Is Sir Allen Stanford the New Bernie Madoff?

It is disheartening at the beginning of a new administration, which promised a new brand of politics, to discover that the vice-presidential mansion at the Naval Observatory is for sale.

The Wall Street Journal reported that Paradigm Global Advisors, a $50 million fund of hedge funds controlled by two members of Joe Biden's family, was marketed by companies controlled by Sir Allen Stanford since July 2007. In addition, Stanford-related companies invested $2.7 million from individual investors under the arrangement. Hunter, the son of the vice president, and Biden's brother James control Paradigm.

This begs the obvious question: Who would hire Hunter and James Biden to manage money unless they wanted access to Senator Biden? The Bidens do not have any history of successful money management. Surely, Stanford could have found more qualified money managers. I do not raise this issue as an enemy of the Bidens. I have supported and fundraised for the senator since he first ran for president in 1988.

It appears that Sir (by way of Antigua and not the queen of England) Allen Stanford has been playing fast and loose with his investors' money for a long time. He is the founder and sole shareholder of Stanford Group, which is located in Houston, Texas. The crown jewel of his investment empire is the Stanford International Bank in Antigua (far, far away from regulators' prying eyes) with $8 billion in assets. Most of the investment activity of the Stanford Group involved soliciting buyers for the Antiguan bank's certificates of deposits. These certificates typically paid twice the market rate in interest with no apparent rational explanation of how they were able to accomplish that.

I never had the pleasure of meeting Sir Allen, but I did meet with middle management of the Stanford Group. At that meeting in 2002, a red flag was raised with me immediately. The Stanford employee called the non rated Stanford International Bank debentures that they were offering certificates of deposit. Even though these debentures technically could be called certificates, it seemed to me that the company was deliberately trying to mislead investors into thinking that these were certificate of deposits insured by a government agency.

The Stanford employee did nothing to disavow me of that notion. I asked repeatedly: "These are certificates of deposit?" He said "yes."

I could not discern how the Stanford International Bank was able to pay a higher interest rate than everyone else unless they were investing the proceeds long term while promising investors short-term liquidity. The bank thought that they could get away with investing for the long term because they were counting on the investors to not withdraw their money. A mismatch of the duration assets and liabilities may work for a time, but it always proves to be a recipe for financial disaster. The bankruptcy of Drexel Burnham Lambert in the 1990s is the most obvious example.

After the Madoff Ponzi scheme was disclosed, the SEC, already under fire for ignoring the signs of the Madoff fraud, began visibly investigating the Stanford Group. The startling combination of learning about Madoff and the SEC investigation understandably made investors nervous. There was an immediate run on the bank which forced the closure of the bank in Antigua. It has been put in receivership by the authorities.

The SEC now alleges that Stanford deceived investors about the safety of the certificates of deposit that he sold through his bank, while the federal authorities are investigating a possible Ponzi scheme at the bank. Once again, the SEC, the Financial Industry Regulatory Authority (FINRA), and its predecessor, the National Association of Securities Dealers (NASD), were AWOL. According to the Financial Times, both the SEC and NASD received a credible allegation from a former employee that Stanford might be running a Ponzi scheme as early as 2003.

The SEC was apparently investigating him for three years, but could not seem to pull the trigger on a fraud indictment. I am at a loss to understand why the investigation should have taken that long. It should have jumped out at the SEC that he is paying twice the going rate on CDs. My own questions to the SEC were answered by the baffling, "We do not have jurisdiction over an Antiguan bank." They seemed to forget the Stanford Group's offices in Houston, Texas.

It is obvious that the $5 million that the Stanford Group spent on lobbying fees and the $2 million in political donations kept the regulators at bay. The pictures of Stanford with Nancy Pelosi or then-President Bush (take your pick) were a successful talisman that warded off the regulatory spirits.

FINRA managed to fine the Stanford Group a grand total $70,000 for a series of serious securities laws infractions. The puny amount of fines is not even a rounding error for a multi-billionaire such as Stanford. Incredibly, they were only fined $10,000 for the failure to properly disclose the risks of the certificates of deposit, which is now at the heart of the SEC indictment of fraud.

While the MSM is castigating the SEC and FINRA, they should also be casting blame on themselves. Since Forbes knew enough to place Stanford number 205 on their list of  richest 400 Americans, they should have been able to discern how he was making his fortune.

Besides the depositors in Stanford's Antigua bank, Beau Biden, the vice president's other son, might be a big loser. Is the questionable business deal between the Biden family and Stanford enough to derail his presumptive bid to follow his father into the Senate?