Thursday, August 19, 2009
Baton Rouge, Louisiana
STANFORD REGULATORY SCREW UPS MAY COST
LOUISIANA TAXPAYERS HUNDREDS OF MILLIONS
By Jim Brown
Hundreds of irate Sanford investors converged on Baton Rouge this week to protest their financial losses from what they charge was a giant Ponzi scheme by this international investment firm. Their wrath is directed both at the Stanford group for undertaking the massive financial fraud, and federal regulators, including the Securities and Exchange Commission, for not providing proper regulatory oversight. But a strong case can be made that there is major culpability on the part of a state agency, the Office of Financial Institutions. And we are talking about Louisiana taxpayers being potentially hit with a bill that could approach $850 million.
Here is the question that several lawyers representing Sanford victims will soon allege: Did Louisiana regulators allow the Stanford Group to set up a dubious, one-of-a-kind trust to handle vast investments, but then never bothered to properly monitor just what was being done with the money and whether Sanford were playing by the rules?
Everyone has heard of a “Bank and Trust”. Well there are also provisions under Louisiana law to form just a “Trust,” with no bank involved. And the law is quite specific as to what a Trust can and cannot do. Here is the exact wording: “A trust company does not have the power to solicit, receive, or accept money or its equivalent on deposit, or lend money, except in transactions reasonably related to and derived from its service as fiduciary.” Not one word there about selling CDs from Latin American banks.
A check of the Office of Financial Institutions (OFI) website lists just one “Trust” company approved to do business in Louisiana. It happens to be called “Stanford Trust Company”. Rules promulgated by the OFI stat clearly that they have the power to “supervise, regulate and examine” any Trust licensed by them. And so far, it would seem that there was no supervision of Stanford’s highly questionable fundraising and investment activities.
So does the Louisiana Office of Financial Institutions have legal exposure? Isn’t it true that public officials are supposed to have immunity in carrying on their official functions? How could OFI be sued? The immunity statures (LRS 9:2798.1) say that “liability shall not be imposed on public entities or their officers or employees based on the exercise or performance” when undertaking policymaking or discretionary acts. If a mistake is made in good faith, then there is immunity. But questions are now being raised that it is not an issue of doing too little or making the wrong decision on the part of OFI. The knock is that they stood aside and did nothing to protect Stanford investors.
A number of brokers from competing investment firms in Baton Rouge bemoan the fact that they have been hearing about the “too good to be true” scenario at Stanford for a years. As one broker told me: “We always felt there was something fishy going on over at Stanford. Their investment returns were just too good. Something just wasn’t kosher. And where was OFI all this time? The state had the authority to stop the selling of these bogus CDs, but did nothing.”
Baton Rouge Attorney Phil Preis, who represents a number of Stanford investors, believes there is liability of the part of OFI. “I think there definitely is an immunity problem for OFI. The Trust is the key. The state (OFI) should have stepped in and firmly regulated just what Stanford was doing. They had several entities; Stanford Financial and the Trust. But it all falls under one business umbrella. OFI could have made a bad decision and not be liable. But they made no decision at all, and apparently OFI just left Stanford alone allowing them to carry on their fraud. That’s where their exposure comes in.”
So how much exposure does OFI, the state, and Louisiana taxpayers have? There is a statutory limit of $500,000 per claim. News reports have placed the number of Stanford investors defrauded as high as 1700. Just do the math. The state could be on the hook for as much as $850 million. And that’s just for Louisiana residents. Stanford brokers solicited investors from surrounding states out of Louisiana offices. So the figure could go much higher.
As the legal wrangling continues, there are a number of questions that need to be answered. Did the Stanford Group receive unprecedented help from the state of Louisiana? Was Stanford allowed to move vast amounts of money from Louisiana investors offshore – without reporting to OFI? If OFI was conducting audits requited by state law, why did they allow the continuing sale of the questionable CDs?
Did OFI exempt Stanford from reporting the amounts of money being sent out of the country, bypassing anti-laundering laws? And shouldn’t the high yields offered by Stanford’s CDs been a huge red flag that should have prompted OFI to challenge claims that the CDs were rooted in legitimate investments? How thoroughly did OFI check out Allan Stanford, the leader of the company? He already had a shaky reputation, having surrendered his banking license to British authorities in a controversy involving a bank he owned in the island of Montserrat.
Here is one positive action OFC could and should take in concurrence with the Louisiana Attorney general: Immediately seize the Stanford Trust and put it into receivership. It this company had been down with the Stanford scandal first broke, the state could have frozen all bank accounts and assets of Stanford in Louisiana. Right now creditors and investors in Louisiana are at the mercy of a federal liquidator. But there is no exclusive federal jurisdiction when it comes to a Louisiana Trust. The state has every right to assert claims on behalf of its own citizens. Right now, every claimant has to get their own lawyer and fight their own individual battle. It should be OFI’s and the state of Louisiana’s obligation to go to bat for these folks just as the Insurance Department does when an insurance company is shut down.
“At almost every level of government in recent years, we’ve seen a de-emphasis on investor protection. The bank regulators, rather than being regulators have been cheerleaders for the banks.”
Arthur Levitt-former chairman of the SEC
Peace and Justice.
Jim Brown’s weekly column appears in numerous newspapers and websites throughout the south. To read past columns going back to 2002, go to www.jimbrownla.com.