What is a 'Ponzi Scheme', how it Works and How does it Collapse?
A Ponzi scheme represents a fraudulent investment trick where the promoter pays return on investment to previous investors from the money invested by new investors instead of the money earned through profit or gain. Customers are promised to receive higher investment returns, compared to market averages, with no risk at all since they will be paid from the money provided by new clients. This investment scam requires an ample flow of clientele for powering the whole fraudulent system.
A Ponzi scheme comes into existence when the promoter is able to cllect initial investment funds from a person. This scheme usually works when the promoter pretends that the funds will be invested in low risk securities that yield higher return on investment. Afterwards, the promoter will deposit the Ponzi scheme funds into his personal bank account to earn interest income or return. To pay promised returns to the original investor, the promoter looks for new investors to deposit their funds. Later, the promoter will utilise new capital to pay promised investment return to the original investor. This Ponzie scheme continues to work until and unless there is a consistent inflow of new capital from different sources. The promoter invests no money out of his personal pocket.
A Ponzi scheme collapses because original investors are paid investment return from the investments of new clientele. The primary focus of this investment scam is to attract new investors. A Ponzi scheme fails when the promoters are unable to find new investors from whose money investment returns are paid to original investors. In other words, Ponzi schemes collapse or fail when consistent flow of funds is interrupted and the individual or an organisation is unable to pay returns to original investors. This scheme falls apart when the investment flow is out of order. A Ponzi scheme fails or collapses when all investors demand their money and returns at the same time.
Investigating the Case of Allen Stamford
This section is aimed at providing a sufficient detail about the Ponzi scheme of Allen Stanford and his team of financial advisors by studying numerous important aspects of the case in the following manner:
The Background to Allen Stanford, the Business he Founded and the Investments he Offered
Robert Allen Stanford is convicted to run a massive Ponzi scheme by laying the foundation of an offshore bank named Stanford Financial Group which was based in Antigua. The Chairman, Allen Stanford, was able to run this investment fraud for twenty years and generated approximately $7 billion. These proceeds were used by Allen Stanford to finance his personal expenses such as real estate deals, betting in cricket tournaments and Allen Stanford’s business ventures . Moreover, Allen Stanford took out loans out of depositors’ money, approximately more than $2.2 billion from certificates of deposits (CDs), without even revealing the transaction to all investors and other stakeholders. Besides this, Allen Stanford purchased a small island at a price of $63 million. Allen Stanford owned luxurious mansions in more than four locations such as Houston, Antigua, Fla and St. Croix. After living in any king-size mansion for one year, Allen Stanford used to move out of it and had the mansion demolished .
Allen Stanford was registered as a brokerage dealer and an investment advisor while he was affiliated with an investment bank in Antigua. This offshore bank offered clients “illegitimate” certificates of deposits (CDs) with a relatively higher investment returns and interest income with minimal risk factor involved. These certificates of deposits (CDs) offered around eleven to fourteen percent investment return that was too high compared to other low risk investments in the United States. It was unlikely that such higher investment returns could be easily earned through legitimate investments in the U.S. in the years 1997 and 1998. By the end of year 2004, Stanford’s clients held certificates of deposits (CDs) of more than around $1.5 billion of which $227 million worth of these certificates were held by the U.S. investors. In 2000 to 2002, Allen Stanford’s business ventures reported to have earned around 12.4% to 13.3% on these illegitimate certificates while the Unite States market indices reported a fall of average investment returns by 11.05% in 2000, 15.23% in 2001 and 25.9% by the end of 2002.
Overall, the Ponzi scheme of Allen Stanford was mainly concerned with sales of illegitimate certificates of deposits (CDs) that were issued by a bank owned by Stanford Group in Antigua and Barbuda. These false securities were marketed all over the globe as secure and safe investments. Allen Stanford was in consistent practice to use Stanford International Bank to finance his personal expenses. He took out more than $2 billion from customers’ funds. Nearly more than twenty one thousand people became victims of this Ponzi scheme in around sixty five countries . The main targets of this scheme were retirees, working-class families and less well-off people.
How Allen Stanford was able to grow his Business Unchallenged by the Regulatory Authorities?
Allen Stanford was able to keep his Ponzi scheme running successfully because of numerous reasons. The first reason behind his long tenure success is that once he succeeded in establishing Stanford International Bank, he created a task force in 1990tofor reshaping banking regulations in Antigua. Moreover, Allen Stanford paid handful amounts to Antiguan regulators in form of briberies for throwing off the United States authorities. One of these U.S. regulators was named Leroy King who once served as a Financial Services Regulatory Commission chief became friends with Allen Stanford. He is fighting banishment to the United States. Apart from this, the Securities and Exchange Commission (SEC) was unable to take any action against Allen Stanford as he was perceived to have strong political connections in the Caribbean and the United States. There were rumors that Allen Stanford was a government informant that helped him escape any lawsuit by the regulatory authorities.
