezuela, but it was carried out openly and visibly. It is hard to believe the authorities did not know about it. (Were they clients?)
Tomorrow, we will begin hearing tragic personal tales of wiped out savings and suffering. Hopefully investors will be able to recover something, but I am not optimistic. The only good news is that the amount held at SIB by my fellow countrymen, or anyone for that matter, will no longer grow at the 20% clip per year that it had been growing, catching even more people.
The duck did indeed implode (or explode?) very fast, I had been expecting it for a long time, but when I first wrote about it a week ago, I cold not imagine the speed at which everything would develop.
Hats off to Alex Dalmady, whose blog is now back live!!!