Allen Stanford’s Disastrous Investment Record

By Nicholas Elliott

Warren Buffett quipped that a good way to become a millionaire is to put a billion dollars into an airline, but investing with just-convicted Ponzi schemer Allen Stanford would have been almost as effective a way to lose your shirt.

Stanford on Tuesday was convicted on 13 of 14 counts of fraud and money laundering, but his attorneys plan to appeal. He leaves behind him“hardship and poverty” for some investors but also what must be one of the most startlingly awful private equity track records ever recorded.

According to a report from the receiver, Ralph Janvey, posted in November, Stanford’s private equity and real-estate investments totaled at least $542 million between 1997 and 2008. Stanford’s records indicated investments of $650 million but the receiver hasn’t been able to find all those purported investments, according to law firm Baker Botts, which is working for Janvey.

Baker Botts told Private Equity Beat that 27 private equity interests have been liquidated for a total net value to the estate of more than $35 million, and it estimates proceeds from the remaining assets of about $7 million. That would put the total loss on the portfolio at between $500 million and $600 million. Real-estate liquidations have brought in about $16 million.

The receiver’s task in realizing value for claimants hasn’t been easy, coming just after the financial crisis. The November report pointed out that Stanford’s real estate and private equity investments were “illiquid and highly speculative,” which also makes them harder to unload.

Baker Botts, in a statement, wrote that “many of these investments were in entities with negative equity; market conditions or adverse events reduced the value of others; and a number included contractual commitments that would have required the Receivership Estate to contribute additional millions of dollars or face significant dilution or total loss of the investment.”

Since the receiver was appointed in 2009, it has sold limited partner interests and direct holdings in companies. Some previous analysis of the holdings by Venture Capital Dispatch is here.

What can investors read into this debacle? It’s clear they can’t rely solely on the Securities & Exchange Commission. Not only was the agency tardy in responding to numerous complaints about Stanford over a period of years, but its lack of action was viewed by investors as giving his investments a clean bill of health.

The 2010 report on the Stanford investigation by the SEC’s Office Of Inspector General reported that “Stanford officials were able to persuasively represent that Stanford had been given this “clean bill of health” because in fact, Stanford had been examined on multiple occasions and only been issued routine deficiency letters which they purportedly remedied.”

It’s also clear that some investors saw warning signs, though whether those investors acted on them is unclear. One 2002 letter from the mother of an elderly investor in Mexico raised questions about yields on Stanford’s certificates of deposit being significantly higher than market levels and apparently being unaffected by market movements, as well as it using a little-known auditing firm in Antigua.

Another letter from 2003 from an undisclosed source pointed to “a Byzantine corporate structure,” and the holding of deposits in offshore entities.

For those who did more research, there were various actions taken against Stanford by the Financial Industry Regulatory Authority, Finra, and charges leveled in lawsuits. Investigator Kenneth Springer, in his book ‘Digging For Disclosure,’ contends that had investors made use of the “enormous” amount of damaging public information about Stanford, they would have put their money elsewhere.