Archive for the 'Stanford Bank' Category

To catch new Ponzi schemes like Stanford and Madoff, the SEC needs a geek squad

February 25, 2009

The recent frauds by Bernie Madoff and Alan Stanford were not caught by the SEC in time to save people’s money. In Madoff’s case, he gave up, as his pyramid was collapsing and confessed (I still wonder why he didn’t fudge the collapse). In the case of Stanford International Bank (SIB), the SEC was investigating the illegal sale of CD’s suspecting that the returns were too juicy.

If Stanford had not tried to sell his CD’s in the US, he would have not been caught, except for the keen eye of Alex Dalmady, who not only saw that there was something funny about the whole set up at SIB (Many of us did), but actually sat down and wrote about it (Which we didn’t).

The question is what can be done about it going forward? How can the SEC monitor for frauds better?

Well, off hand (and on vacation) it occurs to me that given the mathematical tools available these days, something as simple as setting up a geek squad, a bunch of mathematically-oriented whiz kids who would go and devise a bunch of tests to dig out possible Ponzi schemes that the SEC could then investigate further.

I can think of three very simple tests off hand:

1) Benford’s law

I have talked about this in connection to Venezuela’s election, which have been shown to follow the law except for the 2004 recall referendum. Very simply, when you fudge data, you ignore the fact that natural data has certain characteristics. In particular, Benford’s law says that in any list of numbers generated for example, by accountants, the distribution of the first (or second) number (from left to right) follow a distribution which is not uniform. In particular, the distribution for the first number is:

That is, the number “1” has a 30.1% probability of occurring, number “2”, 17.6% and the rest of the numbers declining from there.

Why is that?

Because real world numbers tend to be distributed logarithmically and not uniformly. Consider the following: If a company issues checks between 0 and \$100,000 and you look at the first number of the amount for each check, it is likely that the number of checks near \$100,000 is low and starts going up as the amount gets lower. Well, if the company prints lots of checks, then you could detect fraud if more than expected show up near \$100,000 or if a particular number shows up a lot (a common occurrence). This is actually used in accounting to detect fraud. This also applies to investment returns.

Thus, the geek squad at the SEC could simply look at the daily, weekly or monthly performance data supplied by all regulated mutual and hedge funds and compare it to what Benford predicts. Of course, these tests can be done using more sophisticated algorithms, using statistical measures on the first and second digit to detect discrepancies.

Paul Kredosky has actually looked at Madoff’s data and suggested that Madoff’s data did follow Benford, but his conclusion was only visual. Falkenblog actually concluded that the data did not fit Benford’s law. I would suggest the SEC geek squad could carry out a first and second digit test and calculate statistical measures like chi^2 on the differences between the data and what is expected to see how likely the returns are. (Anyone willing to do it? The data is in Markopolos 2005 document to the SEC denouncing Madoff)

Of course, if the returns of a fund did not follow Benford, there may be an explanation, but detecting it this way would allow for a more detailed study of the funds returns by the SEC.

2) Correlations between returns and markets

One of the red flags raised by Markopolos on Madoff was the fact that Madoff’s strategy was based on the stock market, but there seemed to be little correlation between Madoff’s results and the stock market. Indeed, Madoff showed positive returns on 95.5% of the months, which was not happening in the stock market.

This could all be automated.Each fund would simply define its strategy and set a benchmark for its investments and you could calculate the Correlation Coefficient between the returns of the fund and that of the underlying markets in which it participates. This can be done in an Excel spreadsheet. Basically, it would be very difficult to obtain returns which are uncorrelated to the underlying markets. As an example, last year, it would be suspicious if a fund investing in stocks had a negative correlation with the market unless it invested in gold stocks or a sub-sector of the market that did well last year, but there were very few of those.

Finding anomalies in the correlations does not constitute proof that someone is reporting fraudulent results, but one could automate the process and much as in the case of Benford’s law, it would raise a red flag and the SEC could study it further.

3) A stress test for accountants of funds

One could build two databases, In the first one, one would include the accountants who are active part of the American Association of Certified Public Accountants. A second one would include the top tier auditing firms. Then, for each fund you would ask:

a) How much did you charge to audit the fund?

b) Did you confirm who had custody of securities?

c) Ask who managed and who had custody of securities. Is there any relation between the two?

You could then compile statistics of how much do auditors charge for each size funds. And if b) was No, you would have a big red flag, as well as if in c) the answer was yes. Similarly, if there were anomalies in Benford or the correlations and you used a less known auditor, you could research it further.

