Episode 17: How One Analyst Uncovered a $7 Billion Fraud

humbled billionaire, there's dramatic element, right, oh for sure. But let's start with a billionaire. Back up a little bit. It's a guy called Alan Stanford. Remember, Yeah, I think a lot of people probably do. Uh. He was CEO of the Stanford Financial Group of companies, which included all sorts of things like a real estate company, investment firm, and a bank based in Antiqua, which is this tiny

little island in the Caribbean. I remember Stanford. I remember he was in the news a lot around the same time as Bernie made Off. I don't remember a lot of the details, So I'm really excited about talking about this story. Yeah. I mean, if you were living in the UK, any time before two thousand nine, you would have heard of Stanford because he was this kind of eccentric, larger than life character, this fifth generation Texan, as he described himself, who decided to come in and support the

sport of cricket and transform it. Right. I remember this that he became this huge backer of cricket, which seemed really weird for a Texas billionaire, and it almost seemed impossible to believe that he was in fact of Texan. Yeah. I want to kind of nail the eccentricities here because he used to helicopter into the Lord's Cricket tournament. Uh, he was caught on camera flirting with these cricketers wives. He really made a name for himself in sports and

political circles as well. So I could go on and on, but why don't we just let Allen Stanford kind of speak for himself. This is an interview from CNBC with Stanford back in late two thoight. You managed to avoid the subprime debacle almost entirely, didn't you. We avoided the subprime debacle. How did you do that? What what made you? And I'm sure you had the opportunity to to race some of that risk. What told you it was not a wise move? Well, it's very simple because we never

understood what the risk was. You know, securitized debt's been around for over three decades now, and when you start packaging something with a lot of assets are all mixed up and you can't get your arms around what the real asset is. Therefore, what the risk is. We decided that decided that whatever perceived profits or might be, uh, we decided not to take that risk because we didn't know what the risk really was and to perceived profits

really became irrelevant. Kind of makes you wonder whether or not at the banks or what they were thinking. I think we're going to see a lot of problems surfaced in the first QUARTERBLL nine before we let you go. Is it fun being a billionaire? Well, yes, yes, yes, I have to say it is fun being a billionaire.

But haware hardware. Uh, that was great. I love the idea that he said it was great to be a billionaire, because so many people will say otherwise though they'll say something humble, or they'll say something about how it lets them do good for the world or philanthropy, and he just straight up talked about how great it was to

be rich. That's right, sir, Allen's down flags there or anything. No, Uh, indeed, And I loved also that he said he thought there were going to be a lot of problems for banks in early two thousand nine, because, as it turned out, that was the time when his own bank, Stanford International, came under a lot of scrutiny. Well, at least she was right about banks in general. Okay, that's one way of putting it, all right, But think back to the

headlines in two thousand nine. Suddenly Alan Stanford is accused of a seven billion dollar Ponzi scheme and this widespread, on growing fraud. So how did he defend himself when we first started hearing about these allegations. All right, we have another clip. Let's fast forward to two thousand This was not a Ponzi scheme. Never in my life have I ever set out to defraud a person. Never. Never have we done anything that I'm not proud of. Never have we done anything, to the best of my knowledge,

that was illegal or wrong. And if there are things that were done that outside of of my direct control, uh, you know, I don't know what to say. Uh. He found it a bit different there than his clip from the end of two. Yeah, the tone is slightly different, right, all right, So when we started I mentioned that, in addition to to the Humboldt billionaire, part of the story

was independent analysis and digital journalism. Uh. That's because the investigation around Alan Stanford and his eventual conviction for fraud was sparked by one research note, a single research note that was written by this guy down in Florida and subsequently picked up by financial blogs around the world. Right, remember when made Off collapsed, it turned out that there had been a whistleblower who had written a note about him, but no one picked it up. It was not public,

no one saw it, it it was ignored. This was different because someone actually did write a public note and say, hey, there's something going on here. Yes, he did, and his name is Alex del Maudi. We're going to have him on the show today to talk about the research note and how it came to be and what happened afterwards. And I'm really excited about talking about this now because you know, it's not a coincidence that made Off and Stanford were both discovered during the collapse pups of two

thousand and eight. Two thousand nine, because it's only when the tide is receding people are losing money, that these frauds can no longer go on. And so we're in another period of volatility. And I'm not saying we're going to see another made Off, but the business models that thrived during the boom years and the shady companies, many of them are likely to be exposed in a market downturn. Yeah,

