Odd Lots: How a Financial Analyst Did a Favor for a Friend and Uncovered a $7 Billion Ponzi Scheme
Every week, hosts Joe Weisenthal and Tracy Alloway take you on a not-so-random walk through hot topics in markets, finance, and economics.
In late 2008, the world was reeling from a global financial crisis. As markets tanked and funding became scarcer by the day, two massive Ponzi schemes unraveled. One was the$17.5 billion Ponzi run by Bernie Madoff, the other was a smaller but no less interesting scheme run by R. Allen Stanford, a flamboyant Texan who lived on the small Caribbean island of Antigua and operated a bevy of companies under the Stanford brand.
Best known for his involvement in the sport of cricket, Stanford soon found himself under a much less flattering spotlight thanks to the work of one independent financial analyst, Alex Dalmady.
Two Stanford Financial Group Co. accountants actively assisted R. Allen Stanford in perpetrating a $7 billion investor fraud, a prosecutor alleged at the start of the last criminal trial tied to the Ponzi scheme.
Chief Accounting Officer Gilbert Lopez, 70, and Global Controller Mark Kuhrt, 40, face 10 counts of wire fraud and one count of conspiracy to commit wire fraud, which could send them to prison for more than 20 years if convicted. The men pleaded not guilty after they were indicted with Stanford in June 2009.
“This trial is about two high-level corporate accountants who knew about the biggest part of the fraud and actively worked behind the scenes for years to cover it up,” Jeffrey Goldberg, a prosecutor from the U.S. Justice Department, told a federal jury today in Houston.
Stanford, 62, was convicted in March of misappropriating more than $7 billion from investors who bought bogus certificates of deposit from his Antigua-based Stanford International Bank Ltd. The former Texas financier, who is serving a 110-year term in federal prison in Florida, is appealing his conviction and sentence.
Stanford told CD buyers their money was invested in conservative liquid assets. Evidence at his jury trial showed he was actually siphoning cash into risky private-equity ventures, speculative real estate developments, cricket tournaments and a lavish personal lifestyle that included private jets, yachts and mansions.
The primary evidence against Lopez and Kuhrt consists of e-mails in which they discussed Stanford’s unreported loans and how to value certain assets to disguise that debt in the months before U.S. securities regulators seized Stanford’s businesses in February 2009.
Lopez, Kuhrt and James M. Davis, who was Stanford’s chief financial officer, discussed in these messages how to repeatedly flip a Caribbean resort property among Stanford entities so that its value could be inflated from $63.5 million to $3.2 billion in a matter of months, according to the indictment.
The inflated value was intended to plug the hole in the books caused by Stanford’s personal loans and bad investments, prosecutors have said.
Lopez and Kuhrt also helped represent to investors that Stanford made a $741 million capital contribution to bolster the bank’s balance sheet in late 2008, when “Stanford did not make such capital contributions,” according to prosecutors.
Defense lawyers today told the jury that their clients were just following instructions from Stanford and Davis and never intended to break any laws.
“Did Gil Lopez act with criminal intent, or was Gil Lopez kept in the dark by Jim Davis and Allen Stanford?” Lopez’s lawyer Jack Zimmermann asked the jury of 10 men and five women, including three alternates who may not participate in deliberations.
Zimmermann said Stanford and Davis didn’t tell the accountants they were bribing officials, supplying phony investment returns or deleting disclosure footnotes from the bank’s financial statements.
“Listen carefully for any lies that Mark Kuhrt told, not lies that Jim Davis told,” Richard Kuniansky, Kuhrt’s lawyer, told the jurors. “These annual reports are full of lies, but they are Jim Davis’s and Allen Stanford’s lies. Mark Kuhrt did not lie to anybody.”
Lopez and Kuhrt weren’t part of Stanford’s inner circle and were in the same situation as Stanford’s investors and U.S. securities regulators, Kuniansky said. “They were conned by one of the greatest con artists ever.”
Goldberg, the prosecutor, told a different story.
“They knew full well their boss was lying to his customers and using their money for himself,” Goldberg said during his opening remarks.
He also told the jurors they would hear testimony from Davis during the trial, which may last four to five weeks.
The accountants’ lawyers have said prosecutors are misconstruing documents that were in draft form at the time regulators seized the company. They claim that Stanford and his accountants were in the process of consolidating the private enterprises he funded with investor loans onto the bank’s balance sheet, and that they were prevented from completing the rollup by the government shutdown.
Davis pleaded guilty to his role in the scheme in 2009, testified against Stanford and is awaiting sentencing. Laura Pendergest Holt, Stanford’s investment chief, pleaded guilty in June to obstructing a federal investigation into Stanford’s companies and was sentenced to three years in prison.
As of May 31, more than 20,000 Stanford CD investors had received nothing from about $220 million that court-appointed receiver Ralph Janvey has recovered from the sale of Stanford’s corporate and personal assets. About $108 million of that recovery has gone to cover the U.S. receivership’s expenses and windup costs of Stanford’s sprawling business empire.
An additional $335 million in Stanford assets have been identified in banks in the U.K., Switzerland and Canada. Janvey is fighting for control of those assets with an Antiguan-appointed receiver, who has spent about $20 million pursuing Stanford assets on behalf of defrauded investors.
The case is U.S. v Lopez, 4:09-cr-00342, U.S. District Court, Southern District of Texas (Houston).
Some seven years after Dalmady's work set in motion the events that would eventually culminate in Stanford's downfall, we discuss the research note that sparked a thousand stories and whether he expects more such schemes to emerge in the wake of recent market upheaval.