You see them on the side of the highway, wearing bright orange jumpsuits as they bend, poke and scrape trash into large plastic bags under the watchful eyes of armed guards.
They are prisoners of the Louisiana corrections system, serving sentences of hard labor—a term that traditionally conjures images of hardened men sweating in the torturous heat, driving railroad stakes into the ground or shoveling gravel pits.
But whether it’s housekeeping or tending to produce fields, some of Louisiana’s white-collar workers—employees of Stanford Group Company and Stanford Trust Company—could find themselves alongside the criminal class, serving time as well as meals if convicted for securities violations, theft or money laundering.
Those charges are punishable not merely by fines and a short sentence, but by hard labor in places like the Dixon Correctional Institute in St. Gabriel or the Forcht-Wade Correctional Center in Homer from five to 99 years. It might not be the Louisiana State Penitentiary in Angola, but it’s still unlikely to be pretty.
Last month, the state Attorney General’s Office launched an investigation into the Louisiana-based Stanford companies. David Caldwell, director of the attorney general’s Public Corruption and Special Prosecutions Unit, said last month the state wouldn’t back down from a civil or criminal investigation simply because the feds were already going after Robert Allen Stanford, the sole owner of the companies accused of running an $8 billion Ponzi schme.
“The feds may be going after the whales,” Caldwell said, “but we’re going after the sharks.”
The federal investigation will focus on those people who crafted the alleged fraud, but the state, Caldwell says, has a responsibility in finding those at the company level, who led the local offices or who sold the Certificates of Deposit and punishing them if it’s determined they intentionally, or by failure of any fiduciary responsibility, led investors astray.
Over the next several months, Caldwell and his resource-strapped team of attorneys will dig deep into the framework of the Stanford companies. The investigation will focus on the following allegations: 1] that Stanford brokers were lying about the risk of CDs; 2] the company told investors that the CDs were insured by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation; 3] advisers were forging or lying on paperwork to help investors qualify as accredited investors; and 4] did any local managers or advisers knowingly participate in what the SEC is calling a Ponzi scheme.
Caldwell says the AG’s investigation will pursue both criminal and civil charges, if warranted. “Violations of state securities laws are felonies,” he says. “That’s what we’ve got. Our state laws have teeth. …We intend to take this to a grand jury.”
For the attorney general’s office, its involvement with the Stanford case began in early 2008. A Stanford broker came forward with information about paperwork being forged or manipulated by broker/dealers.
Those claims lead the AG’s office to take testimony and refer the case to the Louisiana Office of Financial Institutions. The testimony was, according to OFI Commissioner John Ducrest, taken into consideration along with other issues when they met with the Securities and Exchange Commission and the Department of Justice a few weeks later to discuss “this overall issue” of Stanford.
The OFI, however, has been rather tight-lipped about the Stanford investigation. Ducrest says OFI was ahead of the game in taking action.
“I hope one day to be able to talk about what we were doing at the time. There are some very positive things,” Ducrest says. “Actions we took in 2007 and 2008 eventually came to light.”
But members of the Louisiana Stanford Victim’s Group say they have had trouble getting information or even a statement of support from OFI, according to Jean Anne Mayhall, a LSVG representative. Caldwell counters that OFI’s silence might be obligatory, a result of the ongoing investigation.
“There are lots of things that the OFI can’t do because the SEC may supercede them,” he says.
For Caldwell, pursuing Stanford advisers or those people running the offices in Louisiana begins with looking at whether or not the advisers misrepresented the nature of the CD. He says investors have come forward with claims their advisers said the CDs were insured by FDIC, SIPC or Lloyd’s of London.
“[He said they were] very safe, liquid, secure, insured—FDIC insured,” Mayhall says. “I have a document that says excess FDIC insurance at Stanford International Bank. So, yeah, I was told what everyone else was told.”
Still, there’s the issue of the Disclosure Statement investors were given when they purchased the CDs. It spells out that the security was not insured and was rather risky—in stark contrast to what investors say advisers told them.
Caldwell says his office will consider the statement.
“That’s certainly an issue,” he says. “But we had a lot of elderly people who didn’t have a clue. The advisers may have just pushed a document in front of them and misrepresented what the document said. We’ll have to look for the difference between a hard sell and misleading.”
Still more investors, like Angey Shaw, the spokeswoman for the international Stanford Victims Coalition, say they were misled about the insurance—claims that lead to deeper arguments about whether or not insurance matters if the product itself is a fraud. “[They] told us it has SIPC, CAPCO, DNO. It is insured by SIPC.”
Accusations that advisers were misleading investors also might be fueled by another angle the attorney general’s office is investigating—whether or not some investors qualified to be accredited investors, the only kind who could legally purchase the CDs.
