June 12, 2024

Jet Age “Run On The Bank” In Antigua

Stanford Depositors Head To Antigua

Depositors from as far away as Colombia have begun arriving in the island nation of Antigua, seeking to withdraw their money from an offshore bank under investigation by U.S. state and federal authorities.

Reached by telephone on Monday afternoon, the chief financial officer at Stanford International Bank, James M. Davis, declined to comment when asked if investors are having difficulty obtaining redemptions. “I don’t have any comment, but I appreciate your call,” said Mr. Davis, the longtime top aide to Mr. Stanford.

A Stanford spokesman said because of the holiday he was unable to comment on the mutual-fund product.

Mr. Stanford said in a conference call to employees Tuesday there would be a temporary moratorium of two months on early redemptions for CDs, according to one Stanford financial adviser who has worked at the firm for about five years. Several depositors say they have been told the same thing.

In Antigua, anxious depositors have flown in from overseas to seek their money from Stanford International Bank, housed in an imposing neo-Georgian building beside Antigua’s international airport.

Just over three months ago, Mr. Stanford paid out $20 million in prize money to the winners of a single cricket match in Antigua. Mr. Stanford announced his inaugural tournament by descending on Lord’s Cricket Ground in London in what was described as a gold-plated helicopter. According to the Times of London, Mr. Stanford now plans to continue the tournament but in reduced form.

My take here is that many innocent people will sustain losses on their investments – See Stanford Financial Investigated. The SEC has been investigating Stanford since at least 2007.  After seeing the SEC in action with Bernard Madoff, investors should have zero confidence in the SEC’s ability to protect investors.

Satyam’s Phony $1 Billion – How They Did It

One would think that with the number of business frauds, Ponzi schemes and other financial deceptions exposed over the last decade that auditors would have a more skeptical and cautious attitude.

The Satyam case is particularly perplexing when considering one of the major fraud aspects of the case.  Satyam reported cash balances of approximately $1.11 billion when in fact they had 94% less, or only around $66.6 million.

What makes this fraudulent reporting of cash balances so strange is how the auditors could possibly miss over a billion dollars.   Verifying cash balances is a routine step in the audit process.   In addition, routine “topside” analytical procedures are usually employed to verify that a large number on the balance sheet makes sense.

For example, if a company reports a cash balance of $1 billion dollars, does that cash balance look reasonable compared to the interest income reported?    A quick check on what rate of interest the company was earning should have resulted in determining if the interest income the company reported from its cash holdings was reasonable.  Perhaps Satyam fraudulently inflated the income earned on their phantom cash as well, in which case this procedure may not have lead to suspicion.  A routine financial audit is not conducted with the intention of discovering management fraud.

Verifying cash balances , however, is an entirely different matter.  Cash balances are easily verified by sending a balance confirmation request directly to the banking institutions in which the cash is held.   Cash confirmations are a simple and routine audit procedure.  A company holding over $1 billion in cash and conducting business worldwide would have accounts with many different banks.  The odds of having someone at many different banks intercept and falsify a bank confirmation is highly unlikely; so how did the auditors miss $1 billion?

The most plausible explanation is that the auditors did not comply with standard audit procedures.   Once the bank confirmations are prepared by the auditors, procedure requires that they be taken directly to the postal service by the auditors.  Instead, I suspect that a very cooperative and friendly staff at Satyam offered to take care of mailing the bank confirmations, thereby saving the auditor the extra effort of independently mailing the confirms.   This breakdown in a routine audit procedure most likely resulted in the bank confirms never being mailed to the banks. The confirmations were retained and fraudulently completed by Satyam, and then mailed back to the unsuspecting auditor.  The doctored confirmations examined by the auditors matched what the company said they had in cash and everyone was satisfied.

Result: simple audit rule violated and huge fraud goes undetected.