Thursday, February 19, 2009

SEC Talking Tough, Taking Little Action

While the SEC was busy plotting and scheming to punish short sellers for single-handedly taking down the US financials, at least two major investment frauds were operating right under its regulatory nose.  Bernie Madoff had the decency to confess his sin of somehow misplacing $50 billion of his investors' life savings.  The Madoff debacle was an embarrassing scandal for the SEC, which  had investigated the firm several times over the years to no avail, after receiving a detailed outline from a whistle blower which pointed to an obvious ponzi scheme.  Mr. Madoff is under house arrest after basically handing himself over to authorities.  

In an effort to improve its public image, the SEC made a big announcement that it had unearthed a major fraud.  The problem is, once again, the major fraud had been operating for years without any action from the SEC, and would have more than likely continued to do so if it wasn't for Bernie Madoff's confession.  Nevertheless, with much fanfare, the SEC pointed its accusatory finger at Stanford Investment Bank.  Only they forgot to arrest Stanford's Chairman, Sir Allen Stanford.  The SEC has no idea of his whereabouts.  Sometimes, it's prudent to make the arrest BEFORE you issue the press release.  But for an agency that is prone to stupidity and posturing, rather than its actual mission of protecting investors, it is not the least bit surprising.

Bloomberg reports that Stanford lured clients with promises that their investments were safe.  The CDs, which are ordinarily FDIC-protected with US institutions, had no such protections for its clients.  In fact, Stanford specifically instructed its financial advisors to tell clients that the FDIC provided relatively weak protection.  Stanford told its clients that their funds would be placed mainly in easily sellable financial instruments monitored by more than 20 analysts and audited by regulators on the Caribbean nation of Antigua.  I have never been to Antigua, but I did have the pleasure of spending a year in the Cayman Islands in my youth, working for a bank to help facilitate off-balance sheet partnerships (a long, but interesting story for another time.)  I was one of three employees of the bank that worked downtown in a small three story building with perhaps 15 offices.  The three of us would go for weeks at a time without seeing any other human being enter or exit the building.  Furthermore, in the lobby of the building, the names of all of the companies that were registered to that address were listed via a bunch of spiffy plaques in a lovely display case.  I would estimate that there were over 500 companies registered at the address of the three story, 15 office building where I worked and rarely saw another human being other than the friendly FedEx guy.  This, my friends, is the hallmark of off-shore tax havens.  It's an address, period.  The odds of there being 20 analysts that monitor anything financial on the entire island of Antigua are slim to none.  Furthermore, the idea that there is a regulatory agency in Antigua that would actually monitor anything but the tides seems preposterous to me.  In any event, many people fell for it, as people have a tendency to do when an investment sounds too good to be true.  This is why we have the SEC, to prevent these types of schemes from ensnaring unwitting investors.  Too bad that our well-funded regulatory authorities in the US are about as effective as the imaginary ones on the island of Antigua.  



Anonymous said...

Please do remember to elaborate on your stint in the Cayman Islands. I would love to have that kind of experience

mrbogue said...

"The extraordinary life of K10" thats an autobiography i wouldn't mind reading :-)

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Joshua said...

As an employee of a bank whose stock is down 60% this year, can we please urge the SEC to stop pursuing these "ponzi schemes" and re-enact the short sale ban?