Thursday, May 21, 2009
Baton Rouge, Louisiana
STANFORD AND MADOFF HAD ACCOMPLICES
There are three things you should learn early in life. Don’t play poker with a guy named Slim. Don’t buy a Rolex form a guy on the street who’s out of breath. And don’t put your money in some exotic investment where the returns are just “too good to be true.” And to see who didn’t follow these rules, just take a look at the Stanford Group and Bernie Madoff.
The Stanford Group, headed up by higher roller Sir Robert Stanford, was a major investment player in Louisiana. Of the $9 billion raided by Sanford in the U.S. and more than 100 other countries, $2 Billion came from Baton Rouge and Lafayette alone. But when all was said and done, the whole financial portfolio was nothing more than a Ponzi scheme, where early investors get paid with the proceeds of later investors.
Stanford financial advisers told potential clients they were selling CDs in the Bank of Antigua. `The money, according to the sales pitch, was that the funds would be placed in mainly easily sellable financial instruments, all to be monitored by a team of more than 20 analysts and audited by regulators on this exotic Caribbean island. Instead, the knighted boss “black boxed” the portfolio, shielding it from independent oversight, and steering a major portion of the funds into hard to sell real estate investments and private equity funds.
Financial advisers, being paid by individuals to manage their money, were tempted with a direct conflict By Sanford. These advisers could pocket 1% yearly commissions on all funds directed to Stanford. So who was looking out for the client?
Surprisingly, Both Stanford and Bernie Madoff were able to carry on their schemes longer because of the downturn in the economy. Many investors liquidated their stocks and bonds but stayed with Sanford and Madoff because these investments were, in many cases, the only performing assets.
And here is what’s really surprising. Many investors had no idea they were even invested with Madoff and Stanford. Their financial advisors didn’t bother to tell them.
Old Bernie wowed his clients by patiently explaining his financial theory of a “split-strike option conversion” trading strategy. The idea, according to Madoff, was to buy a few dozen blue-chip stocks and hedge them by selling out-of-the-money put options. Sure, this has a hint of incomprehensibility that maybe you want in an investment methodology. But that’s just the point. If you don’t understand all this financial gobbledygook, you have no business investing in the first place.
But how could Stanford and Madoff sucker so many investors into their schemes? Many investors were seeking them out, with little hard sell involved. Well it was easy. They just needed the right environment. And the right environment is us-you and me. It’s the same reason why so many Louisianans buy lottery tickets. (As this column is being written, the Powerball jackpot stands at $170 million.) We all want a sense of elation at the possibility that lots of money will come fast. Right away. Not a slow and steady process, but through luck or connections or financial nimbleness.
The Stanfords and the Madoffs know from experience that even “sophisticated” investors take shortcuts. Quantitative analysis? Not necessary. “Hey, we know folks who have been with Bernie for years and done quite well. That’s good enough for us.” Here is what Barron’s Financial News wrote about Madoff in 2001. “Madoff’s investors rave about his performance-even though they don’t understand how he does it.”
One important lesson learned from both the Stanford and Madoff scandals is that you cannot trust the financial regulators to protect you. There have been rumors about both of these guys for years, with specifics being given to the SEC. Yet nothing was done. You have to look out for yourself. That means assuming the responsibility of carrying out several important checks. I leaned these lessons well as an insurance regulator.
First, know who you are dealing with. How long has the company or individual been in business? Ask them candidly about any SEC or other regulatory violations and whether they were sanctioned or fined. You can check this yourself by going to the website of the Financial Industry Regulatory Authority (FINRA) to check on any black mark on your advisor’s record.
What is their track record of investment returns? How can you be sure that your money is protected from fraud? If investments are to go out of the country, who does the monitoring? What about insurance? Is your investment advisor bonded to cover any fraud or misspending? (The same goes for your insurance agent by the way). And you know those monthly and yearly reports you receive in the mail summarizing you r investments. Don’t just toss them away. Look them over, and then keep them in an organized file so you can track by month and year just what kind of performance you are receiving.
It may be smart not to lump all your investments with just one firm or financial adviser. The problem here is that you have to “get involved” in your personal financial decisions so that you have the proper mix in your investments. Your best defense may be a healthy dose of skepticism. In any business decision, rarely does a smart person just take anybody’s word. You check it out. Unfortunately, many of the financial losers did not follow this simply premise when picking a financial adviser.
The good news is that Stanford and Madoff are aberrations. Madoff allegedly defrauded his own family, close friends and a number of charities he was supposed to be supporting. The vast majority of financial investors look out for their clients. The lesson here is to be less trusting and a bit more cautious. And keep your financial goals reasonable. Be a bit more respectful of simple and long-term success.
There is rarely any reasonable chance to make a quick buck. Probably the quickest way to double your money is to fold it in half and put it back in your pocket. Even Slim will agree with that strategy.
I’m tired of hearing about money, money, money, money, money. I just want to play the game, drink Pepsi, wear Reebok.
Peace and Justice
Jim Brown’s syndicated column appears each week in numerous newspapers and websites throughout the South. You can read all is past columns and see continuing updates at www.jimbrownla.com.