Mississippi Attorney General Jim Hood blamed the lax attitude of the Bush administration for the longevity of famous Ponzi schemesfrom the Madoff scandal to the Stanford Financial Group, which has its deep ties in Mississippi.
"These guys were asleep at the wheel and let Madoff and others completely off. The people who let them off actually ought to be the ones in jail. They should have some liability for letting it happen," Hood said.
In early February, the Securities and Exchange Commission accused Stanford Financial Group Chairman Allen Stanford, Finance Chief James Davis, and Baldwin, Miss., resident and former Stanford Chief Investment Officer Laura Pendergest-Holt of running a fraud that allegedly cost investors more than $8 billion in certificates of deposit issued by Antigua-based Stanford International Bank.
The federal government has yet to file criminal charges against Allen Stanford, although the FBI did file charges against Pendergest-Holt last month in U.S. District Court, in Texas, for obstruction. SFG employees offered testimony contradicting Pendergest-Holt's claim that she knew nothing of money the company funneled into the investment bank's Tier III investment category.
The investigation centers around Stanford International Bank Ltd's "diversified portfolio of investments," purportedly managed out of Tupelo and Memphis. The company divided investments into three tiers: Tier I, dealing with cash and cash equivalents; Tier II, investments using external portfolio mangers; and Tier III, consisting of "unknown assets under the apparent control of SGC Executive A and SGC Executive B."
The mysterious Tier III category represented 81 percent of the bank's investment portfolio, which was unfortunate, investigators say, because cooperating witnesses claim a portable USB memory drive held by Pendergest-Holt revealed that a significant chunk of Tier III, at least $1.6 billion, had been loaned out to an executive (currently unnamed by investigators) at a Feb. 4 meeting in Miami.
When one of the cooperating witnesses broke down into tears at the revelation during a Feb. 6 meeting, the company's lawyer (also currently unnamed by investigators) walked over and suggested they pray together. The same attorney later confided to a cooperating witness that "the party is over," and that "the earnings calculations were not calculated properly; the assets may or may not be there."
'God's Honest Truth'
The company chose Pendergest-Holt to stand before SEC authorities on Feb. 10 to take questions. The answers she gave revealed nothing about her earlier meeting with the executive who allegedly emptied Tier III of its available money, nor the information on the portable hard drivedespite very specific questions from SEC investigators. She repeated at a Feb. 17 meeting with SEC investigators that "If I knew anything about Tier III, I'd tell you God's honest truth."
Pendergest-Holt, the first person arrested in the Stanford fraud investigation, posted a $300,000 bond, though prosecutors had sought a $1 million bond before Magistrate Judge Mary Milloy reduced it on the condition that she wear an electronic tracking device.
The Securities and Exchange Commission last week claimed the company may have duped investors out of up to $9.2 billion, and the court froze all of Allen Stanford's business and personal assets.
A March 6 statement by Ralph Janvey, a court-appointed receiver in control of the company's assets, continued the dismal tone first set in February. Janvey notified 1,000 employees in Stanford's U.S. offices that their employment had been terminated, proclaiming that "continuing employment for these employees is not in the interest of conserving and preserving the value of the estate" because of insufficient resources.
Another receiver, Richard Phillips, passed along another of Janvey's dire pronouncements in late February, telling employees at Stanford's Jackson office on Meadowbrook Road to "vacate the premises."
The firings complement an already sad situation that also includes the temporary freezing of Stanford's brokerage accountseven the ones unrelated to the alleged fraud within the companymeaning investors who had no knowledge of CEO's doings can't pull their investments during the investigation. Mississippi Secretary of State Delbert Hosemann said more than 4,500 Mississippians own about $39 million in account assets.
Pendergest-Holt filed a March 10 motion to back out of an order that placed her assets under Janvey's receivership. Pendergest-Holt claims Janvey's lawyers seized her car, diverted her mail and rifled through her underwear drawerand made some nasty snippets on the way out about the limited remainder of time she and her husband would likely occupy their home.
The SEC accuses Stanford and his top officers of running a "massive Ponzi scheme," comparable to the 14-year Ponzi scheme orchestrated by New York investor Bernard Madoff.