That’s it. With these three points, you would go a long way at uncovering the fraudulent funds.

Using these three questions you would have caught Madoff with a), b) and c). However, only c) would have raised flags on Stanford, because there is not month to month data on Stanford’s returns, only yearly data.

But I am sure others can add some additional forensic tools to the detection of fraud in money management. I do hope the SEC may read this and start a geek squad. It would cost very little and go a long way.

And indeed, funds could learn to fudge the data going forward to fit the criteria, but their previous record is there for the geek squad to find.

And now the conspiracy theory on Stanford: It is all a US plot against Antigua banking

February 24, 2009

Former Antigua Prime Minister Lester Bird now brings up the US conspiracy theory on the Stanford International Bank story:

“However, the former prime minister contended that the charges against Sir Allen and his Stanford companies were part of a US plot to break Antigua and Barbuda’s offshore financial services sector.

“All these people do not want us to have offshore financial services and Stanford has done such an exponential job in developing money… and these guys decide that he’s giving too much profit,” Bird said.”

The best part is that he even attempts to suggest that supervision may have been lax since he left power in 2004, despite the SEC allegations that Stanford’s investment results were funny since at last 1995-1996. He also says “other banks” are paying even higher interest rates than SIB.

Oh baby!

Some parting shots on Chavez, Venezuela and Stanford

February 21, 2009

Monday and Tuesday are holidays in Venezuela, so tomorrow I will be disappearing for a week and blogging will be lighter than usual, but I am sure I will manage to post something given the barrage of news around. I am going to a Caribbean beach (not Antigua) where I will try to relax and forget about the world for a few days, if possible.

But there are some loose ends I wanted to tie before going, none of which make a single post but they are all somewhat related.

First of all, not a week has gone by after Chavez’ referendum win and his tune has already changed from the country being shielded from the world financial crisis, to we are facing a “tough and difficult” situation. That did not take very long, no? By next week I can imagine it will all be the Empire’s fault.

And meanwhile, Chavez’ Government, after intervening the local Stanford Bank today, issued an order prohibiting the Board of Directors of the bank from leaving the country. Of course, this does not include the man responsible for building up the Stanford operation in Venezuela, Gonzalo Tirado, who told the Miami Herald in 2005 that 40% of the deposits at Stanford International Bank were from Venezuela. If this proportion was sustained since 2005, that implies Venezuelans had around US\$ 3.4 billion at the Antigua bank. Note in the article Tirado takes credit for building up Stanford in Venezuela and says Allen Stanford, with whom he had a bitter dispute, managed everything directly.

Curiously, in the same Official Gazette in which the Government published the intervention of the local Stanford Bank on Thursday, the Government also published the approval for Tirado to go ahead and buy a local commercial bank by the name of Inverunion.

And while many have tried to portray Stanford International Bank as the bank of the Venezuelan oligarchy, as only the well to do had money there, I hear that the robolutionaries loved the institution, its high rates, as well as other features. You see, Stanford International used Canadian, not US banks, for its wire transfers and did not have the rigorous compliance procedures of US banks after the Patriots Act. Thus robolutionaries apparently were very faithful clients too. Which makes me wonder if this has anything to do with a report by a radio station in Antigua today that a Venezuelan jet carrying some Government officials, arrived in that island for a meeting with the Prime Minister. If they were after the money, they will find very little, if they were after the data, maybe (or hopefully) someone got there before them, after all, the WSJ last wekend already talked about FBI agents being in the small Caribbean island.

Enjoy the long Carnival holiday!

Revisiting and retelling the Stanford International Bank story.

February 19, 2009

While I have been trying to get away from the Stanford International Bank story, it is not easy. First of all, it was all around me today. From friends to family, I learned today of a few people that I knew who had their money there, who were not able to take it out despite my warnings. I also found out about people I don’t even know who think I am an expert on either how to get SIB to wire their money or estimating how much they will one day recover. The story also provides a break from the sometimes tiring political fights in Venezuela.

I actually know very little about what’s happening, either at SIB or in Antigua, I just tell people not to expect to get their wire out, even if it happened before the SEC stepped into the problem and don’t get your hope up that you will get much back. A pyramid is a pyramid, you pay old investors with new money and keep growing it until it explodes. At most, don’t expect to get back more than 10-20% of what you had, but I am always a optimist, there maybe nothing there in the end for you.

