Allen Stanford, Ponzi Operator

Patrick Kidd says that Allen Stanford is "another victim of the biggest economic crisis since the 1930s"; Joe Wiesenthal says that nobody is accusing Stanford of being another Ponzi scheme. So before this meme takes root, let’s be clear about this: Stanford is not a victim, he’s a crook, just like Madoff. And yes he was running a Ponzi scheme. Just like Madoff. The only real difference was that Madoff’s returns were variable, while Stanford’s were fixed.

I’m not sure why Joe is so convinced that Stanford had a genuine investment operation:

Even the SEC concedes that the money was actually invested. What’s more, it’s not clear that the truth is that different from what the company was advertising.

They always admitted on their website that client investments went towards alternative investments. So it’s very possible that assets they thought were completely liquid have now become frozen…

It’s easy to imagine that Stanford’s returns exceeded what they’ve paid out over the past several years, during which private equity and real estate vastly outperformed the market…

Bottom line is that the company’s fraud doesn’t appear to be nearly as baldfaced as Madoff’s and Stanford’s clients may end up with more than pennies on the dollar, assuming any of it can be found.

A couple of factual points here: firstly, the SEC is "conceding" nothing. All they’re saying is that the overwhelming majority of Stanford’s funds disappeared into a "black box" controlled by Stanford and his CFO, James Davis. Now, given that it’s hard to simply obliterate $8 billion, that money had to go somewhere, and I daresay some of it wound up being "invested" in some form or another. But there’s absolutely no evidence to suggest that Stanford’s assets ever exceeded its liabilities.

What’s more, there’s quite a lot of evidence to suggest that a lot of Stanford’s "investments" were in the kind of micro-cap stocks beloved of pump-and-dump operators. That’s not investing in something liquid and then seeing it freeze up, it’s gambling, and it’s often illegal.

And while it’s possible to imagine that Stanford’s returns exceeded what they paid out, that’s largely a function of the fact that they weren’t paying out much if anything. Once you’ve invested in Stanford, you’re very unlikely to redeem your CD unless you really need the money: after all, you trust the bank (otherwise you wouldn’t have invested there in the first place), and you can get much higher interest there than you can anywhere else.

Meanwhile, it’s impossible to imagine that Stanford’s returns exceeded what Stanford claimed those returns to be. As the sole shareholder of Stanford International Bank, Stanford had every incentive to maximize, rather than downplay, his reported returns: it was those returns which gave his investors confidence that he could pay them back.

So right now I have no reason to believe that Stanford wasn’t just as baldfaced a liar as Madoff. And I frankly don’t have much hope that the money in Stanford’s "black box" is going to be found — not unless Stanford himself gives it up. A Ponzi scheme is any scheme where you promise high returns which are actually fictional. Ponzi schemes work so long as there are net inflows, and they fail as soon as you get net outflows. That description fits Stanford to a T.