Q&A: Liquidating a multi-billion dollar Ponzi scheme

Q&A: Liquidating a multi-billion dollar Ponzi scheme

Forensic accountant talks Allen Stanford, litigation, and the future of accountancy

Accountancy Age sat down with Marcus Wide, a forensic accountant who worked as the lead liquidator of Stanford International Bank, the second largest Ponzi scheme after the infamous Bernie Madoff investment scandal. He recently became a consultant for the specialist independent litigation and dispute resolution law firm, Baker & Partners.

What made you go into forensic accountancy?

It was insolvency that initially attracted me, but insolvency involves a lot of fraud. To put it bluntly, doing an audit doesn’t change the financial affairs of the company by more than your fee. For me, it wasn’t particularly interesting.

Whereas insolvency, you are dealing with real money. Getting assets in and paying off creditors, for me the outcome is more ‘measurable’. You can see the consequences of fraud and insolvency and you can also determine if you’ve been successful or not, in real hard cash terms.

In the early days, I did forensics with a pen and paper and I used to get the bank statements and other documents and go through them by hand. These days, it’s far more complicated, but in some ways, it’s almost easier with electronic forensics. Now once you get into a system, and you understand how a system works, you can examine so much more, much more quickly.

The most well-known case you worked on is in the liquidation of Stanford International Bank (SIB). What was the state of affairs when you took over?

I was the lead liquidator and it was done jointly with one of my partners. When we got there, we were substituted for a previous (now defunct) firm called Vantis. Courts in Canada and Antigua where SIB was located, found them to be incompetent.

When I got the file, it had been open for a couple of years and a lot of the trail had been lost. We then started unravelling the file, working out what the claims truly were and working to find the assets. At the same time there was a US receiver appointed who had control over anything in the US. We developed a common claims process as extensively as possible. Coordinating activities so at the end of the day, anything recovered in the US, was paid to the same creditors as those on my list.

The thing about Allen Stanford was that he pretty much spent the money as he gathered in, there was not a whole pile left. He had some of real estate scattered around Antigua in various companies that we had to, in turn, make insolvent to recover the assets.

At the end of the day, our biggest chances of recovery work were in fact through litigation claims against the people who aided and abetted Mr. Stanford in his illegal activities. These included law firms and his bankers in various jurisdictions primarily. Some of them were settled while I was still active but the big one which is against TD Bank, remains outstanding.

How do you liquidate a Ponzi scheme? As you mentioned there are not a lot of assets, how does that process work?

You start off determining what the loss to the creditors is. What we said, which has also been substantiated in other fraud cases, is the losses are just the actual cash loss. You don’t include all the fictitious interest used to lure deposits in. When you look at the book value of the claims against SIB, they were around $7 to 8bn. By the time you whittle it down to the real losses, we came down to about five, knock off the money that has already been paid out and we found losses of about $4.7bn.

There are some fancy ways to try and adjust claims to get ‘fairness’. But the difficulty is that everybody truly is in the same boat. There was a difference in the US and the Antiguan proceedings, where the US receiver was chasing preferences. However, we stopped doing so because the Antiguan court ruled differently. We said they all were the same level of creditor.

Finding the assets is fairly simple. You look at the books and see where the money has gone. About 60 percent of the money that comes in, as a minimum goes out again to make payments to depositors before the scheme collapses. In Stanford’s case he was far more of a spendthrift. If you’re chasing somewhere between 20 to 40 percent of the money lost, you’re doing quite well, in terms of physical recoveries.

How does asset recovery differ across so many different jurisdictions?

If there wasn’t a US receiver, we would have gone under a process called the US Bankruptcy Code chapter 15 which allows for the recognition for a foreign liquidator to take action in the US. There’s also an international standard that came out of the UN, which provides basically the chapter 15 process. The UN principle under UNCITRAL (United Nations Commission on International Trade Law) tries to develop a uniform Bankruptcy Code globally. However, not every country is signed up for that.

The historical issues of liquidations are that they are for the benefit of the creditors that are resident in that specific country. That distorts what I would call the ‘general principle’ of pooling all the assets and paying all the creditors.

Did anything surprise you while working as SIB’s liquidator?

We discovered two thing that were quite surprising. Firstly, I think Stanford could have been shut down very early on in his illicit career. He had already bankrupted himself due to the failure of a gym business he operated in Texas. Typically speaking, banking legislation provides that someone cannot be a principal or a director of a bank, when they have been personally bankrupt in the past.

The Caribbean islands almost universally had legislation which provided for that. Yet, Stanford managed to set himself up initially in Monserrat. It was a combined British American task force that put pressure on the Montserratian authorities to pull his licence. He then jumped over to Antigua. where he received an offshore banking licence, and then also acquired a domestic bank.

Second, he had a very high profile. He was knighted in Antigua and that had come from the British Crown. He also had his famous Lord’s Cricket Ground stunt arriving in his gold-plated helicopter and offering $20 million to his cricket tournament. It always amazes me when someone with that high a profile suddenly appears and becomes in theory a billionaire. It’s like Wizard of Oz, who’s the man behind the curtain?

 

Do you feel our current economic climate will reveal frauds or Ponzi schemes that may have been operating given a decade of economic growth?

I think it’s almost an inevitably. This is going to be a very difficult time for any fraudster running a Ponzi scheme. I think that was the other surprise is how long Stanford managed to keep afloat. Ponzi schemes have a lifetime of around one to three years.

We’re seeing many otherwise viable businesses facing trouble right now. These include both public and private companies. Those large private companies sometime have people who are tempted by large returns in fraudulent schemes. Some of those may look to withdraw their cash to support their business. The demand for cash to be returned to the depositors in Ponzi schemes is going to be significant and that’s always the death of a Ponzi.

Do you feel its harder to run a fraud or Ponzi scheme now compared to when you first started?

People were incredibly naive when I first started doing forensic accounting, It’s far more sophisticated now. There are in place more anti money laundering policies that are applied globally. The prospect of getting a bank that will assist you in running a Ponzi scheme is considerably lower. You would have to go to some pretty unsophisticated jurisdictions to find one.

The caveat I have about that is banks are greedy. If you’re big enough, have high enough cash flow, I’m always surprised at how, they will apparently close their eyes and not look too hard because they’re making money.

Do you have any general advice for someone who like you, may be in audit or tax and thinking about transitioning towards becoming a forensic accountant?

It’s an odd branch. It’s a very small community when you get into the major things like Stanford, there is not many of us who do that sort of work.

One of the real difficulties is just listening to the hardship stories that come out of a fraud. When I took over as liquidator for SIB, I started getting regular calls and emails from people saying ‘I need this money for my cancer treatment, I was going to retire now I can’t afford to and etc.

In most cases, you are obliged to have a meeting with the creditors who have lost money. Their inclination is often to blame you and you meet a lot of anger. In those situations, you have to find a way of saying ‘I know your life is devastated, and it’s on my shoulders to try and see what I can do to recover what I can.’

You will have to be prepared for the possibility of working from dawn to dusk, because when you get into an international fraud, you’re taking calls from all around the world. But it’s fun, it’s exciting and interesting. You get the feeling that you are doing something good for people, trying to put money back into their pockets when they would have otherwise lost it forever.

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