Lot’s of people have asked when I first knew that Stanford was a fraud. The answer is have known for a very long time that something was very fishy. But using Alex Dalmady’s language, I saw the ducky signs one at a time over the years. But let me start at the beginning.

I have known about the existence of SIB for maybe eighteen years, roughly beginning right before the time when the SEC suggests in its injunction, Stanford may have been fudging its investment returns. At the beginning, it was simply hearing about this outrageously high returns on CD’s. When rates for CD’s in the US were 8%, Stanford would pay 12-13%. As rates dropped, they also went down, but always remained 4 or 5 percentage points above market rates in the US.

People always fall for this. In Venezuela, prior to the 1994 banking crisis, you could find banks paying interest rates from 25% to 100% per year, guess which ones failed? But this was in our local currency, the Bolivar, at a time of high inflation.

What I initially thought Stanford was doing, was something we had also seen in Venezuela before, offer high interest rates in US dollars by buying Venezuelan sovereign bonds also  in US\$ dollars paying  say, 13% per year, and pay 8% to depositors. This may sound fine at first sight, the problem is bonds change in price. Thus, if they drop in price too much, like they have three times over the last 15 years, the value of your bonds may drop below the value of your deposits. If the depositors start demanding the money you are broke.

In fact, this happened to a local broker when the Mexican crisis struck in 1994. Venezuelan dollar bond prices also plummeted from 60-70% to as low as 38% and when depositors began demanding their money, the broker did not have anyway of paying for them. I thought Stanford was replaying that movie, using a US name and an Antigua bank, which would make a run on them much harder .

At some point, a friend showed me some marketing material which was highly unusual for a bank. An expensive leather bound book explained the history of the group, how conservative and financially savy it was. In a separate sheet, it explained that it was capable of paying such high rates because it did not have to pay for FDIC insurance. And further on, it explained that over half the portfolio was invested in stocks and some of the money in hedge funds. Say what? You gave them your money, got paid a low fixed income return, so they could aim for high returns and make the difference for themselves? What if there is a bad year? Who makes up the difference? The terrible stock market of 2001-2002 came and went, and Stanford survived. Most of its clients were Venezuelans who are somewhat greedy and don’t ask too many questions. Financial culture is very low here. People buy products if you have a fancy office, not if you have a healthy balance sheet.

Then at some point after 2002, I don’t remember when, Stanford started its website (from which everything but contact information was removed today) and publishing its financial statements every year.

The whole thing did not make any sense. Half the portfolio was in stocks, and interest income was a quarter of the interest the bank paid its depositors. Stocks were indeed over fifty percent of the portfolio and there were huge fees paid to financial advisers and parent Stanford Group. It was clear Stanford Group provided SIB with services, but you could not figure out the whole thing. But the scariest thing were the growth rates for deposits in the bank. 20-30% per year, which jived with the aggressive nature of their executives in Caracas. I was told that each executive had to gather a certain amount of deposits each quarter (I was told five million US\$) and if he missed the target three quarters in a row, he was out.

At this point, I knew I should warn anyone asking me about it to go somewhere else, earn less interest, but sleep well. Few did, most took “some” money out. The typical excuse: “They have never failed paying me in twenty years”. Sure, until they do.

After the sharp drop in stock markets last year, I discussed with a few friends what Stanford would do in its end of the year financial statement. After all, if equity markets drop 40% on average, hedge funds drop 15% and commodities 70%, only gold and silver could help the Stanford portfolio not lose at least 30-35%. And then in mid-December they come out with a letter calming investors, suggesting they did not even lose money!

As Alex would say, what a Duck!

We were thus eagerly waiting for the Stanford 2008 financials which should show up in the webiste somewhere around April, when two things happened almost at the same time. First, I got an email with the link to a new blog called Venepiramides, which had exactly three posts: the first one on Madoff, the second on La Vuelta, a well known pyramid/fraud that got lots of Venezuelans two years ago and a post on SIB, comparing it to Banco Latino, one of the failed local banks of 1994 (The one that would pay over 100% interest rates). Second, I talked to Toby Bottome from Veneconomy, who I collaborate with regularly, and he asked if I wanted to write an article on  a totally different topic, saying Alex Dalmady had written an article on SIB for his monthly that was really good which suggested in the end SIB was a fraud. My interested was piqued and I sent Alex an email telling him I was looking forward to reading it.

