Case #1- Stanford Financial
R. Allen Stanford, a Texas financier and the founder of the Stanford financial Group, was arrested in June 2009 for a civil charge of conducting an $8 billion fraud by deceiving more than 20,000 investors. He cheated investors in a Ponzi scheme through bogus certificates of deposit at the Stanford International Bank located in Caribbean island of Antigua. Stanford International Bank promised investors substantially higher rates of return on their CDs than U.S. banks. It offered investors an annual interest rate anywhere from “7.45 percent to 10 percent” (Goldfarb), which is more than double what rivals offered. Stanford’s clients were told that their funds were put into shares and bonds issued by “stable governments, strong multinational companies and major international banks” (Clark. A). In fact, Allen Stanford used his investor’s money to buy two airlines, build a cricket team and stadium, and he also transferred investor’s money to his bank account in Switzerland. He lied to the investors about how their money was being used. According to the Securities and Exchange Commission (SEC), 90% of the money went into illiquid property and private equity (Clark. A). The trial was delayed after Stanford was involved in a prison beating which held the U.S government back from liquidating his assets to repay investors who claim losses in the billions.
Stanford’s investors would not have lost billions of dollars if the auditors audited the right opinions with professional care. An auditing report is very important because the investors rely heavily on it to make decisions. Therefore, it is important for the auditors to issue the right opinions. Issuing a wrong opinion in an audit report may cause investors to lose billions of dollars. The Stanford investors lost about $ 8 billion due to the unqualified report from the auditor. The Stanford investors are now suing the former auditor BDO over the fraud. The investors claimed that Stanford’s auditors intentionally concealed fraudulent activity and ignored signs of potential fraud. The BDO repeatedly issued unqualified opinions on its Stanford client’s annual financial statements, which made the investors believe that the Stanford financial statements were fairly presented and no material was misleading. As Stanford’s investors said, “Stanford companies needed BDO unqualified audit opinions to satisfy security regulators and to continue recommending sale of the CDs at Stanford International Bank” (Calkins). Auditors were responsible for Stanford’s fraudulent schemes.
Besides auditors, the SEC was also involved in Stanford fraudulent scheme. Stanford would not have been able to successfully run a $8 billion Ponzi scheme from his offshore bank if he did not obtain legal advice from former SEC officials and ex-regulators. According to the SEC’s Inspector General David Kotz’s office, the SEC had information about Allen Stanford’s Ponzi schemes for longer than a decade before Stanford was arrested. In 1997, the SEC had started four inquiries to observe why the returns on the Stanford investments were unreasonably high as compared to similar investments made by others. However, none of these investigations had been completed. It’s simply because Thomas Sjoblom “moved forward with the effort to obstruct the SEC investigation” (Waas). Thomas Sjoblom is a security lawyer and a former 20 year veteran of the SEC’s enforcement division. The reason Stanford to hired the former SEC officials were because he believed that “a former SEC official was the best course to thwart the agency” (Waas). According to Stanford’s former CFO, Jame Davis, Sjoblom knew and was aware that Stanford had engaged in a massive financial fraud. However, he still persuaded the SEC to stand down from its investigation. As a result, the SEC failed in its investigations and Stanford continued to misuse investor’s money through his offshore bank. The SEC did not start investigations on Stanford until it was too late.
The auditors for financial institutions/ individuals that invested in Stanford’s financial instruments would face many issues in verifying the balance on their client’s financial statements. The AU Section 332, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities, clearly states the auditing procedure which auditors need to follow. When auditing a company’s financial statements, it is necessary for auditors to have a basic understanding of the company’s information system and how the company operates it business. Since Stanford International Bank is located in the Caribbean island, it is very difficult for foreign investor’s auditors to understand how Stanford International Bank works and how they operate their business. Since Stanford International Bank involved in the fraudulent scheme, investor auditors may not receive enough information to evaluate if Stanford’s financial statements were presented fairly due to the scope of limitation by high level authorities.
For the investors who are seeking to invest in off-shore banks like Mr. Stanford’s, I would recommend not to invest in the offshore. If they do invest in the offshore bank, they have to take the risk because the investors or independent auditors have no access to the bank’s information or internal control to evaluate the Bank’s financial statements. In addition, hire an independence auditor may cost too much for the investors. It is not worth it to hire an independence auditor if the investor only invests small amount of money to the bank.