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The Massive Fraud Everyone Forgot About

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If ever there was a public service announcement against financial fraud, it's the picture of former Antiguan financier and playboy R. Allen Stanford, all 6 feet 4 inches of him, face battered and bloody, shackled to a hospital bed, hunched over and hacking up blood into a plastic tub following a jailhouse beating.

Though "Sir" Allen presided over a multibillion-dollar Ponzi scheme that is one of the largest financial frauds in U.S. history, the whole affair could be labeled "The forgotten fraud."

Major news sources have reported on developments in the case -- the most recent of which was the 110-year sentence that a judge slapped on the disgraced financier. But whereas it was difficult to open a paper or pull up a news website for a while without Bernie Madoff coverage in your face, the curious have had to search out updates on the Stanford case. It's not that the media aren't meeting readers' demand; it's that few seem to care.

A fellow writer described it as "Madoff fatigue." Maybe that's it. Or maybe it's a Madoff overshadowing. Or perhaps it's that many of Stanford's victims were outside of the U.S.

In any case, it's a shame, because in a great many ways, the Stanford saga is far more interesting and eye-opening than Madoff's.

Stanford rising
To say that Allen Stanford's meteoric rise was a rags-to-riches story is an exaggeration, but not by much.

Stanford's father, James, ran an insurance brokerage that was founded in 1932 by his father, Lodis Stanford. But far from the financial capital of New York or the palm-treed banking havens in the Caribbean, Allen Stanford was raised in Mexia (pronounced Muh-HAY-uh), a small Texas town that had just over 6,500 residents as of 2008.

Roughly 90 miles south of Dallas, Mexia had a recent median income of $35,503, well short of the Texaswide $48,259. Nearly 28% of Mexia residents are counted as living in poverty. The town made national headlines during a 1981 controversy over the drowning death of three young black men who had been taken into police custody during the city's Juneteenth celebration. It was also known as the one-time home of model Anna Nicole Smith, who had worked at Jim's Krispy Fried Chicken in Mexia. Of the Stanford family, one Mexia resident said, "These are churchgoing, small-town people."

But Mexia was no stranger to fast talkers looking for a quick buck. An oil boom in the early 1920s bloated the city's population and attracted a cast of colorful characters. A paper in 1922 proclaimed "last call" to invest in the Mexia Subbie oil well and touted "we have ... a plan and purpose that brought riches to thousands who did just this -- GET A WELL -- SELL IT QUICKLY -- PAY ONE VAST DIVIDEND." In 1930, Texas National Guard Brig. Gen. Jacob Wolters wrote of Mexia: "Murder, highway robbery, gambling, bootlegging, prostitution and every conceivable crime became the order of the day and night."

It was out of this unlikely beginning that Robert Allen Stanford rose to be one of the Forbes 400 richest Americans.

The wild life of R. Allen Stanford
In April, fellow Fool Brian Stoffel took a closer look at the Madoff case and highlighted the fact that Madoff's riches were the product of his legitimate market-making business, not his fraudulent hedge fund. Madoff, wealthy on the back of a real business, was apparently driven by pride and hubris to steal, rather than simple greed.

For Stanford, greed, opulence, ego, and the glorification of his own name were front and center in his fraudulent global empire.

Much of the Stanford story swirls around the small island nation of Antigua and Barbuda, a twin-island nation in the Caribbean that had a 2011 population of just under 82,000. Stanford lived like royalty in Antigua. With a one-time net worth of $2.2 billion, the man towered over an island that has an annual GDP of $1.2 billion. In 2006, the royal image was set in stone when Queen Elizabeth II named Stanford a Knight Commander of the Order of the Nation of Antigua and Barbuda during the Silver Jubilee Celebration. Allen Stanford of Mexia, Texas, thus became Sir Allen of Antigua and Barbuda.

The small-town Texan reveled in the upper-crust view of himself. At one point he had the mansion of Stanford University founder Leland Stanford restored "to help preserve an important piece of Stanford family history." When questions arose over the veracity of the familial ties between Allen and Leland, Allen hired researchers who connected the two as sixth cousins, twice removed. That's a lot of money to spend to graft your branch of the family tree onto one in an entirely different forest.

