Lessons learned from Robert Allen Stanford

Lessons learned from Robert Allen Stanford
By Ken Springer
Until their arrests for running two of the biggest Ponzi schemes in history, Bernie Madoff and R. Allen Stanford had one thing in common: Neither had criminal records.
However, if investors had just scratched at the surface and checked into their backgrounds, they might have uncovered a trove of red flags that could have prevented the loss of billions.
This week’s guilty verdict for Stanford after his long-awaited trial in Houston should serve as a powerful reminder to investors to undertake proper due diligence before investing in a fund or company or trusting their money with an investment manager.
Before the SEC brought its charges against Stanford, a search of publicly available documents would have revealed other possible allegations of fraud, running a Ponzi scheme and maintaining close relationships with money launderers and other criminals.
Some of that evidence is listed below:
• Seven arbitration matters involving alleged fraudulent activity by Stanford Financial Groupwere on file with the Financial Industry Regulatory Authority between 2001-2006;
• FINRA levied fines totaling over $70,000 in 2007-2008 against the company for misrepresenting facts about its certificates of deposit disclosures (keep in mind those CDs were at the center of the whole Ponzi scheme allegations), among other activities noted;
• Two former employees of Stanford sued the Houston financier, claiming in court documents they became aware of an alleged fraud perpetrated by Stanford. One former employee said in court documents that Stanford was running a Ponzi scheme, and one claimed that illegal practices were being used to sell the CDs;
• Investors sued Stanford as early as 2005, alleging he targeted Venezuelan investors with a Ponzi scheme, and that Stanford allowed a known money launderer to use Stanford’s banks to execute the fraud;
• Stanford was sued in 2002 by money launderers who claimed he failed to protect their money (as he promised them) when Stanford’s bank gave the criminals’ money to the Drug Enforcement Administration;
• Stanford and Madoff both employed small accounting firms to handle the books. Stanford’s accountant was C.A.S. Hewlett & Co., based in Antigua and run by Charlesworth Hewlett, who died in January 2009 before the SEC brought its charges.
The point is, most of this information was found through reviewing public records, such as court documents in lawsuits filed against Stanford and his affiliates, and then analyzing and comparing the patterns of information.
Had investors conducted a thorough background check before investing with Stanford, perhaps they would have learned about these prior issues and could have avoided investing with him — saving millions of dollars in the process.
Today, fraud is in the headlines almost every day. Not only are dollars on the line, but protecting your reputation as an investor is now also of utmost importance.
In most cases, proper due diligence will turn up nothing, but in the case a red flag arises you’ll be glad you took the time to investigate.
KEN SPRINGER, a certified fraud examiner, is president of Corporate Resolutions Inc. and a former special agent of the Federal Bureau of Investigation. He is the co-author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters.”