I think that's exactly right. There's that famous Warren Buffett quote about the tide going out, right, we get to see everyone who's been swimming naked, guys like made Off and Stanford. It turns out we're definitely in the nude. And of course you're fond of a gall braves idea of the bezel and what and what what we learned about that during a downturn? All right, let's bring on Alex del MONTI. Welcome to the show the Hi, how you doing good? Thanks? Thanks for joining us. It's my pleasure.

All right, So tell us what you were doing back in sort of early two thousand nine. Who are you and what was keeping you busy back then? Okay, well, actually the story starts a little bit earlier in two thousand and eight when I was just UM doing my saying, which is UM an investment advisor. So I was looking at the chaos in the markets, and a friend called me and asked me to do some due diligence on UM Stanford and National Bank, where he had a substantial

part of the message. So why did that? And then going over the numbers and the notes was financial statements. I it pretty much became clear to me that they couldn't be true, that what they were reporting just was

a lie. There was no way that they could be reporting the kind of performance they were reporting because it was to the bank and instead of giving out loans, it was playing the stock market, financial markets, and the supposedly making very consistent and high returns every single year, something that if you're an investment of vising, you know it's very, very very hard to do. So you looked at this bank, your friend brought you this bank. He had put his money into a CD essentially that offered

this eye popping return. No, not even that eye popping. I think he was at the time he was maybe five percent maybe on on the c ds. Which do you go back to them that that's maybe a couple of points over what you would get on a yeah, I guess, I guess. Now in five seems like an eye popping return, but wasn't that big. So tell us what you saw. You're looking at Stanford's numbers as a favor to your friend. Essentially, what were the big warning

signs that you picked out? Well, the biggest warning sign was the business model itself, which was they state, we do not uh, we don't. We don't give loans. We invest in stocks, bonds, hedge funds, and you know, sold or whatever. So let's just saying they have an investment portfolio, which is fine if you have you know, a low cost,

very low cost of funds. You know, you can't as a bank, you can't invest in the UH in something as volatile as as markets like these, and at the same time expect to be able to return stable amounts

to your depositors. It's it was just an impossible business model because you can't expect to make the kind of returns that they needed to make to pay their expenses and their depositors every year forever calculating that it came out to like what they had to make great keep it and they were claimed given in two thousand eight, they aim to have made a profit even in a year in which literally nobody who was long stocks and long private equity or long gold was making anything. Right,

they were claiming to. At that point we had half year results and they were still claiming to make money. And I went back over the results and things. If they were claiming they were making thirteen four every year, So no, it's just not possible. So I just wanted before we move on, I just wanted to sort of get the summary ride for listeners. So, like a typical bank, you put in a deposit, if it was a CD, you'd get some tiny return, and the bank would then

generate a profit via a typical loan portfolio. On the flip side, you have investment institutions that will invest your money in risky things like stocks and private equity, but those don't ever or typically pay a high fixed return, so the investor could lose money. In this case, it was this combination of both the promise, security and safety of a bank with the returns of an investment company.

And that's what you found implausible exactly. You said it a lot better than I could have, So um, the investor of money supposedly not is not at risk, and and so the whole risk has been transferred to to the bank exexuty and it's leveraged pretty much hy one. And the other thing is the cost of funds is ridiculously high because not so much because the CDs rates were that high, is because they didn't have any other

sort of deposit. There was no you know, UM demand accounts or demand deposits, checking accounts or anything any of that. It was it was basically all CDs. So if all your funding is is accruing interest, it just makes your your costs not much higher. So that was basically the whole thing. The business model itself was impossible and there for the numbers themselves couldn't be true. There were some

