When Bad Firms Happen to Good Advisors
The Firm
In early 2008, three months after he joined, Hogue sold a single Stanford International Bank CD to one client, he says. The client was adamant about staying out of the stock market, he explains. He regrets it now and he never sold another. Reflecting on his experience at the firm, Hogue says Stanford had the money managers, the technology and much if not all of what they promised him in the private dining room that day. But as the months passed, he says, a more shadowy impression of the firm developed. “I told my wife one night after dinner that I felt at times like I was working at The Firm,” he says, as in the novel by John Grisham. “There was the opulence, the sophistication and all, but there was also this mysterious center around the International Bank.” Hogue laughs at the absurdity of the coincidences: Memphis, the setting of the novel, is where a group of the analysts who supposedly monitored the CD portfolio sat; likewise, the Caribbean was where the money was held.
But the SEC complaint indicates that management wasn't at all mysterious about what it wanted Stanford advisors to do. The pressure to sell the CDs was powerful, from upper management on down to branch management. And yet, on at least one occasion, when asked to explain the returns on the CDs, visiting executives became evasive, Hogue says. It didn't feel like a cover up, he says. Rather it appeared even they didn't know what was in the portfolio.
According to the SEC's investigation, the marketing literature for the SIB CD said it contained “a well diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies and major international banks.” That magic formula pumped out returns of between 10.3 percent and 15.1 percent every year from 1995 to 2008, when it lost 1.3 percent — a time when the S&P 500 fell 39 percent. Before the regulatory receiver took over the web site, a 2006 disclosure statement regarding SIB's CD portfolio reported 57.4 percent of the assets were in equities, 21.9 percent in U.S. Treasuries and corporate bonds, 13 percent in metals, 7 percent in alternatives and the rest in cash, mostly U.S. dollars. But the SEC's Feb. 16 complaint against R. Allen Stanford, his firms, his CFO James David and his COO Laura Prendergest-Holt, alleges that 81 percent of the portfolio was held in “unknown assets under the apparent control” of Stanford and Davis.
Others outside Stanford who spoke with Registered Rep. say experienced, upstanding advisors should have known to avoid Stanford: “I think a lot of the guys that went there recently were chasing the money,” says one investment consultant with Citi Institutional Consulting. Another advisor, the same Morgan Stanley advisor who knew Paula Sutton, says he too dined in Stanford's private dining room — in 2004 — but when it got down to business, he didn't like the lack of transparency — and all the talk about managers and the CD. “They talked up their access to managers and all that,” he says. “So I asked them to download their biggest client's portfolio and show it to me, without the name of the client,” he says. They refused. “That was a simple request. To see a statement, see if the returns matched what they were saying, see the managers,” he says. So he walked. It's not a question he would normally ask, he says, but Stanford was talking such a big game, and the firm was such a relative unknown. Of course, he now has the benefit of hindsight. Plus, Stanford had only offered him 70 percent of trailing 12 months production, and no company shares, a package that he called “piddly” compared to what the Street was offering at the time.
“The fear of course, is that we're tainted,” says Hogue. “But most of these people know me well, and they've been supportive through this.” One of those supportive people is Norm Nabhan, the director of foundations and not-for-profits at Citi Institutional Consulting. He knows Hogue from his days at E.F Hutton where the institutional consulting group was born. Nabhan also knows Ventrice and Bober as well as Aitken and Thacker. He says all of them are reputable advisors and he says it kills him to see these guys in the situation they're in — and the likely questions they face from clients. “For institutional guys who are paid by clients to pick money managers, hedge funds, etc. the fear of course is that clients will say ‘Well, jeez, you weren't so good at picking your employer.”
Of course, other firms have blown up recently, but other than Madoff, none have done so due to the sale of fraudulent investments to clients. The Madoff and Stanford debacles will no doubt heighten client and advisor due diligence. “At the very least, brokers need to run FINRA's BrokerCheck,” says Hardy Calcott, a partner with law firm, Bingham McCutcheon. He also suggests running the names of the firm's principles through FINRA's database. (Besides one personal bankruptcy, none of the 11 principles at Stanford had any marks on their CRDs.) Who audits the firm's books? Madoff used a no-name one-man shop to audit his entire operation; Stanford relied on an Antiguan accounting firm, also without name recognition stateside. Calcott says advisors would be wise to get a firm understanding of the company's governance structure, too — are there audit committee requirements? Is the board independent and competent, or stocked with cronies? Stanford's board included his father James, who told The Wall Street Journal he hadn't attended a board meeting in years; as well as O.Y. Goswick, a family friend from Stanford's Texas hometown, Mexia, who suffered a stroke in 2000 that all but totally disabled his speech — but didn't jeopardize his position on the board.
“Years ago, you'd ask around your city, your own firm, among your peers in the area to learn about a firm's reputation,” says Calcott. “Unfortunately, that's not enough anymore.” Investment bankers conducting due diligence on firms hire private investigators, usually to look into the principles. But if it comes to that, your gut is probably already telling you to look elsewhere.
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