Corporate Scandal Stanford Essay Example

Bankrate.com (RATE). In the prior year, this global banking institution had sold five-year CDs with an impressive return rate nearly touching 7.03%; almost double compared to the typical industry rate revolving around 3.9%.

The United States Securities and Exchange Commission (SEC) has intervened to halt the operations of a firm it charges with duping investors through a fraudulent scheme, commonly referred to as a Ponzi scheme, worth up to $7 billion. The SEC defines a Ponzi scheme as "a deceptive investment activity where supposed profits are distributed to early investors using money obtained from new investors. [...] Usually, individuals involved in such scams focus on gathering fresh capital to meet commitments made to earlier participants and fund personal expenses while seldom participating in any legal investment activities.

Over a period of twenty years, the Stanford Financial Group oversaw a Ponzi scheme that gave its investors remarkable high yields, which were financed by other people's investments. The Securities and Exchange Commission (SEC) eventually put an end to this operation, confiscating both the firm and Mr. Stanford's personal assets in the process. This intervention resulted in Mr. Stanford being apprehended and criminally indicted in 2009, with his jury trial scheduled for January 2012 in Houston. Generally speaking, Ponzi schemes are more common and easier to supervise within smaller private corporations.

Nonetheless, due to the continuous need for fresh investors in Ponzi schemes to finance the gains of current ones, there arises a phase in business expansion where exploring unknown territories becomes crucial. This is exactly what transpired with Stanford International Bank. It initiated its activities in Antigua and consequently had to broaden its

scope to other countries, mainly in the Caribbean and Latin American areas.

Stanford's predicament primarily stemmed from the inability of its management to abide by proper corporate governance norms and conduct thorough audits. An exhaustive audit goes beyond a routine examination of a company's financial records. It also entails evaluating the credibility of the stated business performance in all critical sectors, particularly for financial institutions, matters like corporate supervision and the integrity and reliability of those in leadership positions, as well as their perceived trustworthiness. Therefore, if a fiduciary institution becomes overly focused on profits leading to loss of other people's money, it cannot claim that it has performed 'due diligence'.

The situation involving Stanford can be likened to the notorious Bernard Madoff incident, which resulted in the largest financial fraud scandal on Wall Street in recent history, influencing other International Markets too. At present, Madoff is doing a federal prison term of 150 years for engineering a multi-billion dollar Ponzi scheme which defrauded thousands of investors. There's a significant resemblance in these two cases, although the scale of fraud in the Stanford Group's scenario was comparatively less ($7 billion in contrast with $50 billion).

The profitability of both companies was determined by the appealing profits they promised to their clients. While Madoff didn't ensure incredible immediate investment returns, his investors' counterfeit records demonstrated moderate, incessantly positive yields - even amidst unstable market situations. Furthermore, both Madoff and Stanford prioritized building a prestigious reputation in the financial sector, having established themselves as purported specialists, adept risk managers and knowledgeable curators of top-tier investment portfolios.

As time passed, it was revealed that

both characters were adept con artists who had exploited their intellectual and technical abilities to trick not just numerous individuals, but also influential establishments. Moreover, Madoff and Stanford established notable personas in their personal lives as socially aware figures possessing an enhanced level of ethics. They were perceived as contributors and supporters in their respective domains. Their involvement in social, cultural, and sports activities earned them recognition and credibility within societal groups. This standing in society enabled them to attract clients from the upper echelons.

In other words, both utilized the model created by Alan Greenspan and Robert J. Shriller, termed as "irrational exuberance". This principle explains that many people appear to achieve substantial returns on their investments. Sharing tales of their success tends to project the investment as secure and too tempting to pass up. Another critical aspect that enabled the establishment and endurance of such an intricate scheme for numerous years was Stanford's particular decision to locate the bank on the Caribbean island of Antigua.

While stationed in Antigua, the corporation's executives were able to exploit the considerably more relaxed regulations there compared to a nation like the U.S. This lenient setup facilitated them in setting up the framework for their scam. The Stanford case is distinctly characterized by negligence and laxity from the oversight bodies, who despite having sufficient cause for suspicion for a considerable length of time, remained unresponsive. This inaction allowed the fraudulent and criminal behaviours to persist over extended periods, thereby impacting a broader client base and consequently, larger financial sums.