Furthermore, to steal $7 billion from investors in around sixty five countries, Allen Stanford used the classic model of Ponzi scheme that went unchecked by the regulatory authorities. It was an ordinary business deal where a simple plan plan was employed to get money out of peoples’ pockets. Actually, Allen Stanford and his team of financial advisors fooled the public by presenting those securities that were portrayed to be risk-free and offered unusually higher investment returns. To convince investor a plausible story was presented at the time of meeting the client. For hiding the fraud, fake testimonials and financial reports were created for impressive presentations. The securities offered above market returns and for supercharging sales pitches, Allen Stanford offered his financial advisors one percent commission of the face value of sales they generated.
It was a bank in Antigua that claimed that all certificates of deposits are safe, maintained minimal overhead and were traded in low-tax jurisdictions. Allen Stanford was able to continue his Ponzi scheme because at that time, Antigua was lightly regulated. It was the former head of Antigua and Barbuda's Financial Services Regulatory Commission, named Leor King, who partnered with Allen Stanford in this fraudulent cause in keeping the bank’s misdeeds hidden from regulatory radar. Allen Stanford also opted to modify banking regulations in Antigua to his benefit since he was perceived to be well-regarded and powerful. In the 1990s, Allen Stanford became the sole regulatory body and was responsible to look after the banking operations. This is how he was able to keep his scheme hidden.
Overall, the influence of Allen Stanford went beyond the local government in Antigua where majority of the U.S. diplomats came to Antigua for partaking Stanford’s generosity and extend their support for Allen Stanford. With a regulatory protection, Allen Stanford was able to run his Ponzi scheme for years. The Securities and Exchange Commission (SEC) was unable to take any action against because whenever Stanford’s case was brought to his attention, the enforcement director Fort Worth office of the SEC, Spencer Barasch, either terminated or most of the times, discouraged the case from being investigated further. He argued, in favour of Allen Stanford that either the case is too complex or it will take longer time for investigation due to which the team’s attention was diverted to low priority cases .
How the culture inside the business enabled Stanford to continue with the fraudulent activities for so long?
Allen Stanford was able to keep his fraudulent financial empire running smoothly for a longer period because the internal corporate culture of his business was based on fake presentations. All of the members of his financial team presented fake sales records to customers, showed false return on investment on certificates of deposits (CDs) which appeared to much higher than the market averages. Moreover, the internal company culture was that any sales person who ended up pitching a sale was offered one percent of the face value of the illegitimate certificate of deposit (CD) sold to any customer.
What eventually brought about Allen Stanford’s conviction?
It was on February 16, 2009 that the Securities and Exchange Commission (SEC) filed a lawsuit against Allen Stanford where an emergency relief was requested. This was because the SEC alleged that Allen Stanford has been misrepresenting customers about the safety of his certificates of deposits (CDs) arguing that these represented a fraudulent investment scheme on a larger scale. The Ponzi scheme allegations were added on February 27, 2009. In the mid of June 2009, Allan Stanford was convicted of conspiracy and fraud on a larger scale . It was the Securities and Exchange Commission (SEC) that filed a complaint against Allen Stanford. His right hand and the company's chief financial officer, Jim Davis, dislosed the Ponzi scheme for a reduced sentence in jail in return.
3. Although Stanford was convicted and imprisoned the case continues. Reflect on the claims he is making and comment on whether Allen Stanford is truly guilty.
Throughout the court proceedings, Allen Stanford continued to steadfastly present his defensive arguments. Allen Stanford argued that he has never done anything unethical and was never involved in any fraudulent activity. Allen Stanford claimed that he never stolen money from the general public since his financial statements were audited by independent entities for over twelve year period. Had there been any fraudulent activity, the independent auditors would have surely reported the issue at once by whistle-blowing. He further presented his claim that his financial conditions were also audited by the Internal Revenue Service (IRS) for twelve years. Allen Stanford maintained that he became victim to political propaganda. He continued to claim that he and his team invited the Securities and Exchange Commission for scrutiny. He further blamed SEC for having everything manipulated every financial record and lobbying against him. He claimed that all of his financial reports were appropriate since these records were looked into by regulatory authorities in around fourteen countries.
The Real Picture of the Case backed by Self-Analysis
References
Adelmann, B., 2012. Allen Stanford’s Ponzi Scheme a Study on Regulatory Capture. [Online] Available at: http://www.thenewamerican.com/usnews/crime/item/7595-allen-stanford-s-ponzi-scheme-a-study-on-regulatory-capture [Accessed 18 January 2017].
Cohn, S., 2012. Allen Stanford Found Guilty in Ponzi Scheme Case. [Online] Available at: http://www.cnbc.com/id/46630391 [Accessed 18 January 2017].
Ibrahim, J., 2012. Allen Stanford: Descent from Billionaire to Inmate # 35017-183. [Online] Available at: http://www.cnbc.com/id/49276842 [Accessed 18 January 2017].
Kotz, H.D., 2014. Why Ponzi Schemes Work: An In-Depth Look At The Allen Stanford Fraud. [Online] Available at: http://www.finalternatives.com/node/29448?p=2 [Accessed 18 January 2017].
Vardi, N., 2012. Allen Stanford Convicted In $7 Billion Ponzi Scheme. [Online] Available at: www.forbes.com/sites/nathanvardi/2012/03/06/allen-stanford-convicted-in-7-billion-ponzi-scheme/#24ceb4512b08 [Accessed 18 January 2017].