Stanford owned a 112-foot Hakvoort yacht dubbed "Sea Eagle." He purchased the boat for $3.9 million and then had it upgraded through a $16 million retrofitting that ripped out teak in favor of mahogany, extended the length, and plunked in new engines and generators. The empire also included two airlines, a $100 million fleet of jets, one of Antigua's two major newspapers, restaurants, and multiple sprawling multimillion-dollar homes in the U.S. and the Caribbean, including the $10 million, 18,000-square-foot Wackenhut Estate, a Coral Gables, Fla., castle that Stanford had demolished in 2008. He also owned a private Caribbean island (yes, the whole thing).

Children from an ex-girlfriend flew in private jets and were chauffeured by insured drivers. They attended a $50,000-per-year private school and had $1 million trust accounts. A man who apparently liked to spread his seed as much as he liked to spread his financial firm's logo, Stanford reportedly had at least five children by three women other than his wife.

And while the financier stamped his company's emblem all over the globe through sponsored golf tournaments and other sporting events, many outside the U.S. know him best through his love of cricket. Not far from the Antigua airport lies the Stanford Cricket Ground, named for Sir Allen after he rebuilt the stadium in 2004.

In 2008, the brazen billionaire made an indelible impression on the cricket world with his helicopter entrance to a press conference announcing the five-year, $100 million Stanford Super Series, a series of $20 million, Twenty20-style, winner-take-all championships between England and -- I'm not making this up -- the Stanford Superstars. He made the announcement from behind a Plexiglas crate of U.S. $50 bills wrapped in $10,000 bundles.

If you could say nothing else of Allen Stanford, it's that he made the most of his enormous wealth.

But it was all a farce. Stanford's life in the lap of luxury was afforded by bilking investors out of billions via a surprisingly simple scam. To continue with part two of the story, click here.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (8) | Recommend This Article (40)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 06, 2012, at 2:35 PM, TMFMorgan wrote:

    Great work Matt!

  • Report this Comment On July 06, 2012, at 6:10 PM, dennyinusa wrote:

    What a useless human being, hang him now and save the money spent housing him in prison.

  • Report this Comment On July 07, 2012, at 1:33 PM, Cruiser55N wrote:

    Ponzi schemes are simple. Take money from people, promise a future return then consume the wealth rather than invest no future returns. Same scheme used by Stanford, Madoff and Social Security. One, the biggest, hasn't met its inevitable end yet.

  • Report this Comment On July 07, 2012, at 11:03 PM, lwbaum wrote:

    The above commenter brings up a useful point: that there are many pyramid situations. I use the word "situations" rather than "schemes" because they may be unintentional. Any system that relies on continued growth is susceptible to collapse when the growth stops. It is very important to be aware of this throughout the economy and society so that we can head off the collapses before too late.

    Some examples are pension plans of big, old companies. When the companies stop growing or shrink, the pension liabilities, if the pension funds were not fully set aside when the liabilities were incurred (I suppose when each employee is hired/promoted/vested), may drag companies into death spirals. I guess that a way to prevent that problem is for companies to use individual, fully-funded pension plans, like 401K. Governments, local or national, face the same problem.

    Another example is academic research. The research system at universities evolved as the number of scientists and amount of funding was growing. This growth has continued for generations, keeping the system going. Each professor trained many graduate students, who did the lab work. The students went out and became professors with their own students. It was a population explosion that relied on increasing resources. Now that funding has hit ceilings across the developed world, the system is unsustainable, just as if food production plateaued while families continued to have 8 kids each. The funding famine means that PhD grads do a couple of postdocs and then have to leave science. I'm a professor, and many of my classmates from grad school had to leave science, wasting their years of training, because available jobs are only professors or postdocs, with nothing in between. Another big waste in the system is that the success rate of grant applications has become very low: only around 10% for typical US NIH grants. Think about that. That means that a professor has to write, on average, 10 grant applications, each taking weeks to prepare, to get one funded. That adds up to hundreds of thousands of person-years spent filling out forms instead of doing research to cure diseases. It's not dramatic and very visible, but it's a rolling disaster. A solution could be to cut the number of PhD student positions as well as to cut our (professors') salaries and move half of us to lower positions, working under other professors in larger research teams, more like in companies, thus cutting the number of people applying for grants and reducing the time wasted in competing for grants. With the money saved, more PhD grads could be employed doing research, like they were trained to do.

