Stanford Scores Perfect 10 on Ponzi-Meter

By Scott Reeves  JUN 19, 2009 12:30 PM

Sir Allen finally surrenders.


Telltale traits of a Ponzi schemer:

1. Unusually steady returns despite the market’s ups and downs.

2.  “Improbable, if not impossible” returns (the SEC’s words) from thumb-sucker certificates of deposit (CODs).

3. A knighthood conferred by the government of Antigua and Barbuda.

Texas billionaire R. Allen Stanford scored on all 3 and was arrested by the FBI Thursday night. In April, Stanford told Bloomberg News: “I’m not a damn swindler” -- perhaps a variation on President Nixon’s Watergate denial: “I am not a crook."

Stanford is scheduled to be formally charged today in US District Court in Richmond, Virginia.

The Stanford Group allegedly sold $8 billion in CODs in Stanford International Bank. The SEC charges that the company’s advisers told clients their money would be placed in CDs marketed around the world while, allegedly, the money was used to purchase real estate and other speculative investments. Some of the money, investigators believe, was used to fund Stanford’s operations.

As alleged Ponzi schemes go, Stanford’s wasn’t very imaginative. At least Bernie Madoff cooked up a phony trading floor in his $65 billion scam and manufactured statements to show consistent gains. No investments were made. That’s takes talent -- and chutzpah.

About 200 investors have received legal requests to return money they withdrew from Madoff’s funds before the scheme collapsed. Two hedge funds run by Banco Santander (STD), a Spanish concern, have agreed to return $235 million withdrawn from their accounts a few months before Madoff’s masterpiece came unglued. Other firms with some exposure to Madoff include the Royal Bank of Scotland (RBS) and HSBC (HBC).

Such “clawback” requests are routine and are likely to be made in Stanford’s case. The withdrawals were paid as part of a scam, the legal theory goes, and therefore should be returned and divided proportionately among all those who were defrauded.

This could get sticky: What if an investor withdrew the money and immediately spent it? Or lost it in another investment? How can spent money be recalled, and how can the court ask investors to lose the same money twice, especially if a savvy investor got a whiff of the true nature of Stanford’s operation before it fell apart?

In tough times, it might be wise for individual investors to be dull -- trade security for yield by sticking with trusted stocks such as Clorox (CLX), Microsoft (MSFT) and Procter & Gamble (PG).

Does it make sense to turn your money over to people like Madoff or Stanford when there are solid companies like Goldman Sachs (GS) out there?

At least Stanford isn’t a complete dummy. The FBI arrested him as he left his girlfriends house in Fredericksburg, Virginia. Meanwhile, Mrs. Madoff yelps that she’ll starve without millions. Girlfriend versus wife? If you’re running a Ponzi scheme, it’s a good way to cut your overhead.

Stanford launched his career as an entrepreneur with a chain of body-building gyms. If he’s  convicted, he’ll have plenty of time to work on his pecs in the prison yard.
No positions in stocks mentioned.

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