One adviser, Michael Word, has been singled out for this accusation. When Business Report sat down with Word, his wife and his attorney, Michael Stanley, in an earlier interview, Stanley ruled out specific discussions related to his client’s investors qualifying as accredited investors.
Another Stanford investor, Kim Scullin, says her sons, under whose names the CDs were purchased, didn’t come close to qualifying as accredited investors. When she received their summary each year, Scullin says she would call back to correct the net worth on their statements. Each year, the summary came back incorrect. Scullin always thought it was an administrative error, not an intentional act to falsify her sons’ qualifications for the securities.
There is, too, the possibility that advisers will be charged with fraud for having knowingly allowed investors to purchase CDs that were only worth the paper on which they were printed, or charged with failing to see or acknowledge the fraud occurring in their midst.
Onnig Dombalagian, a Tulane Law School professor and a former visiting fellow at the SEC, says the latter charge might be difficult to prove.
“The problem with anti-fraud is the state-of-mind rule. … They’ll have to prove that [the advisers] intended to deceive or spoke with reckless disregard,” Dombalagian says, noting the advisers could attempt to claim they were duped as well. “There are issues with demonstrating state of mind. They’ll also have to examine if there was a relationship of domination and control.”
It might be easier to prove those running the show on the local level—and not the advisers—had knowledge of the fraud.
Caldwell says his team also is looking into charges of money laundering, where the reality of hard labor comes into play. “Any time you’re moving money from one institution to another, that’s something we examine,” he says. And while Caldwell declined to talk specifics, the AG’s office is looking at the maximum sentencing bracket. “Once you go from [laundering] $20,000 to $100,000, you’re talking about Angola.”
According to Louisiana statute 14:230 of the criminal law code, “Whoever violates the provisions of this section, if the value of the funds is $100,000 or more, shall be imprisoned at hard labor for not less than five years nor more than 99 years and may be fined not more than $50,000.” Whether or not that means Forcht-Wade or Dixon or Angola will be left to the court to decide.
A case with some similarities, which is highlighted within the explanation in state securities law, explains that if convicted of felony theft [another possible charge against Stanford employees] and also money laundering, there is a minimum sentence of five years’ hard labor.
In United States v. Vinyard, the 4th U.S. Circuit Court of Appeals agreed that “concurrent five-year prison sentences for three counts of felony theft and one count of money laundering did not violate constitutional provision prohibiting cruel, excessive, and unusual punishment, although victim greatly facilitated defendant’s criminal conduct with its lax or virtually nonexistent inventory control and oversight.”
There also is the possibility the AG’s office could decide to pursue civil or criminal charges for their failure to detect the Ponzi scheme or for their failure to execute fiduciary responsibility. “[There] may be some things that are a breach of fiduciary responsibilities,” in violation of state law, Caldwell says. “And it may or may not rise to a criminal level.”
Ultimately, Caldwell says the AG’s office is focused on filing charges—if there are any to file—as soon as possible. “We have to look out for the people of our state. You can’t just assume that other agencies are going to do the right thing,” he says.
Their pursuit of the Stanford case, he says, will not be hampered by the impact of budget cuts on their office. He says they have some experience in the area and are moving as quickly as possible. “It’s not so much about brains. It’s about motivation,” Caldwell says, insisting his division will not be hampered by manpower shortages.
While the possibility of hard labor looms over the heads of those people involved in the Stanford scandal, Caldwell adds the focus will be on helping Louisiana victims recover. “It’s very important for people to know that some of their state agencies aren’t just going to sit around and talk about it,” he says. “At the end of the day, we’ll be judged in what we actually do.”
Financial Terms Glossary
Certificate of deposit [CD]: A certificate issued traditionally issued by a bank as a record of deposit for a specific amount of money. Typically, banks use the funds deposited for a CD to make corporate or personal loans. U.S.-based CDs make, on average, low interest payments over their maturity date. The Stanford CD offered higher than average interest returns for long-term deposits.
Accredited Investor Status: According to Rule 501 of Regulation D from the SEC, the term refers to a number of qualifications that, if met, allow a company to sell nonregulated securities to the individual or accredited investor. In the case of an individual, accredited investors have either a net worth [or joint net worth] of $1 million at the time of purchase, earn in excess of $200,000 annually [$300,000 annually for joint earners] or have a trust worth in excess of $5 million.
Ponzi scheme: Named for Charles Ponzi, who in the 1920s convinced residents of New England to invest in speculative postage stamp purchases that would take advantage of the differences in currency exchange rates, promising a 40% interest return. Now the term is used to describe any investment scheme in which [whether initially or eventually] the cash from later investors is used to pay out interest to earlier investors.
Broker: An “adviser” who is paid a commission per transaction of securities. In the case of Stanford, many advisers served as a broker between the seller [Stanford International Bank] and the buyer [investors]. As a broker-dealer, advisers can buy and sell on the behalf of clients.
