Invest at your peril: Why did the SEC fine the Stanford Group two years ago?

Wednesday, September 20, 2017 - 14:28

In this week’s column I shall conclude the discussion on Stanford Financial Group started last week. Following that, over the next few weeks I shall undertake a review of the CL Financial Group, Trinidad and Tobago. As we shall see, like in the case of Stanford Financial Group, there are many important lessons to be learnt from the Guyana standpoint in that firm’s financial meltdown. 
Lessons to be learnt
From last week’s discussion of the Stanford Financial Group readers should draw four very important lessons about investing in Caricom financial markets. First, investing individuals and firms should not be greedy and lose sight of the bigger picture. Higher returns on investments always translate to higher risks. This is an invariant rule of financial market behaviour. And, indeed we might also say that, when financial markets are undeveloped and the returns seem too good to be true, beware of a scam or swindle, as in all likelihood these lurk behind the investment.
Second, the practice of due diligence is not simply confined to a formulaic or pro-forma type balance sheet analysis. It requires serious investigation and scrutiny of the corporate culture of the financial firm you are planning to put your money into. Professionals for sure, but also ordinary individuals, should realise that prudence on their part, requires as much close attention to issues of corporate culture and governance, as to the balance sheet details. In other words, one needs to get behind the numbers put into the balance sheet to assess where the information comes from, as well as the reputation in the market of those providing it. To ignore this injunction in Caricom’s financial markets certainly means putting your investment at peril.
Third, even if one were inclined to dismiss the many scandals surrounding the Stanford Financial Group over the years as mere rumour, the global financial crisis and credit crunch, which started last September were so fundamentally challenging to the region, as to warrant an immediate search for safer investment havens, even though these would have been less profitable.
Finally, to reiterate, it seems to me quite difficult for any careful observer of Caricom’s finance and business to avoid being exposed to the many misgivings and doubts surrounding the Stanford Group. In my judgement, greed had to override caution for investors to persist with the group for long.

Not only Hand-in-Hand Trust
Hand-in-Hand Trust is the best known firm, which was taken in by the Stanford Group. However, there is a great likelihood that other firms and individuals in Guyana were also caught up in this scam. My experience has been one where credit unions, trade unions, acquaintances, friends and family had all inquired of me as to the soundness of investments held with the Stanford Financial Group (and CLICO also) after I had begun writing about the threatening nature of the global financial crisis since last September (SN September 25). In every instance, I had cautioned persons not to be greedy. I further advised an immediate pull-out from these investments. I was at great pains to point out what I am saying here that the higher returns would prove illusory if one lost the money that was invested.

The SEC fines the Stanford Group in 2007
Of course by last September the media had already reported that some time ago (2007), the United States Securities and Exchange Commission (the financial regulatory body in the US), had imposed a fine on the Stanford Group (Stanford International and Stanford Trust) for failure “to adequately state the risks involved in the sales of certificates of deposits.” Any investor worth his or her salt could not seriously ignore the warning implied in the fine. To continue, despite this, to hold about US$4M in certificates of deposits (not to mention other sizable pension holdings) is to my mind unpardonable.

Panic in Antigua
The Stanford Group swindle hit Antigua the hardest, in the Caricom region. There was panic and a run on the Antigua bank operated by the Stanford Group. Fortunately, the Organisation of Eastern Caribbean States (OECS), which includes Antigua and Barbuda, as well as Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines was able to take action to contain the crisis.
Under the coordination and guidance of the Eastern Caribbean Central Bank, a new company was formed to take over the Antigua bank operations of the Stanford Group. This is the Eastern Caribbean Amalgamated Financial Company. It is 40 per cent owned by Antigua. The remaining 60 per cent is held by four other financial firms in the OECS states. These are St Kitts and Nevis-Anguilla National Bank, National Bank of St Vincent and the Grenadines, National Bank of Dominica, and Eastern Caribbean Financial Holdings. All of them are either partly or wholly-owned by OECS governments.
Containing the disruption in Antigua is testimony to the significantly higher level of regional integration which has been achieved in the OECS when compared to Caricom, the parent body. The OECS operates a common monetary policy. It utilizes a common currency and practises “reserves pooling” across the seven OECS states. It has a common central bank that is responsible for these. It also practises cooperation in other areas, such as joint external missions. An OECS Secretariat exists to administer the affairs of the sub-grouping.

The resilience and prompt action exhibited by the OECS stand in contrast to that exhibited by Caricom to date, to cope with financial contagion in the larger region.
Next week I shall begin a review of the lessons to be learnt from the meltdown of the CL Financial Group (Trinidad).