I was going to write a post for my blog that weekend, but I was really into a post on Central Banks and their balance sheets, showing how the Venezuelan Central Bank kept in its books money that was gone to the tune of US\$ 26.3 billion. I wanted to make that post pedagogical and spent most of the weekend on it. I did not get to the SIB post until Monday the 9th. and everything moved very fast after that.

People ask why I did not denounce it earlier. To whom? It is clear that Venezuelan authorities have known about this even before Chavez. Stanford Group bough Banco Galicia in 2004, which I believed was done to give some form of legality to its SIB dollar business. The Government did not object. Military intelligence even raided the SIB “Asesores” office in Caracas in October 2008, so they clearly knew what was being done there. And the person who grew the SIB business in Venezuela bought a commercial bank himself a month ago. Do I have a chance with a Government which condenms an opposition politician for supposedly giving away a car, while multimillion dollar corruption and suitcases full of cash  in the Chavez era is not even news anymore?

In the end, I thought innocently that Duck Tales would blow up locally and not abroad. I even talked to Alex about how surprised I was that his write up had not even made the local news except for Descifrado in its first two weeks. Maybe if I had known how fast the blogs and the mainstream media would catch on to the story I may have posted something. But I didn’t and the credit goes to Alex.

In every post, I think this is the last time I will post on SIB. This time I will not fall  for that. There is now a drug angle to the story, there is the question of how much of the Stanford Group is impaired, where is Allen Stanford, how much money is actualy there, how negligent the Antigua authorities were (As a friend points out,  the Primer Minister said “the fallout threatens to be catastrophic…but there is no need to panic” Huh?) and then there is the local Bolibourgeois angle: will this, like Maletagate, gives us a glimpse into Government corruption?

Stay tuned…

SEC accuses Stanford Group, the Duck implodes (or explodes?)

February 18, 2009

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!!!

SEC accuses Stanford of “massive, ongoing fraud”

February 17, 2009

Bloomberg reports that the SEC is raiding the Houston offices of Stanford and has formally accused two principals of the firm.  Sad, very sad, this could have been avoided

Feb. 17 (Bloomberg) — U.S. regulators accused R. Allen Stanford of running a “massive, ongoing fraud” while selling about \$8 billion in certificates of deposit through investment firm Stanford International Bank Ltd. The Securities and Exchange Commission filed legal papers against him and two other people at Dallas federal court today seeking a temporary restraining order, court records show.

Alex Dalmady goes from whistleblower to blogger

February 16, 2009

Guest-ghost blogger Alex Dalmady of Duck Tales fame, has decided to start his own blog. I think it’s great, he can tell us lots of stories in the upcoming days, including his view on the mainstream media approach to avoiding suits and rough edges. The best part is that having his own blog will force him to write often and we will all enjoy it.

I can’t believe it has only been a week since I first posted on his Duck tales article, it seems like eons. I am still amazed that this has made so little noise in Venezuela where so many victims live, only El Nacional had a blurb on it last Saturday.

The topic is not over for me, I will let Alex blog about the overall picture as the duck explodes, but will write about the local effects, which I always believed would lead the way. I never imagined it would begin outside Venezuela. This has been one of my most interesting blogging experiences. I have blogged a lot about things that  people began to learn and understand slowly like corruption in the Chavez Government and arbitraging the official exchange rate, but never about something that moved so fast and reached so far. The blogosphere is indeed an amazing vehicle.

In the meantime, kudos to all the bloggers that participated in this, particularly in the early stages: Gringo in Venezuela, Inca Kola News, Felix Salmon and Venepiramides.  Venepiramides was already onto the story, but being in Spanish gave it a limited reach.

So, referendum over, duck over, what do I blog about now?…I have an idea…

February 14, 2009

It’s over. Regulatory bodies have caught on. WSJ just announced that the FBI is investigating. “Duck Tales” is in the hands of dozens of analysts who “get it”, including many with ties to the MSMs (that’s Mainstream Media for you, Toby LOL). The press is flowing more freely. The MSMs have sent guys to Antigua. It’s big. They “get” it. THE EMPEROR HAS NO CLOTHES. Stanford has no answer. “Sir Allen” has been silent since over three days ago, as that spokesman who was beginning to look a lot like Jim Carrey at the beginning of “Fun with Dick and Jane”.

Hope he gets even like Carrey did.

