Wednesday, February 18, 2009

Regulators Catch Alleged Fraudster (Even a Blind Squirrel Gets The Ocassional Nut)

I am thinking of changing the name of this blog to 'Bang Up The Banker'. Back in 2007 (you remember the good old days, don't you?) we could write articles on the latest deals, stellar performing hedge funds, interesting IPO's etc. Now it seems that the only thing worth talking about is the latest implosion and subsequent arrest of some 'banker' somewhere.

Ever heard the saying 'Eventually even a blind squirel will find nuts in the forest' well today's edition of 'Bang Up The Banker' focuses on the SEC who have 'caught' an alleged dodgy banker , Sir Allen Stanford, who has been accused of a fraud of 'shocking magnitude'.

Stanford's companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action.

The SEC, reeling from a caning in Washington, 'seized' the opportunity (15 years after the alleged fraud began) to arrest the companies executives and freeze all their assets.

"As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

Apparently the scheme centered on the defendants misrepresenting to CD (Certificates Of Deposit) purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds into 'liquid; investments. A team of 20 analysts was said to monitor the portfolio and was subject to audits by Antiguan regulators.

It also turns out that this multi-billion dollar portfolio is managed by Stanford; Stanford's father who resides in Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales; Pendergest-Holt, who prior to joining SFG had no financial services or securities industry experience; and Davis, who was Stanford's college roommate.

The words 'flag' and 'red' come to mind.

The SEC's complaint also alleges an additional scheme relating to $1.2 billion in sales by SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data. According to the complaint, the false data helped SGC grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in 2007 and 2008. The fraudulent SAS performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivized to reallocate their clients' assets to SIB's CD program.

I find this all a bit depressing for a number of reasons, however the one that is gnawing at me today is the realisation that for years I have been playing cards with others dealing from a crooked deck.

How, in the financial industry, are you supposed to believe that you can build a legitimate business when you are competing against the likes Madoff, Freeman and Stanford?

The banks haven't covered themselves in glory either. For years they have been making bogus profits, plowing these into advertising, sponsorship and manpower so much so that smaller companies just cannot compete.

You maybe sitting there in your guilded office at an investment bank (if there are any left) or a massive fund chortling at my naiveté but I wouldn't get too comfortable.

It is my opinion that the regulatory agencies and governments were very keen on large institutions, mammoth operations that could be relied upon to have massive compliance departments looking after Joe public. This would make the regulators job easier n'est pas? Then all you have to do is make it harder and harder (enter MiFid etc) for smaller companies to compete against their buddies in the banks and, Bob's your uncle, you have a utopian financial system.

Only problem is, it didn't work, did it.

Moving forward I believe that the big banks and huge financial institutions should be broken up... what is the point of their existence? We have already seen that they couldn't manage a piss up in a brewery. The only thing the masses relied upon them for was to be good shepherds of their money, and they couldn't even do that. If governments had not stepped in millions would have lost money and I fear we would have entered the dark ages.

Even now, anyone with any sense knows that most of these institutions are broken. Replacing the CEO is like moving deckchairs on the Titanic.

What is needed is a complete overhaul. Put someone in charge of the regulatory authority that is not some pussy who never got picked for the football team when he was kid and was not a Fag at public school for half the boards of the banks and institutions. Get someone in there with some gumption, for God's sake.

Did you see them getting grilled on The Hill? Seriously, would you want them to be fighting on your side? They were, frankly, pathetic. I know we hear of these top guys 'tough' reputation, but do you believe that? I certainly don't, they looked like a bunch of bean counters who worked their way up in a cushy admin job waiting for a call from a bank to employ them for millions.

I rabbit on, and I am just getting angry.... Here are my thoughts..feel free to comment..

1. Break up the banks into smaller operations

2. Ban banking mergers

3. Have a company select its mode of business and do not allow it to have any other operations. You sell stock, you trade stock, you advise on mergers, acquisitions etc, you manage a fund, you give financial advice, you take deposits and make loans (you get the picture).... pick one... and that is your lot. Want to do any other business... forget it.

4. Break up the regulators into specialist authorities (just like it was in the UK) Specialist regulator for fund managers, financial advisors, stockbrokers, banks etc. This will provide more concentrated focused regulation

5. Prosecute some regulators for their failings in Madoff, Stanford and Freeman. The authorities banged up some bankers, to teach the market a lesson, why not the people who were asleep at the wheel, would focus the minds of those to come would it not?

I have heard others like incentivising regulators etc, but shouldn't they be doing their job anyway?

Bottom line is that there needs to be a shake up, we have to admit that some have screwed it up for us all and now I want my bail out. I don't want money, I just want a level playing field.

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