    We should be aware of pyramid situations or any system that may become unstable if conditions change. Then we can prevent disaster instead of just reacting to it. Governments give banks stress tests and require that drugs be tested before approval. Militaries play war games to anticipate various scenarios. People buy insurance in case bad things happen. Let's run more simulations or simply think things through for any big, important system.

  • Report this Comment On July 09, 2012, at 8:28 AM, iviewit wrote:

    Lame reporting on this story, should have looked up in Google Iviewit + Stanford + Proskauer Rose and you would have uncovered the Real Stanford Story.

    How did you miss this story and what about the CIVIL ACTIONS against PROSKAUER AND CHADBORNE and for the whole 9 Billion Loss.

    ABA Journal - Law News Now

    Stanford Investors Sue Proskauer, Chadbourne and Ex-Partner Sjoblom in Texas State Court

    Posted Jan 5, 2012 11:45 AM CST

    By Debra Cassens Weiss

    Mexican plaintiffs who invested with accused Ponzi schemer R. Allen Stanford have filed three nearly identical lawsuits in Texas state court against lawyer Thomas Sjoblom and two law firms where he previously worked.

    The suits, which seek class-action status, claim Sjoblom aided and abetted the fraud by obstructing an SEC investigation of Stanford’s operations, the Courthouse News Service reports. He worked at Chadbourne & Parke through August 2006, when he joined Proskauer Rose, according to the plaintiffs. He resigned from Proskauer in 2009. Both law firms are named as defendants.

    Courthouse News quotes from a complaint alleging that Sjoblom spent “four years delaying and obstructing the SEC's investigation of Stanford by lying to the SEC, telling the SEC that he himself had checked Stanford out and that it was not a Ponzi scheme, advising Stanford to hide documents from the SEC, and even omitting to disclose the existence of the formal SEC investigation in audit response letters at Stanford's request.”

    Proskauer Rose issued this statement to the ABA Journal: "The suits filed against the firm in Texas state court are copycats of a suit filed two years ago, which was dismissed in September 2010 by the federal district court in Texas. We are confident that these suits are baseless and will be dismissed as well."

    Former coverage: “Stanford Investors Sue 2nd Law Firm, Ex-GC; Proskauer Partner Withdraws” “US Claims Misleading Statements by ‘Attorney A’; Is Proskauer Lawyer at Risk?”

  • Report this Comment On July 09, 2012, at 9:41 AM, umh wrote:

    Statements like "Madoff, wealthy on the back of a real business, was apparently driven by pride and hubris to steal, rather than simple greed." are very disingenous. Money is fungible and he was indeed living off his fraudulent behaviour. If he wasn't living off of the money from his fraud he could have given it back. Maybe he couldn't have given them what they thought they had, but he could have returned their principle and what he made using their money.

  • Report this Comment On July 09, 2012, at 9:03 PM, hbofbyu wrote:

    Seriously, as egregious as Stanford's crimes are purported to be, how different was his organization from many of today's more, uh, "traditional" banks

    According to the report, government officials claim they have "found only $500 million of the missing $8 billion in the alleged scheme." If I'm doing my math correctly (and if I'm not, I'm sure I could still find work as an SIB accountant), that amounts to a $7.5 billion shortfall - far less than the $33.9 billion that Bank of America was required to raise as part of the Fed's "stress test" back in 2009.

  • Report this Comment On July 13, 2012, at 8:24 PM, Fracguy wrote:

    Mexia, Texas has an even more famous one time resident - Anna Nicole Smith.

    She was bit more honest than Mr. Stanford, if not as smart.

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