The Antiguan regulators are on it. They made a complete “about face” on Friday, going from “not probing Stanford” to “to quiz Stanford” and “its not a Friday afternoon cocktail anymore”. It’s obvious that someone told them to “wake up and smell the guavaberry”.

They are still in denial, however. A Mr. King says “I know Allen Stanford personally put close to half a billion dollars of his own money to beef up the capital structure of the bank.” Did you see the check, Mr. King?

NO ONE and I mean NO ONE has disputed the facts in my article. The central issue of Show me the money! has not been addressed by Stanford or anyone else. Some MSMs have asked me how I got to my figures and I’ve sent them my dinky little spreadsheet. No questions. Maybe I should pretty it up a bit.

It’s becoming painfully obvious that this was in a death spiral anyway and the story was going to blow really soon. Matt Goldstein had plenty of research he was ready to go forward with, as was Allison Fitzgerald at Bloomberg. They were googling for Stanford regularly when my stuff came up. More stuff will come forward anyway. I’d say if not for “Duck Tales” this had maybe a week or two more to go, before it blew itself up (ran out of money) or the press blew it up.

That’s really bad if you think about it. Ponzi schemes live off liquidity. If these guys are strapped for cash, after pulling in \$2 billion in fresh money in 2008 and “injecting fresh capital” in December…well. It’s obvious that this isn’t just a product of the 2008 market crash, stuff has been going on for a while. If I had to guess, I’d say this might have been legit until 2000 or at least a “viable model”, since the markets were doing well, but somewhere back it took a bad turn and a little hole grew into a crater. They were filling it in and perhaps trying to build up a business on the side (Stanford Group?). But its just speculation here and we won’t know unless an insider talks.

So…there it is. It’s my 15 minutes. Thanks for lending me your blogs (I really should get my own).

*A simultaneous blogcast exclusive of the Devil and Inca Kola News

Post 2 by Alex Dalmady: Confessions of a Reluctant Whistleblower Or how the Blogosphere took on Stanford

February 13, 2009

It started back in October when my long-lost friend Roberto (I’ll save his last name) called wanting me to help him with his portfolio. I said: “sure I’ll look it over”. He commented that he had a good chunk of his assets in CDs at Stanford International Bank.

I knew the Stanford name. I had heard mention of people holding CDs there. The rates were good. Assumed they could do that because as an offshore bank there was no taxes, no FDIC insurance and they could plow the money into T-bills and high-grade corporate paper and live off the spread.

But it was also mentioned in a murkier sense. People in the financial world have been questioning the deposit rates for quite a while. How could they pay those rates?

So when I went over to the bank’s web site, I was stunned. First, it looked so simple, so unsophisticated. The language used wasn’t quite right. I downloaded the financial statements and to my surprise the “business model” jumped out at me: investing in Stocks, Bonds, Hedge Funds and the like. That’s OK if you’re managing a fund, but not a bank, which is leveraging its balance sheet 15 or 20 to 1. Just a 5% drop in the portfolio, completely wipes out any equity.

“Roberto”, I said, “take your money out YESTERDAY”. He did, albeit slowly, but by December he was out. In the meantime, I found myself lured to the site over and over, my browser would wander to the SIBL and Stanford Financial site and I was googling the words “Stanford International Bank Antigua” over and over.

I saw that the SEC had been investigating since July. “How could these guys not be found out by now?” ANY trained pair of eyes looks at that audited report and says “whoa”.

Then the Madoff case blew, and it became obvious. No one was looking at stuff like this. The SEC had its head up its butt. So I dug deeper and put some numbers on a spreadsheet (took me about 30 minutes). It just got worse. Where was the portfolio? What were they invested in? 20%+ returns on their hedge funds? No way. Outperforming the S&P in stocks? No way. With 30% deposit growth (i.e. money constantly coming in)? No way.

I sat down and wrote “Duck Tales” in January. I showed it to my wife, who didn’t like it much, but was more afraid of my naming names. She didn’t want to see me gunned down by the Jamaican mob or something. A banker friend read it and said, “I agree, but if I were you, I wouldn’t publish that”.

So I sent it to Robert (Toby) Bottome, long time friend and ex-partner at Veneconomy. He said “I love it and just in time for our January issue”. “Do you want to sign it or should we just put Veneconomy Editors” “I’ll sign it”, I said.

