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Leading article: Everyone is a loser in the Stanford scandal

Alarm bells should have been ringing over his operations long ago

Saturday 21 February 2009 01:00 GMT
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Like all bank runs, the fall of Allen Stanford’s financial empire this week has been brutal and quick. On Tuesday the FBI seized documents from three of Stanford Financial Group’s US offices, and the Securities and Exchange Commission regulator accused the Texan-born businessman of perpetrating an $8bn fraud on investors around the world.

The next day, depositors began queuing outside branches of Stanford’s various banks across the United States, the Caribbean and Latin America seeking to withdraw their money. Stanford himself was finally served with legal papers and requested to turn in his passport on Thursday in Virginia.

This week’s action was welcomed as a triumph for the American Security and Exchange Commission. But the truth is the Stanford case is almost as embarrassing for the US financial regulator as the recent Madoff scandal. The regulation of the US financial sector, like that of the UK, is often described as “light tough”. But “no touch” would appear to be a better description. For years, the American authorities were no more assiduous in investigating Sir Allen’s operations than the Antiguan regulators of the businessman’s adopted home (and the tax haven where Stanford International Bank is registered). The SEC revealed this week that Stanford International Bank’s investments were not monitored by a team of analysts, as investors had been told, but by Stanford himself and an old college classmate. The group’s auditor was a small accountancy firm based above a shop in a north London suburb.

But why did the SEC uncover these grotesquely improper arrangements only this week? Its job is to stop fraudsters before they take investors’ money, not after they have built up a vast multinational banking empire. Stanford’s 30,000 investors must now sweat to see how much of their money is actually left.

And it is not as if the authorities were given no cause to investigate Stanford. The alarm bells should have been ringing long ago. Stanford promised investors interest rates well above those offered by other banks. And the returns were suspiciously smooth too. The bank reported returns in 1995 and 1996 of exactly 15.71 per cent. That was a clear indicator that something was fishy.

Stanford had dubious connections too. Ten years ago it emerged that the Mexican drug lord Amado Carrillo Fuentes had entrusted some $3m to Stanford’s care. The credulous English Cricket Board welcomed Stanford’s cash as if he were a model of probity, but it is notable that other cricketing authorities steered clear of him.

In fact, it seems that the SEC was aware of impropriety in Stanford’s business affairs. There are reports of investigations into Stanford going back 10 years. But the fact is that it was only after the Madoff case broke that the SEC finally decided to do something. This is no triumph, rather a frantic bolting of stable doors.

Yet culpable though the SEC and others have undoubtedly been, this is not solely a tale of regulatory failure. Those who invested their money with a bank promising implausibly high returns cannot seek to shift all of the blame on to the regulators. There is a reason why certain businesses choose to operate out of places like Antigua and it is not because of the weather. The simple fact is that it is easier to cook the books offshore.

The financial regulators in whose jurisdiction Stanford operated have reason to be ashamed. But so does everyone – from English cricket to careless investors – who bought into the Stanford magic with no questions asked.

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