While Bernie Madoff focused on the exclusivity of his investment opportunity, R. Allen Standford built his financial empire with hard-sell sales tactics and incredible employee incentives. His "business" grew from just a half-dozen offices in 2004 to more than 20 in 2008.
Financial advisers earned sales commissions on CDs of one percent, plus a chance to earn an additional one percent per year over the term of the CD as long as they sold $2 million worth of CDs in a quarter. Some employees nicknamed the program "bank crack," according to Friday's Wall Street Journal, "because it seemed to be addicting."
The CDs at Stanford's Antigua bank promised yields that were as high as 9.87 percent, much higher than investors could find in U.S. banks. Now investigators believe that the new money that came in paid the older investors, just in like any traditional Ponzi scheme. The trouble started when people began pulling their funds out of the Antigua bank in late 2008. Federal authorities now believe at least half of the $8 billion raised for CDs may never be recovered.
To find more cash to feed the firm's unraveling assets, Stanford flew more than 200 overseas employees to Miami in January for a weekend meeting and yacht cruise, according to the Journal. That's when Stanford gave a pep talk and announced the quarterly sales contest called the "Top Performer's Club." Leading sellers were to compete for huge bonuses. A video of one financial adviser talked about how he'd won $400,000 during a similar contest in the past.
These types of sales contests were not new to Stanford employees. The Wall Street Journal reviewed emails from 2005 that indicated advisers around the world formed sales teams with names like "Superstars," "The Deal Hunters," and "Money Machine." In a quote from one email, the managing director of the Baton Rouge, LA, office wrote, "We only have about $1.7MM of production for October, well short of our $21MM monthly goal! However, I'm counting on a really strong November and December!!!"
To get these level of sales high rollers were wined and dined. Advisers accompanied wealthy potential CD buyers on three-day, all-expenses-paid trips to Antigua, so they could meet bank officials. If the potential sale was at least $5 million they were flown to the island on private jets, according to one adviser quoted in the Journal story.
In 2007, FINRA fined the Stanford Group for using sales material that contained "misleading, unfair and unbalanced information" about the CDs, as well as for other questionable sales tactics. In 2008, investigations started by the FBI, SEC, IRS, and U.S. Postal Inspection Service. Investors are wondering why it took so long.
Stanford lived high on the hog and studiously avoided taxes. The Internal Revenue Service reports that he and his wife owe $226.6 million in back taxes. Stanford declined to comment for the Journal story. David Finn, a lawyer for executive Jim Davis, Stanford's chief financial officer, simply said "We are fully cooperating with the federal investigation."
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and the Complete Idiot's Guide to Value Investing.