other red flags though as well. Right, you have this bank based in Antiqua, which isn't necessarily well known UM capital of governance. It's not Switzerland. Right. You also had the fact that Stamford was using this totally unknown auditor which seemed to be run by a single guy. Like I said, it was the small auditing firm. He had been auditing forever. They had never changed auditors. That was

another red flag. And then you had. There was a number of things, just just the language of the of the statements was not typical of what you will find in an audited statement. It made subjective um qualifications, like, for example, just as an example, it said that the bank had a balanced portfolio. That's something that no auditor will ever find off. The numbers didn't make it. The language wasn't right. So I just told my my friend, you know what, get out as soon as you can.

When did you actually make the decision to synthesize all of these points into a public analysis? Yeah, now this is something I haven't I told a lot of people before. Afterwards. What happened is in December um of two thousand eight, the made Off scandals came out. I'm sitting there and I'm we're looking at I'm looking at the TV and and and my friend again he calls me and it turns out that not only was invested in Stanford, he

had invested in made Off. So that was quite unfortunately not a large amount because he kind of lost that just totally just just put me off the rails. And I told him, you know what, I'm going to write something about about Stanford. We're gonna we're gonna blow that open. And so he had already gotten his money out. He said, well, go ahead, you know, nail him. So this decision of yours to go public with your findings, you wrote a note.

It was called duck tails, the reference being if it walks like a duck and quacks like a duck, it is a duck. If it looks acts like a ponzi, it is a Ponzi. There's an important parallel with made Off, which is that there was a whistleblower, Harry Marcopolis, who had tried to warn the world about made Off a long time earlier, but he never really went public with his findings. Wasn't something that journalists could have picked up on. Regulators ignored him. So when you decided to go public,

people actually discovered it. You did it in a way that allowed people to actually find and promote your work. So tell us about exactly where you published the material and then how you got the attention for it. Yeah. Initially I was going to publish it in a in a Venezuelan newspaper, but the end they turned me down, So I went to uh Venezuela economic review newspaper. Alex I was going to ask were you scared publishing this because you know, let me set the scene. We're talking

about this larger than life character. He's kind of famous for giving lots of money to sporting events. He has a knighthood from Antiqua. He's donated millions of dollars to US politicians. You must have been a little nervous, right, I was terrified. I thought I was gonna be sued, and I thought, my my, especially the editor, and I

were going to be get our pants suit off. On the other hand, I figured, well, it's pretty much certain that this is this a fraud, So if they come out and sue, you know, that was just make the whole thing much more public. So even though there was the obvious fear of calling this large organization and rich guy a fraud star, because you were just so rock solid in your analysis, you ultimately determined you just had

nothing to red it was. I was per cent sure because for their numbers to be correct, he had to be the outlier of the outliers. You published this note and it gets picked up by initially I think all these sort of financial bloggers, right yes, and the Financial Times picked it up picked it up pretty early too,

and that was that was a big things. Mostly it was the bloggers who picked it up and put it in the cyber domains, you know, because I had published on paper initially, so once it got into the internet, they would seeing that happened. Although there was lots of people looking at him at Standford the same way I had been looking at Matthew Goldstein from Business Week was

had been preparing an article. He was one of the first to call me, and the folks at Bloomberg were also onto the stories, and and once once it started going through getting into the more mainstream blogs and and and articles, then it just is it is bloaded. My My article went out at the end of January, and two weeks later the offense were raiding the Houston offices and shutting them down. So, Alex, when I listened to the story, the overwriting question I have on my mind

is how did regulators miss this guy? You know, you took a look at the financial numbers and with certainty said this was a ponzi. How come no one else get the same? Well, the thumb is with regulators is that high probability isn't any good is improved for them because they are more than than accountant or financial and us their lawyers. So what they need is a smoking gun. They want somebody, an insider, to tell them that's palsy. They want a customer to complain that it's a posy.

You know, they want something more than high probability of of its not being as it's told. You can't really act on it's probable. I understand. I understand their position, not totally, I mean, but to a point. Because your your regulators, they're they're bound by certain there's certain things that that the company has to produce. They have to produce uh financial statements after this that. But and if you check those all off the list, well they're good.