Madoff, who has become the face of the economic breakdown as well as CEO largesse and greed, pled guilty to 11 counts of fraud, money laundering, perjury and theft last Thursday, a plea that could land the 70-year-old investment manager 150 years in prison. His sentencing is scheduled for June 16. The Madoff scandal has cost investors an incredible $65 billion, comparable in scope to the $79.5 billion fraud uncovered at now-defunct telecommunications giant WorldComanother company that, like Stanford, had Mississippi connections.
Lies, Lies and More Lies
Mississippi Rep. Cecil Brown, who is also a Jackson investment adviser, said it was the receding waters of the nation's failed economy that revealed the scum of cosmic-sized Ponzi schemes.
"The way the thing works is they pay off the old investors with (the) newest investors' money. But when the market's down 15, 20 or 30 percent, you don't have a new group of investors coming in. And if you don't have any new investors and people demand their money back, you don't have any money to pay them," Brown said.
Brown, while expressing no presumptions about Pendergest-Holt's or Davis' guilt, explained that it takes a massive amount of work to keep a scheme of Stanford or Madoff proportions running.
Keeping the lie going for 2,000 or 3,000 unwitting investors means sending them bogus confirmations on all the trades that never happened. That, Brown said, likely involves a veritable army of dodgy accountants willing to falsifying documents. People holding more legitimate investment accounts can view their account every day and see what it has either earned or lost. Stanford and Madoff had to "make it up for every account," Brown saidall 2,000 or 3,000 accounts, every day."
"If we tried that at my company, we'd get into trouble very quickly," Brown said. "The SEC has examiners who come in and periodically look at your records. Whether they find anything depends on how often they come in and look at your records, how skilled they are and how complete your ruse is. In Madoff's case he'd falsified enough documents to where people could look at them and see trades."
Whistleblowers actually reported suspicious trade practices on Madoff back in 2006, and the SEC had stepped in and took a peek at things, Brown said. But either they weren't looking very hard, or the cooked documents lead to nothing more than a library of other, similarly cooked, documentsan enterprise in deceit bordering on the colossal.
"You need to create several thousand documents because you don't know which ones they're going to look at. And you've got to completely hide the fraud. You can't have any document in your office telling the truth. The SEC comes in they get to look at your e-mails, your correspondence and question everybody about it," said Brown.
Of Cokeheads and Scams
Hood said the feds would have taken better notice had they handled Madoff and Stanford with something more than kid gloves, and had not cut funding to regulatory agencies.
"They cut off some resources to federal policing agencies, but it went further than that," Hood said. "The Bush administration created a change in behavior among the policing agencies. There was this bill dealing with the Federal Trade Commission, and last March I went with Sen. Chuck Schumer (D-New York) and about 34 other AGs to promote legislation regulating lead paint, and even though that legislation passed we had to basically stuff that money down their throat. Can you believe it? We had to force them to use additional money for the Federal Trade Commission to help regulate lead paint in toys. This was what we had to deal with. I mean you had a guy snorting cocaine who was supposed to be watching over the oil leases and Brownie (Michael Brown) running FEMA."
Hood said the failing of the federal government forced state attorneys general, such as New York's Andrew Cuomo, to step in and regulate the system through prosecution. Cuomo further involved himself with bailed out insurance giant AIG this week, demanding detailed information, possibly through subpoena, as to who at AIG is slated to get $165 million in controversial bonuses and whether those individuals were involved with the insurance giant's meltdown and subsequent need for taxpayer bailout funds.
Rep. Brown agreed that the federal government has yet to clear itself of responsibility regarding recent Ponzi schemes.
"There's been a lot of speculation as to how these scams continued for so long," Brown said. "The SEC, after all, looked at Madoff and gave him a clean bill of health. We don't know at this point whether that was because they were that incredibly incompetent or maybe there was something else going on."
Hood said he expected more regulation from the new administration, but would be "looking for holes in the state's regulation system" to include in a legislative package for next year to deal with future Stanford situations. State laws are currently fashioned to react to bad businesses dealings, usually through prosecution. It is not geared for prevention.
"[T]he best method for us all right now is prevention through the media. We need someone to tell people that you don't get four times what other people have made on CD'sespecially when they're based out of Antigua. That ought to be a red light right there.