Scandals tied to Miss. erode faith in economy

/Home/Notorious Frauds and Tips on Avoiding them/Meet Texas Billionaire (And Mini-Madoff?)

Scandals tied to Miss. erode faith in economy
Stanford, WorldCom cases caused by ethical lapses, professor says
LARAYE BROWN • LARAYE.BROWN@CLARIONLEDGER.COM • MARCH 8, 2009
Read Comments(3) Recommend (1)Print this pageE-mail this articleShare

Another financial fiasco continues to unravel with Mississippians once again linked to an alleged scheme to bilk investors out of billions.



While much of the national spotlight has been focused on Houston, Texas, where Stanford Financial was based, the firm's alleged $8 billion fraud is the biggest scandal to touch the state since WorldCom's $11 billion deception.

Each case centers around a man. For WorldCom, it was Bernie Ebbers. With Stanford, it's Allen Stanford.

WorldCom was based in Clinton, and Stanford's connection to the state can be linked to a group of senior executives from Baldwyn and $391 million managed for more than 4,500 Mississippians.

For Ebbers and Stanford, the same descriptions apply. Ego. Image. Greed.

Behind each man, too, is a chief financial officer who handled the books. For the Canada-born Ebbers, who adopted Mississippi as his home, it was Scott Sullivan who cooked the books and went to prison for it. With Stanford Financial, James Davis, the Texas billionaire's college roommate from Baldwyn, is accused of doing the same. He's been named in a civil action but, at least so far, faces no criminal charges.

Fraud may be the tie that binds Stanford and WorldCom.

"They both appear to be caused by ethical lapses of proper procedures," said Paul Grimes, a finance professor at Mississippi State University. "There were things done behind the scenes that resulted in some people receiving a great deal of profit at the expense of others."

On the one hand, you have WorldCom, an equity scheme aimed at stockholders. On the other, there's Stanford, where investors were lured with promises of high returns on money that may never have been invested.

"Stanford was an investment scheme, which WorldCom really wasn't. Stanford has more in common with the Madoff scandal in New York," said Bill Brandt, administrator of the trust that sold Ebbers assets to recoup losses by investors.

"With WorldCom and Enron, people were sort of keeping stock prices somewhat artificially inflated solely for the purpose of keeping value in the business," said Brandt, president and CEO of DSI, a Chicago-based restructuring and work out firm.

Bernie Madoff, the former head of the NASDAQ stock exchange, has been accused of running a $50 billion Ponzi scheme.

If nationally chartered and Internet banks were unable to offer returns competitive to those promised by Madoff and Stanford, investors should have been immediately skeptical, Brandt said. And although Stanford advertised, a key phrase was always missing: "FDIC insured."

"I'm always surprised at how people delude themselves into thinking, 'I've got the get-rich-quick scheme nobody else has figured out,' " Brandt said.

That Stanford is a private company adds to the chicanery, Brandt said, pointing out the difficulty federal officials are having deciphering the company's actions.

Sam Owens, a former WorldCom investor who lost more than $75,000, said a difference in motivation defines the two cases.

"The Ponzi scheme is where you set out to deceive somebody, and I don't think the WorldCom people originally set out to deceive anybody," Owens said. "When things got to going downhill for them, that's where the criminal intent came. Their egos wouldn't let them fail, so they were going to cook the books and stay the darlings of Wall Street."

That WorldCom was required to make its financial statements public gave some investors a false sense of security. This highlights the faith some have in the U.S. Securities and Exchange Commission, the agency now charged with unraveling Stanford's financial scheme, a plot the receiver said involves at least 175 companies and an organizational chart spanning 25 pages.

"How can one person control 175 different entities and the Securities and Exchange Commission not know they are not legitimate," asked John Mosley, a former WorldCom investor who lost $27,000 in that collapse.

But the SEC isn't the fiscal police agency many envision.

"The staff time and the budget it would take for the SEC to monitor all these things would be crazy," Brandt said. "They don't get involved unless someone raises a red flag and it requires them to get involved."

For every lawyer or forensic accountant charged with figuring out the scheme, there are people like Mosley who bear the sting of losses. When a multibillion-dollar scandal is carried out, it doesn't just hit investors. It has the potential to damage everyone from the employees who thought their company was acting honestly to those employed by the companies supporting the collapsed business. Stanford Financial's collapse has dumped employees into a job market laden with rising unemployment.

"It hurts because we're in the middle of a big market downturn," said Nancy Anderson, an investment manager and owner of New Perspectives Inc. "That's usually when fraud shows up because you can hide it when everything is going well."

Stanford's problems surfaced in the midst of a recession, and WorldCom collapsed just as the dot-com downfall was beginning.

Stanford was well-respected in his field, and a YouTube video shows a recent Stanford interview on CNBC. He forecast there would be a lot of problems during the first quarter of 2009 and, when asked, shared, "I have to say it is fun being a billionaire, but it's hard work."

For communities, the scandals reach beyond money.

Ebbers, well-known in the Clinton community, was a man who made a name for himself with donations to Mississippi College. He was active at Easthaven Baptist Church.

"It was a jolt for us in Clinton," Anderson said. "You feel like you're an upstanding community, and then you feel kind of hit with the same brush as these guys who were conducting this fraud."

For Mississippi, the epicenter is Baldwyn, where Davis was championed for his efforts to renew the community's downtown area with shops, apartments and a restaurant. Davis lives in an expansive, gated home outside town and is a founder of a nondenominational church.

And Stanford Financial opened a $12 million distribution center in the city of 3,300 last fall for Forefront Holdings, a golf accessories company the Houston company owns.

"As far as the city is concerned, he has been very generous in wanting to restore buildings downtown," Baldwyn Mayor Horton told The Clarion-Ledger days after the scandal broke last month.

Ebbers' 25-year sentence hasn't been as effective as Mosley thought it would be in discouraging other corporate leaders from deceiving the public.

"It's aggravating that this is still going on today," Mosley said. "With Bernie Ebbers going to prison, you thought that would set an example. Greed has corrupted the business world."

WorldCom was Owens' first experience with the stock market. He says he'll never invest in it again.

These scandals, Grimes said, affect people's faith to invest in communities by buying homes, starting new businesses or taking on new projects. That loss of faith erodes confidence in the economy.

"Everybody has just lost their confidence in our system and, until we get that back, I don't know that we're going to dig out of this mess," Grimes said.