However tempting it may be to say it, the Stanford Financial “fraud” is no Bernie Madoff 2.0. Not even close. Let’s start off with the fact that nobody is accusing it of being a Ponzi scheme.
Instead, the SEC accuses it of misrepresenting the performance and safety of its “CDs” by claiming that the money was invested in safe, liquid securities, while in actuality the money has been invested in in illiquid private equity and real estate ventures. So even the SEC concedes that the money was actually invested. What’s more, it’s not clear that the truth is that different from what the company was advertising.
They always admitted on their website that client investments went towards alternative investments. So it’s very possible that assets they thought were completely liquid have now become frozen. A year ago, Citadel or the Harvard endowment might’ve told you that all of their investments were liquid, but obviously what was liquid then could be frozen now.
Meanwhile, the fact that Stanford Bank promised its depositors an unusually large guaranteed rate of return isn’t so disturbing. Consider, if Citibank offers you a guaranteed rate on a CD, but then blows all your money on crappy loans, Citibank still has to honour that guarantee. Of course, if Citi’s investments go down, the government and FDIC kick in to ensure CD depositors get their guaranteed rate. Stanford’s investors don’t get that.
That being said, it’s easy to imagine that Stanford’s returns exceeded what they’ve paid out over the past several years, during which private equity and real estate vastly outperformed the market.
Now what definitely seems misleading is the company’s strategy of marketing what was essentially a giant hedge fund (or a fund of fund) as a CD, which everyone knows connotes safety and conservativeness. Even the greatest alternative investors in the world aren’t safe and conservative. Clearly that was clever, deceptive marketing.
Furthermore, the company has been engaging in bad behaviour of late as it lied about its exposure to Madoff and the health of its portfolio, all the while telling clients that they’d have a long wait in order to redeem their cash. All this seems worthy of civil and criminal charges. What’s more, this could be a prelude for more charges, such as money laundering or other corrupt activities.
But bottom line is that the company’s fraud doesn’t appear to be nearly as baldfaced as Madoff’s and Stanford’s clients may end up with more than pennies on the dollar, assuming any of it can be found.