You will all no doubt have seen the stories this morning alleging investment fraud against the Texan billionaire (and “cricket impresario”) Allen Stanford. A complaint has been lodged in the US by the Securities and Exchange Commission alleging another giant “Ponzi” (or pyramid) scheme - where existing investors are paid returns using funds provided for investment by new investors - operated by Stanford Finance Group. Allegations have also been made against Mr Stanford’s brokerage firm, Stanford Group Company.
These allegations follow swiftly on the back of the alleged Ponzi scheme operated by Bernard Madoff. For our Law Now on the Madoff matter, please click here.
Losses in the Madoff case have been estimated in the region of US$50 billion. In the case of Mr Stanford, the initial estimates of the size of the fraud in today’s reports amount to US$9.2 billion, with further allegations that the assets in the funds managed by Stanford Finance Group exceed US$50 billion. We are getting used to seeing reports of huge potential or actual losses in the course of the current financial crisis. But on any analysis, the figures, if correct, alleged in the Madoff matter and now against Mr Stanford are huge.
The allegations against Stanford and his companies share similar features to the allegations against Madoff. Both cases involve US based vehicles. The investments in both cases promised improbably high returns and a significant portion (if not the entirety) of both sets of investments were shielded from independent oversight (this has been referred to as “black box shielding” of the investments). Both the Stanford and the Madoff investment vehicles were audited by relatively small firms compared to the size of the business. Further, in a bizarre twist, it is claimed by the SEC that Stanford’s operation may itself have invested client monies with Madoff.
It is not surprising that during a credit crisis, Ponzi schemes are exposed. Existing investors seek to withdraw their money, whilst it is increasingly difficult to attract new investment. During a boom period, on the other hand, the investment levels are easier to maintain and any fraud easier to perpetuate. Further, the SEC was subject to criticism following the exposure of the alleged Madoff frauds for failing to spot the problem in the first place. They will therefore be keen to be seen to be investigating any other potential problems thoroughly, to avoid the risk of further criticism. There is, therefore, a very good chance that this is not the last allegation of a Ponzi scheme that will be made in the near future.
In light of the allegations, it is now expected that, as with Mr Madoff, there will be speculation as to the identity and exposure of investors to the fraud. In particular, there is likely to be a focus on exposed hedge funds and so called funds of funds, as well as major banks, and the claims that may be made by and against each of them.
As a firm we have a wealth of expertise in advising financial institutions, including fund managers, banks and other financial institutions, as well as insurers, on fraud cases and the litigation that arises in these situations. For further information on how we can help, please speak to your usual contact at the firm or the authors below.
