There’s a sucker born every minute.
The line was spoken 140 years ago and attributed to P.T. Barnum, creator of the “Greatest Show on Earth,” which eventually became Ringling Bros. and Barnum & Bailey Circus. But the phrase was actually coined by David Hannum, the head of a Syracuse syndicate that owned the Cardiff Giant, a 10-foot-tall petrified man. Barnum had his own fake giant until a judge declared both hoaxes in 1870.
Hannum — surprise — was a banker. Now more than a century later, financial showmen with names like Madoff and Stanford are becoming footnotes to the phrase. While far more sophisticated than the petrified giants of the 19th century, today’s alleged Ponzi schemes still contain the single, most important element of any successful hoax: they’re attractive enough to make people think they’re getting something for nothing.
“I’m not sure you can prevent this,” says Fred Werner, senior partner with Summit Financial. “There’s probably enough protection in place, but the [SEC] regulators have continued to look the other way. Now they’re stomping their feet and saying, ‘We have to stop this,’ and they’re the ones that were doing nothing [all along].”
Nary a week goes by when someone isn’t accused of bilking millions and even billions from hapless investors. They did it by promising to pay off early investors with investments from later investors, just as Charles Ponzi did almost 100 years ago in his postage scam. Ponzi talked investors out of millions of dollars in 1920, but the billions worth of fraud allegations against Bernard Madoff and R. Allen Stanford almost 90 years later dwarf Ponzi’s original scam.
“It’s not like the investors or advisers there were ignorant; a lot of very intelligent people were taken in,” says Don Paul, a local investment counselor for Edward Jones. “If someone like Madoff is touting a 20 percent return when everybody else is at 8 percent, and Stanford is claiming 8 percent for CDs when the rest of the world is offering 2 percent, then maybe you should remember that if it sounds too good to be true, it probably is.”
That could very well be the mantra of every investment counselor still advising, especially those with the words Madoff or Stanford absent from their résumé.
Werner still can’t understand how the investors — and maybe even their advisers — believed the returns.
Werner never did. “We were suspicious of Stanford fairly early, and one of my former partners actually called [a newspaper] and tried to get them to investigate. When they finally did the story, they called him back and asked if he wanted to be quoted and he said, ‘oh, hell, no.’ At that point, he didn’t want his name associated with the story at all, because reputation is everything in our business.”
Dave Romagosa of Cornerstone Financial Group isn’t giving advisers a pass, believing they failed to do their due diligence — in part, he believes, because they were so focused on marketing their firm’s products. “Anyone who has the education that is required to be in this business should have seen a bunch of red flags and should have been concerned,” he says. “When dealing with customer accounts, suitability and disclosure are a big issues. As my firm’s local compliance officer, I am required to review all customer accounts to make certain that the investments recommended by the representatives in our firm are appropriate.” Romagosa maintains, however, that it’s the responsibility of the registered representatives (i.e., the Stanford advisers) to know what’s most appropriate for their clients. “The investments sold [or recommended] must be consistent with the client’s risk tolerance, age, assets, liabilities and overall financial situation,” continues Romagosa, who has advised clients in the Lafayette market for more than four decades. “The client must be advised by his or her representative of all risks involved.”
A leveraged municipal bond fund, for example, is not appropriate for most investors.
And neither are offshore certificates of deposit, Romagosa notes. “These investment offerings should be limited to wealthy, sophisticated investors with large, well diversified portfolios. They should only represent a small portion of invested assets, even for very wealthy investors. These investments should only be offered to people who can easily withstand the loss,” he says.
Based on their experience with area Stanford brokers, some local financial advisers strongly believe that the Stanford representatives did not follow these guidelines, and that the Stanford compliance officer failed to complete an appropriate review of customer accounts.
A local financial adviser who asked not to be identified says he has a client who also invested a portion of his portfolio with Stanford. When the local Stanford broker wanted the client to invest a large sum in a leveraged portfolio of municipal bonds, the client asked this unidentified adviser to review the proposal. After a thorough review, the adviser strongly suggested the client not invest in the fund, saying it was too risky for his profile, because the potential for loss far outweighed the potential gain — and there was even a chance he could lose the principal. “The investment manager being recommended was relatively small and untested,” says the anonymous adviser, who also saw a conflict in that the chief investment officer was the same person designated as the chief compliance officer for the investment management firm. “This is like asking the fox to guard the hen house,” he adds. “The leveraged municipal bond portfolio was recommended by [local Stanford reps] as a source of high, tax-free income. It was described as relatively risk free.” This unidentified adviser did not believe the risks were fully and properly disclosed, which he expressed to both the client and the Stanford representative.
“The Stanford adviser told me that I didn’t understand the European model of investing,” the financial adviser recalls, “that I was caught up in the way we do things in the U.S., that their model was different and more sophisticated. Fortunately, we strongly disagreed. I think [the Stanford adviser] was so busy selling that there was a lapse in due diligence.”
The client took the advice and steered clear of the leveraged municipal bond fund; within a year the portfolio had experienced substantial losses. Today that client is a very happy man.
All local advisers interviewed for this story say the black eye of the scandals will take time to heal, especially as details of what really happened continue to unfold. But, they also say, there has been an upside for those in their field with a solid track record for doing their homework for clients.
“Initially I think people just lumped all of us together [when the scandals broke],” says Paul, who has been with Edward Jones for almost a decade. “But you explain that Edward Jones and most other firms are made up of honest people and to not let the stuff affect you, and there are crooks in all walks of life out there. I think the whole thing’s probably helped [Edward Jones], because it’s driven people to seek more advice from us.”
Werner believes that hundreds of investors in Baton Rouge and Lafayette have been adversely affected, but not everyone has come forward. “I think they started in Baton Rouge first, got plant workers and retirees to invest, then moved on to Lafayette and perhaps a wealthier clientele. You know, you have $10 million and you lose a million, that’s not good. But you lose a life savings of a few hundred thousand, that’s devastating.”
First there was Madoff, then Stanford, and now allegations involving Lafayette-based Bowman Investment Group and its former broker-dealer Brookstone Securities. Many people are wondering what the next scandal du jour might be. In the meantime, federal and state authorities are crawling all over the individuals and companies involved in these alleged schemes, which, financially crushing as they were to some people, have served to further erode the confidence of the Acadiana consumer.
Perhaps if authorities can get to the bottom of who’s responsible for the billions that have been lost that confidence will return. Attorney General Buddy Caldwell hopes to do just that in Louisiana. On June 16, Caldwell announced that his office has launched a formal criminal investigation into the activities of Stanford Group Company, which is also the subject of federal civil, criminal, and Securities and Exchange Commission investigations in the alleged $8 billion Ponzi scheme involving so-called CDs in Allen Stanford’s Antigua-based bank.
The investigations are centered on victims who were defrauded, with losses in Louisiana believed to exceed $1 billion. Houston-based Stanford Financial opened Stanford Group Company in Baton Rouge in the 1990s along with another Stanford entity, Stanford Trust Company, and expanded to Lafayette in 2005. It celebrated the opening of its new Stanford Group Company office in River Ranch in early 2008.
The AG says he has opened a criminal investigation to determine what violations of state law may have occurred and to fully protect the rights and interests of Louisiana victims.
Two days later, on June 18, Sir Allen Stanford himself surrendered to the FBI, hours after a federal grand jury returned a sealed, 21-count indictment against him. The Texas billionaire is charged with fraud, conspiracy and obstruction. Six others, including a former Antiguan bank regulator, were indicted as well.
Stanford faces a maximum sentence of 250 years.