There was the question. Why me? Putting my name out there in the firing line. It’s scary. I didn’t want a repeat of my Mercantil experience (nothing really happened) and I certainly didn’t want to get sued. However, it was probably the best. I had nothing at stake. I wasn’t a disgruntled employee, I wasn’t looking for business, I wasn’t plugging my website…heck, Toby didn’t even pay me for the article (LOL). I haven’t written for years, after my InvestAnalysis newsletter with some a little Veneconomy on the side and a brief foray online. Still, people in the financial sector in Venezuela remembered me and I had a ton of credibility with those who remembered. Toby, for his part, is an INSTITUTION in Venezuela and doesn’t take crap from anyone, not even Chávez.

Off it went. It took awhile to get the magazine out. Production problems, it seems. So it is with print. In the meantime I caught wind of blog raising some red flags about SIB also. A start-up called venepiramides, run by someone who calls himself Bernardo Madoff (LOL). It was good to see I wasn’t alone and at least had an “imaginary” friend.

But there is also a sense of confidence from something that is solid, on paper and can’t change with a click. I sent an electronic copy to family and a few friends. I was expecting some kind of reaction or outroar from Venezuela. The article was reproduced in Descifrado, a local financial “insider” weekly, and the audience grew.

All along, the feedback was the same; nobody questioned my conclusions or asked but what if? The whole thing just made too much sense.

I really don’t know how things played out in Caracas, but I know the article got around. However, the local press didn’t pick up on it. I presume that more than one “investor” made their way to Stanford’s offices to ask for their money back.

The Duck enters the Blogosphere

While the “The Duck” took flight in Caracas, it really exploded once it hit the blogs. Miguel Octavio’s “Devil Excrement” took up the story on Monday the 9th as did Caracas Gringo. Miguel, of course, is a financial veteran, (ex-kooky scientist, like me) so he understood the gist and the details of the article all too well. He came up with some more evidence of trouble in a company named Elandia, where SIBL had to give up control in exchange for not having been able to fund a \$28 million dollar loan commitment.

Miguel’s blog entry was quickly picked up by Inca Kola News, a really fine Latin American blog with a sarcastic twist to it. What I liked about the way Miguel and Inca’s takes was that they said: “Here’s this, look at Alex’s report and look at Stanford’s information…decide”

Both blogs get plenty of hits…here from Inca Kola:

“2) So far today this humble blog has had several visits from major newswires, three visits from the US Federal Reserve and one from the SEC, all using combos of “Alex Dalmady”, “Stanford”, “Madoff” etc as keyword entries*. Not to mention all those people from some island called Antigua and plenty from a company called “Stanford Eagle” in Houston. Hi guys, having a nice day?”

The first mainstream reporter to call was from Businessweek. He apparently was working on a Stanford article already, but more from the angle of the “bank excesses” to show how the bank was rewarding its advisors. Bloomberg was next. Also had been working on a story and had other sources.

The next day a couple of more mainstream US blogs picked up the story and things began to get interesting. Felix Salmon at portfolio.com did his homework, read the article and saw it pretty much the same way I (and everyone else) did. That put the mainstream media on alert as well as the arb traders in EMAG, who briefly crushed the stock (it incredibly bounced back).

What I enjoyed the most was a hilarious blog called “I’m Bernie Madoff”. It ran a spoof with Andy Madoff writing to his dad about the deposit they had in Antigua. They linked my article. “Andy” calls me a “another nutcase like that guy Markopolos”. The next day Sir Allen wrote back to Bernie that I was “more ornery than an porcupine in heat”. I’m still ROFL. Although humorous…the blog was dead-on with facts about SIBL.

That took us to Wednesday. The EMAG deal was supposed to close during the day, but before the open EMAG informed that HSSO was telling them that SIBL wouldn’t fund the deal. How can a bank with an \$8 billion portfolio NOT find \$62 million –twice! You call up your broker and tell them…send it. You don’t have sell a share (or bond). Eight billion worth of securities is a fine collateral. But we sort of expected that to happen. Previously, I even lurked at the EMAG yahoo message board and posted some links to the elandia deal to see if people would “get it” and not lose more money. It was useless; I was insulted off the place.

Clusterstock at businessinsider.com came out with a summary of Felix’s assessment and an unequivocal “Whistleblower Alleges \$8 billion fraud at Sir Allen’s Offshore Bank”. Businessweek’s take was a bit lame asking if “Stanford Financial’s Offer was Too Good to be True?” without naming our report, me, Veneconomy or anything else. Our little write-up was only good enough to validate their previous report. I was disappointed (I used to read BW). They did offer me some props later, though. The calls were coming in now. Bloomberg, Reuters, Forbes. I was talking to everybody. Some of the reporters understood what I was talking about. Others might have been a bit out of place.