So Alex, what are you doing nowadays? I'm doing the same thing I've always been doing. I'm I'm I'm an investment advisor. I'm a financial analyst. People ask what to do with their money, and I'll give my ideas, and do you keep an eye out for the next like do you know for the next one? Like do you sort of probe? And I don't. But somehow some of these things actually seemed to find me. No. I was a couple of years back, I actually found um but

there was a case called Final Forest. Oh yeah, yeah, I found myself on the other side of that, had some some clients invested had bonds of this company. And unfortunately, of course, since I had been in in the whistleblower shoes, you know, I got out quickly. Joe and I were talking earlier about the idea that when the easy money kind of dry, it is up, and when bowl markets come to an end, a lot of these ponds e's emerge.

We've seen a lot of market volatility recently. Do you think we're in a sort of same time period now? Could we see some of these things come out of the woodwork? Oh? Very possibly. But but then again I think regulators are have tightened up a bit too also, so so the easy ponzis were also discovered back in two thousand and eight and two thousand nine and two thousand ten. You see the activity in that sense. I

think it's bogged down a bit hopefully as uh. But there's a lot of things that that that were and could continue to be um problematic. I mean, you hedge funds are just not transparent enough and and and they're prone to being fraudulent, and you know, and then you have all these if you went off the market products, you know, the unlisted and unregulated reads and things like that, but you're never sure. So do you have real quick one or two rules that everybody should abide by if

they want to avoid getting scammed? I'd say, you know, the best thing is to try to find find to understand, um the motivations and the and and the why somebody is selling this to you. You know, if it's so good, you know, why, why isn't this person? Why is it? Why are they selling what are they offering it to meet? Why am I suspect that they're offering this this huge opportunity to me? So that's that's one thing I would

look out for. And the other thing is if you can, if you really know somebody who is who can look at it for you and it doesn't have a vested interest in it, it's good to get them to look at it. Just like my friend did you know he he called me out of the blue after someone for I don't I haven't seen him for years, and and and that turned out really well for him, and it turned out well for me too. I mean, it was an interesting part of my life, I guess interesting indeed, Alex,

thank you so much for your time. Thank you. That was great. There's so many good things about that story. And I think for both of us, a story like this has a special place in our hearts for multiple reasons. One, both of us were very active in digital media during the crisis. We both covered this story. Uh it's a little guy versus a big guys story. It's just it has everything. Yeah, And I feel like I should mention that Alex is actually ending a book on this very topic,

so it should be out this year. It's going to be called If It Walks Like a Duck. And if you want to hear more about this kind of crazy tail, you should definitely pick it up. One thing that I just want to go back to, and you hit on this because it is kind of the craziest thing. It's just the guts that it takes to publish something like this, even if you're totally sure this is a big financial institution, this is a billionaire. And there was no equivocating in

his original essay on it. It wasn't like I have concerns and said this is a fraud. And I just find that to be extraordinarily brave to do even with all the evidence on your side. I think that's absolutely right, and if anything, it really demonstrates the importance of independent

financial analysis. And also and that the reason, you know, his explanation for why regulators aren't equipped to catch these things, they're not really so much looking at the financial stuff, they're more wanting tips and stuff like that is also another fascinating angle. And I actually, yeah, he gave me a little more sympathy for the people who missed these frauds.

Do you think so? I'm a little bit. I'm kind of more angry about it because here I see this little guy who certain just by looking at numbers and coming up with his own thought process, and then you have regulators whose job is to do the same thing, and they won't act without a certainty. Yeah, no, that's true. I guess I'm just thinking in terms of filtering out.

You know, you look at you try to you see these financial institutions, and I could see how you end up just checking off the box like they filed this, They had this auditor do this and say okay um, And so look at how regulators might go about trying to find these frauds. It sounds like there's structural things that might need to be changed with that. All right, we're gonna leave it there for this week. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloy. And

I'm Joe Wisenthal. You can follow me on Twitter at the Stalwarts. Thanks for listening. Two a