Tuesday, March 3, 2009

Stanford vs. Stanford

This is just to clear up some concepts, especially for the friends in media and some of the readers who may be confused. I really should be getting off the case, soon.
There are several “Stanford” institutions being mentioned these days, so it’s important to try to separate and clarify.

Stanford International Bank (Antigua) is the center of the controversy and where everything started. This is the “CD” issuer and where the $8 billion (more or less) portfolio seems to be missing. There are 28.000 account holders very upset at this bank.

Stanford Group Company, based in Houston, is NOT a bank. It (and its subsidiaries) is a broker-dealer and investment advisor, along the lines of a Raymond James (with our apologies to the good people at RJ). It also has accounts, about 35.000 of them.

SGC, however, does NOT have custody of the securities or cash in these accounts. These are kept at Pershing, J.P. Morgan Clearing and others. SGC and its team of advisors and brokers just “managed” these assets, that is gave orders to buy/sell or whatever.
So these assets are “safe” and the holders of these accounts (including Johnny Damon, my mistake) have not lost their money (unless they had Antigua CDs…of course). But these accounts are currently “frozen”, as in the holders can’t make withdrawals or shift their assets to a different broker/dealer (Merrill, Morgan Stanley, etc.) at this moment. This is a bother for these people, but it should be temporary.

The value of these assets is also a good question, since SGC has claimed to have $50 billion “under management”. Given the “numerical enhancement” ability of the Stanford PR team, that would seem to be an overstatement. Why is this important? Read on.

SGC is owned by Mr. Stanford directly, presumably bought or established somehow with money originating in Antigua (compensation or “Loans”, etc.). So if this business could be liquidated or sold somehow, that money could be used to compensate the Antigua CD holders (stress the could).
The ideal scenario: sell SGC to a competitor quickly, take that money and put it in the bank to pay those CD holders.

However, the SGC receiver, a Mr. Janvey is quickly finding out that SGC is a little black hole in itself. Being an analyst, we went to see SGC’s statements. Only a balance sheet is available (no P/L) and its from 2007. But that’s good enough.

First glimpse: $85 million in equity. Hurrah! However at second look, it is not so good. The cash and “equivalents” is listed at $48 million. Normally that would be good. But in the notes we see that Mr. Stanford made a capital infusion of $7 million in SGC early 2008. Why would a stockholder put in additional capital to this company, if it had $48 million in cash and was way over regulatory net capital requirements?
The $48 million may have been there, but it was more likely an “equivalent” than cash.
Receivables from Antigua? Perhaps.

The other item that stands out is $39 million in “Advanced compensation agreements” From what we gather, SGC would pay money upfront to investment advisors/brokers for them to bring their clients’ assets to SGC. These amounts would be amortized over time, as those assets would generate fees (supposedly) for the company. If the advisor/broker left, he or she would be on the hook for this money (look up “disgruntled ex-employees”).

Basically this is money that has already been paid and never gets collected, as long as the advisor/broker works at the firm. If the firm no longer offers them a job…well I guess they may not want to pay that money back. In the current situation, this item would seem to be worthless.

The buildings have mortgages, the equipment is leased, you get the idea.

How about the intangibles? Although numbers are lacking, referral fees from Antigua made up a good part of SGC income. It did generate income from its internal business, but that would not suffice to sustain its current structure. You may not be able to give the company away.

That leaves the 35,000 accounts and Mr. Janvey’s headache. He would love to be able to “sell” or assign this business to another broker/dealer investment advisor. But this isn’t quite as clear-cut as when Barclays purchased Lehman’s business. Who are those accounts really tied to? Stanford or the advisor? Or given what has transpired neither?. No one is going to buy a business that walks out the door the first chance it gets.

Time is of the essence; the longer the accounts are frozen the more likely they are to move away once thawed. There is little or no cash to pay employees to come in and work a transition.

And there is likely to be very little left for the US receiver to distribute back to Antigua (if any at all).

Of course, the good news (if you got all this) is that the fraud still stands at around $8 billion (not $50 billion).

EDIT: The "assets under management" were estimated by the receiver at $6 billion.


  1. so those that had money invested on Antigua CDs, the chance of getting those churupos back is basically null.

  2. Alex,

    Excellent post. I only wish I would have known guys like you existed in 2006 when I took the advice of my Stanford Advisor, who suggested I move into CDs since I was planning on retiring for good. Frankly, over the previous years I had built a trust with my Stanford Financial Advisor and trusted his advice.

    I think as a practical matter, before Stanford's and Madoff's came to be, my generation was brought up to believe financial statements and to trust agencies like the SEC and FINRA. These agencies don't really do what they advertise and I believe this is one of the reasons why we have problems in the financial markets today.