Bloomberg broke the story early Thursday. Well-documented, they even had another analyst back me up (or me backing the other analyst up either way, it’s good). It was obvious that the story was “in the works”. The Financial Times story on Alphaville was excellent also. The reporter had called me late Wednesday and you could tell she knew her stuff. As the “Caribbean” reporter she knew the political connections of the bank. I sent her my spreadsheet. Why not? It’s about as simple as can be. Like I tried to tell everyone, this isn’t rocket science…it’s COMMON SENSE. Apparently she was shuttled off to Antigua to follow up.

Stanford had no answer to this. Some spokesperson was saying stuff like “it’s only one analyst” or “our clients trust us”. Sure, but how about “Show me the money!” Nothing. Reporters had found me. Stanford had not. Better by me, frankly. Their best strategy is to obviously ignore the “obvious”. If they make too much noise, people will actually look…and that’s not good for Stanford.

I also received a somewhat disheartening call from David Marchant who runs offshorealert.com. He’s gone deep into Stanford for years and gave me the explanation of how Stanford lost his banking license in Montserrat. It’s obvious this guy has a lot of inside stuff. Why aren’t regulators talking to him and guys like him? But he also told me he had spent over \$500,000 just to defend himself against crooked offshore bankers. Ouch. It must be hard to know all that stuff and not be able to say it.

As I write this the story gains traction. A reporter just called from the WSJ. I gave her every thing I had, including my dinky little spreadsheet. She has some Venezuelan roots and apparently knows Miguel and Toby, so there is a ton of credibility right there. Reuters called. They’re calling my home phone now…that’s a bit scary.

As this hits the mainstream media, it’s the in the hands of the lawyers. They can decide what goes and they don’t want to step on any toes. Have they been emboldened by the Madoff blowup or do they still want to go with the “official version” and let Stanford skirt the issues? We’ll see.

You have to wonder how deep the rabbit hole actually goes. I don’t know. There’s Stanford Financial Group and then there’s Stanford International Bank. I only know about the latter. How it relates to the former…not sure. Then there’s politics and philanthropy and cricket. This could go anywhere.

The guy from Reuters asked me if I was going to publish anything further. I don’t want to. I really think that inquisitive reporters and analysts from around the world can put two and two together and take it from here. I think I’ve done my part. But this little journal can help. I can get things off my chest and maybe gain some sympathy for the “little guy”.

I have an idea about how this SHOULD end. In my dreams, Stanford gives up and Jon Stewart invites me to the “Daily Show” (which my kids love) and then I can get back to my work. I have a ton of emails to answer and reports to write.  In my nightmares, I get dragged into court or the FBI shows up at MY door (understand the paranoia…I’m from Venezuela).

My friend just sent me Sir Allen’s letter to the bank’s clients. They are now retorting on Bloomberg.They appear ready to fight this. Money and plenty of influence against some good ol’ common sense. Not an even fight, I’d say and I wouldn’t expect these guys to fight clean.

But Stanford still hasn’t “shown the money” and that has to be the issue. How do you hide an \$8 billion portfolio? How can you have an \$8 billion portfolio and not enough liquidity for pre-determined deals/needs? Why can’t anyone answer this easy question?

I wonder what the SEC and the like are doing. It’s really hard for me to grasp that they have been at Stanford since July and haven’t come across those financial reports. Maybe they were building a case and just waiting for the right time to pounce. Hope so.

Great. Got that off my chest. Rant.

Post I From the Devil:The Stanford International Bank Story: The duck spreads its wings…abroad

February 13, 2009

On Monday I was chatting via email with Duck-Tale extraordinaire, whistle blower, Caracas and Florida-based analyst and it turns out regular visitor Alex Dalmady and was telling him how surprised I was at the little impact in Venezuela of his piece in the monthly Veneconomy on Stanford International Bank, despite the fact that it was reprinted practically in its entirety by Descifrado.

He noted that we all have a friend, relative or acquaintance who has or had an account in it and thus this may be limiting the spreading of the news. And while we were watching inside Venezuela, the whole thing exploded outside. That night I finally wrote my piece on it, not because I was delaying it, but simply because I finally had the time to write it!