Undeniably, "tax havens" have been instrumental in facilitating such financial scams. The establishment of Stanford's

institution in Antigua was merely a tactic to evade the regulations imposed on all financial bodies managing funds from third parties - a standard practice worldwide. A significant point worth emphasizing is the role of customers in these schemes. Without their desire for fast wealth, driven by fear and greed, no one would have risked investing with Stanford.

Exceptionally high interest rates can raise suspicions, yet people frequently choose to ignore the reality and avoid inquiring too much, anticipating quick fund access. Investors may experience a sense of wealth from the substantial amounts they think they have earned from rapidly expanding institutions that promise impressively high interest rates until these schemes are exposed by regulatory bodies or falter or explode. However, their perspective changes when they try to retrieve their capital and are told by the banks that this is not possible.

The alleged $50 billion Ponzi scheme of Bernard Madoff has significantly eroded the faith and confidence of global investors and regulators in investment-management firms promising consistent high returns. Stanford Financial along with its affiliate bank suggests, "Extraordinarily high interest rates ought to have been a red flag for customers," revealing limited details about these specific investments. The annual report of 2007 from the bank indicates that stocks, rare metals, as well as unconventional investments such as hedge funds and real estate make up 75% of their portfolio.

The bank's SEC filings for the previous two years lack detailed specifications and majorly denote a selection of investments in the stocks of smaller-scale companies. This constitutes an atypical assortment of investments to support CDs, as most certificate of deposit issuers situate CD

finances into high-gain U.S. Treasury bonds or equivalent moderate risk tools. The investors did not effectively carry out their individual obligations as they ought to have scrutinized and obtained understanding regarding the corporate management at the establishment they intended to deposit substantial amounts.

Several disconcerting aspects of Mr. Stanford's personal life might have been alarming for discerning investors. For instance, there were rumors that he was secretly supporting "five clandestine wives." Furthermore, he attempted to falsely associate himself with the esteemed Stanford family, founders of Stanford University in California, USA. This deceitful action led the university to instigate legal actions against Mr. Stanford for unauthorized use of its logo. Despite these red flags, numerous private investors frequently become victims of fraud.

They often take pride in their own 'investment savvy.' It is a straightforward task for scheme operators to stroke this pride, praising their shrewd business sense and financial wisdom. The worst part, however, is their overwhelming greed. This greed drives them to overlook the inherent risks associated with their actions. While the clients were not the ones morally wrong or guilty of fraud, they should acknowledge their own negligence in investing their money with Stanford. As the well-known adage articulately expresses it, some offers are simply "too good to be true". Undeniably, numerous individuals became victims suffering substantial losses in the Stanford case, but it was largely avoidable to a certain extent.

The SEC provides a thorough list of "red flags" related to Ponzi schemes that potential investors should pay attention to when considering investment ventures. These warning signs include unrealistic high returns with little or no risk, consistent

stable returns, unregulated investments, unauthorised dealers, complex or secretive tactics, inconsistencies in documents and difficulties in obtaining payments. Should any of these traits be noticed, the SEC has offered a contact number for reporting suspicions and starting an inquiry.

Margaret Steen suggests that "ordinary individuals with good intentions often inadvertently become involved in practices that they should have recognized as unethical." However, as Marguerite Rigoglioso articulates, corruption can also erode companies' competitive edge. A research conducted by Ernesto Dal Bo, an associate professor of economics at the Stanford University Business School, posits "corruption— abusing a position for personal profit— results in unnecessary expansion of employee numbers. This subsequently causes a negative business environment and ultimately impinges significantly on a country's affluence".

Hence, it is crucial to motivate companies to abolish the deception of corporate fraud through schemes like Ponzi. This can be achieved by implementing stringent criminal charges and personal asset accountability for fraudulent officers. Additionally, campaigns ought to encourage prospective investors to carry out thorough research before investing their money, protecting them from being tricked by organizations such as the Stanford Financial Group.