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With R. Allen Stanford's conviction for running a $7 billion ponzi scam -- defrauding some 30,000 investors -- we've come to yet another valuable teaching moment in the history of investor protection.
Could one of the biggest ponzi operations since Bernie Madoff have been prevented? It's always easiest to look through a rear-view mirror, but let's take a hard look at how this disaster unfolded.
Leyla Wydler, who had worked for Stanford, alerted the authorities back in 2003. Here's an account of her whistleblowing from Eyal Press of TomDispatch.com:
"Consider the case of Leyla Wydler, a broker who, back in 2003, sent a letter to the Securities and Exchange Commission (SEC) about her former employer, the Stanford Financial Group. A year earlier, it had fired her for refusing to sell certificates of deposit that she rightly suspected were being misleadingly advertised to investors. The company, Wydler warned in her letter, `is the subject of a lingering corporate fraud scandal perpetrated as a massive Ponzi scheme that will destroy the life savings of many, damage the reputation of all associated parties, ridicule securities and banking authorities, and shame the United States of America.'
It was a letter that should have woken the dead and, as it happened, couldn’t have been more on target. Wydler didn’t stop with the SEC either. She also sent copies to the National Association of Securities Dealers (NASD) -- now called FINRA -- the trade group responsible for enforcing regulations throughout the industry, as well as various newspapers, including the Wall Street Journal and the Washington Post. No one responded. No one at all [at the time].
In the fall of 2004, Wydler called the examination branch of the SEC’s Fort Worth District Office to relay her concerns. A staff person did hear her out, but once again nothing happened. More than four years later, as the aftershocks of the global financial meltdown continued to play out, the news finally broke that Stanford had orchestrated a $7 billion Ponzi scheme which cost thousands of defrauded investors their savings."
Why did the regulators ignore Wydler? Was it because it didn't involve a big fish from Wall Street? Because she was fired? Because she was a woman? We don't know. A host of authorities failed us once again. A strange culture that even ignored warnings about Madoff somehow prevented justice from being done at an earlier stage of the scam.
It's not getting any better. As you might imagine, Wall Street would rather not give whistleblowers any attention. In fact, it's working to kill provisions in Dodd-Frank that would make it easier to out wrongdoing. Does Wall Street cow the SEC and its slap-on-the-wrist, no-admission-of-wrongdoing mindset? Here's Press again:
"One provision of Dodd-Frank, for example, allows employees to bypass corporate internal compliance programs and report violations directly to the SEC. Another provides rewards for Wall Street whistleblowers who step forward and offer the government tips that lead to successful prosecutions of fraud.
But even these modest steps may soon be reversed. Last year, Congressman Michael Grimm (R-NY) unveiled the antidote to Dodd-Frank’s gestures toward the urge to leak. His “Whistleblower Improvement Act” -- a name that Orwell might have appreciated -- would do away with the Dodd-Frank protections, such as they are, which the U.S. Chamber of Commerce and other industry groups lobbied against and continue to vigorously oppose."
Wall Street vigorously protests that its "internal compliance" measures are adequate and they don't need any more regulation. Scamsters will always find a way to circumvent the system. That may be true, but that doesn't mean that a better watchdog can't be on guard.
In reviewing Wydler's testimony before the Senate banking committee, a few glaring deficiencies in investor protection stood out that need fixing now:
- Wydler noted that Stanford pushed his brokers to place a huge priority on concentrating his clients' assets in his phony offshore certificates of deposit. As any reputable financial planner will tell you -- and Wydler realized at the time -- this was against the best interests of his clients and exposed them to unnecessary risk. These were mostly older investors just looking for a better yield. They got burned big time by people they should've been able to trust.
- There were "no reputable accounting firms auditing the financial statements" of Stanford's company. Most investors don't even think to ask for independent, legitimate audits. It should be required before people are sold anything.
- The products were sold as if they were safe vehicles, but the proceeds were invested in highly risky investments. Investors weren't told.
- Stanford's prime regulator, which at the time was NASD, initially sided with Stanford in a wrongful termination claim of Wydler. Under industry rules, Wydler had to submit her claim to the industry's arbitration forum and was denied a court hearing.
I have no objection with any firm selling risky investments -- as long as those risks are fully disclosed and clients understand them. They shouldn't be sold, however, if they are unsuitable or falsely packaged.
Plain-language prospectuses and marketing sheets should clearly state on the first page how much money you can lose. It should be as obvious as a cigarette label warning.
In addition, all broker-dealers who directly sell investments should be required to be fiduciaries. That makes them legally responsible for putting their clients' interests first. If they don't, you should be able to sue them.
Sure, crooks will be able to elude these common-sense safeguards. They always manage to outsmart the best early-warning systems. And no matter how many times we scribes say this, people will still invest in flim-flams, even though their returns are too good to be true.
But until we change the system to make investors' interests legally protected by making all brokers and agents fiduciaries, we're going to see many more Stanfords emerge -- and investors' assets go up in smoke.