And then the whole thing exploded, not here, but abroad. What I had probably not understood is that while the victims of SIB may be located mostly in Latin America and the Caribbean, the wounds and noise of Madoff have set off a race to find new Ponzi/Pyramids/Madoffs wherever they may be. Funny, when Venepiramides first appeared I thought the topic was somewhat narrow, maybe its owners now regret not doing it Enlish rather than in Spanish. They were on the right track and have kept up their great job, but the Venezuelan blogosphere has yet to catch on to the subject.

My post was noted by Inca Kola News (hey! I don’t hate Chavez, I just don’t want him as President!). Soon after a post appeared in portfolio.com written by Feliz Salmon, which was clearly noticed as Seeking Alpha picked it up and then Business Week and the ball started to roll (and then gave Alex and Veneconomy credit).

But in some sense, it did, because Alex Dalmady had a very specific prediction or smoking gun to watch in his Duck Tales article: SIB was supposed to provide financing to Health System Solutions to acquire Emageon by Feb. 11th. and it just failed to do so, suggesting that SIB was indeed having liquidity problems if it was unable to come up with the funds and incurr in a US\$ 9 million loss. And SIB failed to do so, pushing Emageon shares down as much as 56% that day. I had earlier found a similar failure for SBI to deliver financing to Elandia, which cost SBI control over the company. That makes two separate smoking guns that liquidity is just not well a the US\$ 8.5 billion institution.

By now, the duck is spreading its wings far and wide. Bloomberg broke the story concentrating on the sale of SIB’s CD’s in the US, clearly a no-no. Caracas Gringo interviewed Dalmady, the Financial Times jumped on the story loving the cricket angle, a New York Times blog got into the story and by now the  Associated Press is also into it. (Only Forbes and the WSJ are missing now…)

But still, what the hell is going on at the Duck?

So far, responses to the criticism have been surprising to say the least. “It is just one analysts opinion” simply does not fly well. And then tonight we get a letter (see comments, its veracity ahs been confirmed) from none other than Sir Allen to its employees, which to me raises more questions than answers:

” Although we have not been the beneficiary of any taxpayer money, hard as we try, we are not immune from that crisis”

Funny, all the accusations by Dalmady are based on the Antigua based Stanford International Bank, why should that entity get anything?

“You have heard that regulators from different agencies have visited our offices in recent weeks, as they have been doing to many financial operations around the country.”

Visits all over the country have a different purpose than looking into the sale of CD’s issued by Antigua-based Stanford International Bank to US citizens.

“SIB remains a strong institution, and even without the benefit of billions in US taxpayer’s dollars we are taking a number of decisive steps to reinforce our financial strength. We will take the necessary actions to protect our depositors. I have already added two capital infusions into the bank and we are considering a number of other steps as needed.”

Once again, why should SIB even aspire to receive US taxpayers dollars?

And then, if as reported in the December 17th. letter in its website, things were peachy and the bank had not incurred in any losses, why did SIB had to inject US\$ half a billion in capital and “is considering a number of other steps are needed”?

There were very simple questions which were not answered in this letter, like: Where are the assets that generated the wonderful results SBI claims in a year when equities were down 4-0-50% across the world and the bank claimed to have started the year with a 50%-plus allocation to Equities? Why did the bank fail to provide financing to Emageon and Elandia? Are withdrawals being promptly met? Or even why did Sir Allen really withdraw his funding from the 20/20 cricket challenge in December?

But in the end, the strangest aspect of the whole story is that there is total silence in Venezuela. Nothing in the news in the country that gave SIB its initial push, with as much as US\$ 3 billion in deposits from Venezuelans. Stanford even purchased a local bank “Stanford Bank” to give some semblance of legality to the sale of SIB products, which is a gray area in my country. Stanford’s reach is so wide, that I am sure that many of the new Boli-bourgeois, have accounts there, after all, it was probably the bank with local presence with the lowest compliance requirements in the market and the most aggressive sales force.

As I said, everyone in Venezuela either knows or is related to someone with money at SIB. In fact, I have been warning people I knew about this for years. And I must say, while some listened to me partially, not a single one of them withdrew all of its savings from SIB. Not one.

Finally, I find it somewhat hilarious that when I wrote about this on Monday, the Duck Tales or El Pato write ups were nowhere on the web, so I decided to post them  at my usual location (www.filesavr.com) where I load up documents that I can’t find on the web. Everyone seems to be unloading it from there…You truly never know where your blog will take things…

But as you can see from the next post, Alex Dalmady is quite amazed…