The Allen Stanford alleged Ponzi scheme case is currently before the courts after years of delays.  We are finally getting to hear from witnesses and co-conspirators about what they say were the lengths undertaken to defraud Stanford’s investors.  Given the magnitude of the alleged $7 billion fraud, it would be no surprise if Stanford had elaborate mechanisms in place to ensure that his scheme remained undetected.  But no matter how sophisticated any attempts at subterfuge, a basic public records search should have been sufficient to uncover enough red flags to send investors running for the hills. 

For instance, several witnesses have testified that Stanford knew that prospective investors would want assurances that his banks were properly insured.  These former co-workers allege that, perhaps concerned about being subject to a legitimate insurance company’s rigorous due diligence, Stanford created a shell insurance company.  They explained that Stanford based his mythical company in London, and gave it an appropriately self-important moniker, the British Insurance Fund Ltd.  This was back in the early 1990s, when folks didn’t have access to the Internet and Google wasn’t even invented.  So, when a conscientious prospective client requested confirmation of the insurance company’s coverage, Stanford is alleged to have gone so far as to fly his CFO from Texas to London to keep up the ruse.  Once there, his colleague faxed the prospective client a fake confirmation from an empty office in London outfitted with little more than a fax machine for that very purpose. 

It’s unclear if this was enough to answer any concerns that unwitting prospective client may have had.  It’s easy to imagine, though, that with that fax in hand he could now invest in confidence that he had done his due diligence. 

But had he really done enough?  You can’t assume that because one item on your due diligence to-do list has been properly satisfied—Insurance Confirmation, check!—that you can go easy on the other items on that hypothetical to-do list.  You don’t stop just because you got good news.  You have to keep digging around, rigorously pursuing additional information, because regardless of what you’ve affirmed so far, you never know what you will find. 

For instance, although Stanford may allegedly have had an elaborate charade in place to trick customers into believing he was adequately insured, what he couldn’t hide was the fact that as far back as 1990 he had been in serious trouble with the IRS.  According to a 1997 Tax Court case, he had been assessed an eye-popping deficiency of $497,000. Certainly uncovering that the sole owner of a bank you are considering investing in is in tax trouble is a red flag for any prospective investor.

But that’s not all.  An April 2007 FINRA report on the Stanford Group Company said the firm had been found to be operating a securities business while failing to maintain its required minimum net capital. FINRA saw fit to list an extensive group of companies owned by Allen Stanford, including Stanford Group (Antigua) Ltd.

In addition, a former employee of Stanford’s, Lawrence de Maria, alleged in an April 2006 complaint in Florida state court that Stanford was operating a Ponzi scheme. 

And all that was needed to uncover this information was an unwillingness to stop digging.