    I focused on working and bringing in the money and trusted the advice I got from my advisor. I can see that was a mistake now.


  3. Well, the financial statements told you clearly this was no normal CD. On top of that, this was an Antigua bank, not a US bank, so SEC and FINRA had nothing to do with this.

  4. HI:

  5. Actually FINRA had a lot to do with this. They licensed all of the brokers who sold the CDs to US customers. They also investigated Stanford twice in the past two years only to give them a slap on the wrist and $30,000 in fines. One of the fines was for not have enough capital...kind of like now. Would have been nice if they'd shut them down then.

    Oh, and the receiver is Janvey, not Jarvis.

  6. First Anon,

    There are some assets in the US that can be liquidated. But the analysis is to show there isn't much to get out of Stanford Group Company.
    There isn't much cash (the receiver said as much) and there are lot of small investments out there. The process won't be quick.

    Last Anon,

  7. Newsflash, Alex -- the B/D was dead at noon on Feb. 17 -- I know. I was part of it.

    There is nothing to save or sell. The assets were people and intellectual capital, and those are not lashed to the mast of the sinking ship. On the institutional side, any client with an iota of fiduciary responsibility immediately terminated the relationship. Our division died that day.

    The balance is large book of (bloated) costs and receivables (overpriced rents on marble floored offices inlaid with the Stanford crest) and no revenue. Who in their right mind would *buy* it? It would have needed a cash infusion to stay in business (especially after being shut down). There is no value in the associated brand. It's worthless.

    We all have presumably been fired by a post on a website, and may have no health coverage in the U.S. not even overpriced COBRA. For my colleagues having babies, recovering from cancer, or simply relying on their coverage for their families, this has been devastating for them.

    Not only was the SEC derelict of duty in its role of protecting the investors at Stanford and Madoff because it never asked the simple questions you did, thousands of decent people have also gotten the shaft, even if our divisions never had anything to do with the CD.

    At bottom the lesson is: the only eyes and judgement any of us can rely on is our own. And if it walks like a duck... quacks like a duck...

    I'm just grateful, I guess, that it hit the wall so quickly. Better than a multi-year unwinding. Wish us luck, we are all going to need it. Hopefully we are all wiser for having lived through this. And I am glad Jon Stewart said out loud what we all feel.


  8. I really do wish you luck, and everyone who was affected by this one way or another. And those who sit on their "high horse" and say that people got "what they deserve" should come down a bit. This kind of stuff happens to everyone and can happen to any of us.

    No one is deserving of what they "got" or will ultimately get in this whole ordeal.

    ...as for the newsflash (B/D being dead), I guess it didn't take a financial analysis to figure that out. But it's what I do. Thanks.

  9. no one is commenting on whether SGC has insurance(Lloyds,SIPC etc)to cover any loss?Mr.Stanford was worth $2.2billion independently.Where are his assets?How about Davis&Holt?Has Vantis taken control of any assets?SEC allowed Madoff/Stanford to thrive via benign neglect--DonFar

  10. donFar.

    SGC is covered by SIPC. However, that is to cover fraud that SGC may have committed. That is, if the assets in the broker/dealer were misplaced/stolen. And it is limited to $500.000 per account. It does NOT (at least from what I understand) cover the fraud at SIBL.
    The Lloyds insurance mentioned by SIBL is to cover the bank's deposits in other banks.

    As for Mr. Stanford's wealth...that is a poor estimate by Forbes. I explain that in another thread. His main assets are his companies, Those are worthless.
    Davis and Holt's assets are frozen. How much? Don't know...hopefully a lot.

  11. Hey Alex..
    Something has been bugging me with this story. I graduated from Baylor in 1974, which is when "Sir" Allen is claiming to have received his business degree. I finally dragged out my old yearbooks, and funny thing I could find no mention of his royalness in 1970, 1971, 1972, 1973 or 1974. Not even a mention in the sports sections, where I read he supposedly played until a knee injury put him on the sidelines. And nothing for James Davis, the alleged roommate-turned-finance-guru. What do you think? Could they have attended under cover? Are they possibly not even college grads? Are you curious? You do great research. Can you check it out?

  12. Dear Anon,
    I'm off this story. I'll pass your note to a couple of reporters who have been looking into Stanford's past,if you don't mind.

  13. Thanks Alex... and keep up the great work. We need your clear, no-nonsense reporting.

  14. Anon again (and whoever else is reading),

    One of the reporters talked to Baylor and they said that Allen Stanford did graduate in 1974 with a BA in Business Administration. Davis has a BBA in Accounting and Finance (1975). I don't think either was Magna Cum-Laude, though.
    Gotta wonder if they taught Business Ethics back then and if it was a required course.