Guyana and the wider world

Smelling the stench
In recent years, individuals who have had their ears close to the ground in Caricom’s financial, accounting, business, professional, and other expert circles, could not avoid being aware of the sordid doubts and deep misgivings swirling around corporate governance at the Stanford Financial Group. Even if some persons were inclined to give the group the benefit of the doubt, certainly there were enough misgivings around for prudent persons to exercise caution when dealing with the group.

If persons on their own could have gathered the need to exercise caution, then certainly reputable financial firms wanting to invest substantial sums in the group could have gathered a similar awareness of these misgivings. This could have been arrived at through various techniques, including selected interviews, surveys of expert opinion, and the hiring of financial investigators.

Stabroek News/London Daily Mail
The Stabroek News of March 15, 2009 has provided some results of an investigative report on the Stanford Group printed in the London Daily Mail. That report provided names, addresses, the sums of money involved, and other pertinent details in support of general concerns already being expressed in Caricom circles.

Consider some of these. First the claim that Stanford re-located his first bank, Stanford Incorporated from Montserrat to Antigua in 1985 because of clashes with British regulators, has been dispelled. In the SN article a much more sleazy escapade was indicated as being closer to the truth.

Second, that sleazy escapade revealed a portrait of Sir Allen Stanford, the group’s principal, which differed vastly from the highly promoted image of a ‘do-gooder’ and philanthropist who came to Antigua’s help at a time of need.

The SN article attributes to him “five outside wives.” Without seeking to offer any moral judgement on this, it was common knowledge throughout Antigua that he was, as the article says, “a womaniser.” The aspect of concern in this to a potential investor is that the same article continues to point out that the “common knowledge in the company was that all his women, like his employees were financially dependent on him and subjected to his controlling manner.” To a prudent investor this reputation should immediately raise suspicions about the rectitude of financial information coming out of the group.

Third, the SN article also portrays several other disturbing deceitful actions. One is Stanford’s attempt to forge lineage with the prestigious Stanford family, which established Stanford University, in California USA. That attempt was so heinous, the university was forced to file suit to protect for infringement of its logo.

As if this was not enough, a suit was filed in US courts and later settled last August, which provides ample details of his lifestyle. All this is public record in the US, and, any good search engine could generate information leading to these sources.

One would not expect that in practice, many individual investors would do their own due diligence in these areas. Certainly, however, an astute corporate investigative arm would seek out information on corporate governance at the institution in which it plans to place large sums.

Who are the suckers?
As a rule, Ponzi-type schemes such as that alleged by US authorities as operating at the Stanford Group, have been more successful in duping individual investors and privately owned and controlled companies than corporate organisations with professional staff capable of doing the investigation and financial modelling required to test the veracity of these schemes and discover how they earn their returns.

Individual investors are gullible. They are also vain about their ‘investment savvy.’ They are thus easily flattered by operators of such schemes in regard to their financial intelligence and business acumen. Worst of all, they are consumed by greed. This encourages them to downplay the risky nature of their action.

The old adage is very true. If the returns offered seem too good to be true, when compared to others in the market, then they are not true. Greater returns always embody greater risk. If an investor (Stanford Group) offers rates of return close to double what one can get from long established and well-known institutions, one must beware. We have seen this recently in the praise given by Dr Luncheon for the NIS returns from CLICO investments, when compared to others. The reason for the higher returns is that the risks are greater.

Firms are better suited to exercising caution. As a rule, they are expected not to be taken for a ride when they are holding other persons money in trust. For, if monies are lost through a financial swindle in an institution in which it invests then by definition it has failed to exercise proper due diligence.

In the case of Stanford Financial Group, as I have outlined above, suspicions have been around for some time now. Moreover, I would add, even if the trustee ignores these suspicions and as the saying goes, is taken in, once the financial     crisis erupted last September, this should have led to an immediate pull-out from the firm and the search for safe investments, albeit at lower rates of returns. Trust companies cannot exercise greed, lose other people’s money, and then claim they have practised ‘due diligence.’

As we shall see next week in the discussion of the CL Financial Group, although no criminal charges have been laid against its principals so far, that group has also made the fundamental error of underestimating the negative impacts and the contagion precipitated by the eruption of the global financial crisis and credit crunch last September.

Conclusion: Due diligence
Readers should observe from the above that a due diligence exercise is not a simple standardized pro-forma exercise in balance sheet analysis. It involves also testing the credibility of the reported performance of an enterprise in every important dimension, including for financial institutions, its corporate governance as well as the character, probity, and confidence deposed by others in the principals of that institution.

The harsh truth is that if a corporate financial institution is swindled then due diligence could not have been adequately exercised.

Losses through financial swindle are different from losses incurred in ordinary trading.

That is buying and selling goods, services, and financial instruments on organised markets.