corgentum analyzes the risks in the allen stanford case and how they could have been detected

8/2/2019 Corgentum Analyzes the Risks in the Allen Stanford Case and How They Could Have Been Detected

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2011 Corgentum Consulting, LLC

In light of the recent guilty verdicts handed down in the trial of R. Allen Stanford case, it isworth revisiting the facts and circumstances that brought us to this point to see what lessons canbe learned.

While Mr. Stanford was not a hedge fund manager, his case represents yet another example ofhow common sense due diligence can prevent investors from losing money. From an operationaldue diligence perspective there were likely many yellow flags that would have led to red flagsthat potential investors in the Standford funds and financial products could have detected.

But it does little to take an I told you so attitude to due diligence without prescribing someforward looking advice as well. Said another way, perhaps it is more fruitful to focus on how to

prevent the next Standford rather than simply chastise those that have been swindled.

Below is a list of just some of the risks surrounding the Stanford organization and the duediligence steps investors could have taken to detect them:

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The RiskQuestionable auditor

The Facts

Stanford reportedly utilized a tiny Antigua-based auditor (C.A.S. Hewlitt) with an even smalleroffice in North London, that was in no way appropriate for the size of his organization. It wasalso alleged that after the firms CEO, Charlesworth Hewlett, died no one took over the auditingresponsibilities and all of his hard drives were deleted.

What Investors Could Have Done To Detect ThemDuring the operational due diligence process investors should conduct an evaluation of allservice providers, including the auditors, to determine if they are of appropriate size andsophistication for the organization under review.


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The RiskLack of transparency

The FactsIt was reported that Stanfords own employees didnt know and werent given information aboutwhere his portfolio was supposedly invested.

What Investors Could Have Done to Detect ThemInvestors should inquire not only as to what type of information they will receive from the fundbut what transparency a fund manager provides internally as well.

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The RiskReputational risks

The Factspotential reputational risk existed concerning Stanfords ostentatious lifestyle and close ties withAntiguan officials that raised many concerns related to bribery of local officials (something hewas eventually acquitted on). Stanford also had public verbal feuds with Baldwin Spencer, theprime minister of Antigua and Barbuda.

What Investors Could Have Done to Detect ThemInvestors could perhaps have been aware of such risks through reference checks and speakingwith other investors


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The RiskOutside business activities

The FactsStanford had a myriad of other business involvements including newspapers, sports teams andrestaurants at which he would often entertain his large banking clients

What Investors Could Have Done to Detect ThemInvestors should inquire directly with a manager first concerning outside business involvements.Additionally, media and other public records searches may have yielded indications of

involvement with other businesses. When a fund manager has extensive activities outside of theorganization it may produce a distraction from the business of fund management.

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The RiskEmployment of relatives and employee romantic relationships

The FactsThere were reports that Stanfords organization employed many individuals who were closelyrelated, either by blood or marriage.

What Investors Could Have Done to Detect ThemInvestors could have asked if any relatives are employed at the firm. They could also havelooked at organization charts to see if any employees had the same last names. Additionally,James Davis (Stanfords former finance chief who cooperated with the U.S. government and

testified against Stanford) testified that Mr. Davis also admitted that he was having an affair withanother Stanford employee Chief Investment Officer Laura Pendergest-Holt.The employment ofrelated individuals, particularly those who report to each other, can present a serious conflict ofinterest and one which investor should vet during the operational due diligence process.


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The RiskOngoing litigation

The FactsStandford was involving in litigation with Stanford University. The university sued him claimingtrademark infringement based in part on a fabricated historical connection Stanford claimed tohave had with the founder of the university.

What Investors Could Have Done to Detect ThemInvestors can work with third-party due diligence and background investigation firms to detect

historical and on-going litigation.

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The RiskStanfords questionable background

The FactsBefore forming his fraudulent Stanford Financial, Stanford had previous experience running afailed gym before finding success in real estate speculation

What Investors Could Have Done to Detect ThemA background investigation or other similar review of Mr. Stanfords background could have

brought his previous experience to light.

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The RiskStanford Financial Groups elaborate offices

The FactsStanford reportedly had extremely lavish offices. When too much money is spent on elaborate

offices, investors should ask questions. Perhaps the money could be better spent on improvingthe organization or hiring or retaining top notch employees.

What Investors Could have Done to Detect ThemInvestors performing an on-site due diligence visit could evaluate whether an office is perhapstoo extravagant for a particular fund manager.


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The RiskStanfords volatile personality

The FactsSohil Merchant (Stanfords head of information technology) testified that he had to repeatedly

fly in new laptops for Stanford to replace the ones that he had smashed or dropped into water.

What Investors Could Have Done to Detect ThemInvestors may not have known these intimate details of Mr. Stanfords life but through on-sitedue diligence interviews there may have been either direct cues from Mr. Stanford himself or

other indications of a volatile personality.

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The RiskQuestionable performance claims

The FactsIt was reported that Stanford presented hypothetical investment results as his actual perform inclient sale presentations. Additionally, Stanford also reportedly made statements that his CDswere safer than US government backed accounts.

What Investors Could have Done to Detect ThemInvestors could have dug deeper into historical investment performance to determine if it wasaudited or was even indeed accurate. Furthermore, anytime a fund mentions statements concernscapital security or guarantees investors should raise concerns.


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The RiskRumors of regulatory inquiries

The FactsAfter the Stanford scheme was unveiled, it was revealed that regulatory authorities including theSecurities and Exchange Commission and FINRA had been conducting investigations ofStanfords activities. It was also reported that the FBI had been conducting an investigation into

Stanford since 2008 regarding allegations that he was laundering money from Mexican drugcartels.

What Investors Could have Done to Detect ThemInvestors with a finger on the pulse of industry developments and perhaps even relationshipswith sources at regulators can sometimes be aware of rumors of such inquiries. Investors who donot have such networks themselves can perhaps leverage off of the services of a third-party duediligence specialist consultants who may have such networks.

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The RiskHistorical tax liens

The FactsIt was reported that public records show Stanford had a history of tax problems including, federaltax liens in excess of $200 million before the fraud was even revealed.

What Investors Could Have Done to Prevent ThemFirstly, investors could have inquired directly with Stanford to see if there was a history of anysuch. Additionally, a due diligence review of public records may have yielded indications of theliens.

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In this case, one antidote to prevent future fraudsters like Stanford is clear: due diligence and lotsof it!

For more information: Email:[email protected]: 201.360.2430
mailto:[email protected]:[email protected]:[email protected]:[email protected]

corgentum analyzes the risks in the allen stanford case and how they could have been detected

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