Bonfire of the Vanities 

An international financial scam burns Memphis investors, nonprofits, and politicians.

If Sir Allen Stanford had not come to Memphis to do his financial magic, we would have had to invent him.

What Memphis' tale of financial misery has lacked so far is a villain. When the Securities and Exchange Commission charged Stanford and his top executives with "massive fraud" last week, Memphis had itself a worthy successor to such flamboyant personalities as Pyramid promoter Sidney Shlenker and media mogul William B. Tanner, who, like Stanford, was the patron of the city's pro golf tournament 30 years ago.

Stanford's pedigree is exotic and mysterious — a Texan with a passion for the sport of cricket, holder of a title bestowed not by the queen of England but by an adjunct of the realm in Antigua, owner of a gold helicopter, boaster of a rumored and apparently bogus link to the founder of Stanford University. He is exceptionally good-looking, as are several of the top dogs at Stanford Financial. He looked terrific on television on the final day of the Stanford St. Jude Golf Tournament last summer. If only he could have worn knickers, an ascot, and a target on his back.

Which, in a way, he did, at least as far as the target. Stanford's benevolence to local causes and charities, including Youth Villages, the Memphis Symphony Orchestra, and ArtsMemphis, prompted suspicions as well as gratitude.

"They definitely made a splash when they came to town," said Bob Fockler, president of the Community Foundation of Greater Memphis. "It was such a big splash that it was somewhat surprising, even for a new business."

Fockler and Leo Arnoult, head of a fund-raising consulting firm, co-authored a study last year on charitable giving in Memphis.

"Memphis has far too few national companies, so when Stanford Financial moved here, everyone was excited that we had another strong financial firm," Arnoult said in an interview. "The concern is to what extent wealthier Memphians bought into Stanford investments. My hope is that Memphis investors were not overly exposed, although I can't help believing that a significant number have been. Many nonprofits have wealthy board members who, perhaps out of appreciation, might have invested in Stanford."

The SEC has pegged the fraud at $8 billion and zeroed in on unconventional high-yielding certificates of deposit (CDs). That would make it one of the largest frauds in U.S. financial history. Stanford's headquarters is in Houston, and it operated through firms there and in the Caribbean, attracting investors from around the world. The extent of Stanford's fraud locally is hard to determine.

CDs are the gold standard of fixed-income investments, along with Treasury bills. They are insured by the Federal Deposit Insurance Corporation. On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009.

But Stanford's CDs were not FDIC-insured. They paid at least twice as much interest as conventional CDs. And they were held in the Stanford International Bank in Antigua — offshore, in financial parlance. The words "offshore" and "CDs" go together like bacon and bananas. It should have been clear to investors and brokers that they were living on the edge. How much Memphis money was invested in them? One informed estimate puts the total at $50 million or more.

According to people who were there when Stanford's Memphis office in the Crescent Center was raided last Tuesday, employees were gathered in the reception area by United States marshals and SEC enforcement officials. The Memphis FBI office says it was not involved, although national news reports say the SEC and the FBI were both investigating Stanford and agreed that the SEC would take the lead.

The tone was described as polite, not threatening or abusive. Employees were assured that this was a civil action. They could leave, some of them anyway, but their customer and personal accounts were frozen by a temporary restraining order. They could not even remove personal items from their desks, lest they contain data about the company.

Among those in the room was Laura Pendergest-Holt, Stanford's chief investment officer. Like another one of Stanford's top executives, James M. Davis, she is a native of Baldwyn, Mississippi, near Tupelo. In 2006, she was named by the Memphis Business Journal as one of 40 notable Memphians under the age of 40. Like her bosses, she exuded extravagance. At a recent local wine event, she startled participants by producing a $700 bottle to consume on the spot.

The SEC thinks Pendergest-Holt knows where the money is. She supervised analysts in Memphis, Tupelo, and St. Croix in the U.S. Virgin Islands. When the feds mentioned the missing $8 billion, some of those in the room thought they heard her say, "I know where two-and-a-half billion of it is." Others had a sickening realization that Stanford Financial is finished, probably sooner rather than later.

Judgment was swift. Within hours of the raid, Stanford was being lumped in a rogues gallery with Bernard Madoff, accused perpetrator of a $50 billion Ponzi scheme. The Sunday New York Times wrote, "Job hunting is hard enough in this market. Pity the poor employee coming from Bernard L. Madoff Investment Securities, the Stanford Group, or another company tainted by bad news of one sort or another."

Why were the skeptics in the financial industry so slow to react to their suspicions about Stanford Financial? One reason is because Stanford hired well-regarded employees from local brokerage firms, notably UBS Financial. Employees include Justin Fair, son of former Shelby County commissioner Morris Fair and a member of the Memphis Cook Convention Center board; state lawmaker Paul Stanley; and oft-quoted financial analyst Kevin Reynolds, who left the firm in 2007.

"They had good people," Arnoult said. "The owners are bigger than life, but the people they hired locally were people of great integrity."

Memphis has been a major bond market since the pioneering days of First National Bank (now First Tennessee) and the notorious "bond daddies" of the 1960s. Stanford made a run at high-producing bond salesmen at Morgan Keegan and First Horizon but found, like other firms who came to Memphis before it (such as Bear Stearns and Dain Rauscher), that the bond market is hard to crack.

Buying friends was an easier nut.

"Stanford was all about raising their brand," Fockler said.

Under the leadership of local marketing veteran Suzanne Hamm, Stanford Global Foundation distributed millions of dollars to Memphis charities and events like the Blues Ball, although its tax return and records cannot be found in the listings of nonprofits on Guidestar, an organization that tracks the finances of nonprofits.

Years from now, the five years from 2002 to 2007 will be remembered as the golden era of wealth in Memphis. The Dow passed 13,000. The stocks of the Big Three Memphis banks — Regions, First Horizon, and SunTrust — hit all-time highs, thanks to an orgy of lending and the sales of subprime mortgages and high-yielding investment products that would become poison a few years later. The stock price of FedEx reached $118. The housing industry boomed. And corporate giving to charity, according to the study by Arnoult and Fockler, got a noticeable bump, from 6 percent of total giving to 8 percent. Some of that was due to Stanford.

The loss of wealth in Memphis in the last two years has been staggering (see box on page 19). FedEx now sells for $47; International Paper for $6. Regions Morgan Keegan bond funds were consistently ranked as the worst of the worst, until its name and fund manager were changed. The bank stocks are down 80 to 90 percent. Housing starts are at a low, and foreclosures are at a high.

Given such losses, it is not a great time to be pointing fingers. Ask not for whom the whistleblower blows; he blows for thee.

So Allen Stanford, finally located in Virginia last week and served with papers, goes into the Hall of Shame. But, like others before him, there should be an asterisk next to his name. We should not be too smug. Less than a year ago, remember, he was at Southwind handing out the trophy at the golf tournament. Sidney Shlenker was Memphis magazine's Memphian of the Year in 1989. Before he went to prison, Bill Tanner was a celebrated entrepreneur, famous for his philanthropy and his lavish parties with entertainer Danny Thomas during the golf tournament then played at Colonial Country Club.

Like they say, the bigger they are, the harder they fall.

A Snapshot of Memphis Corporate Wealth in 2007 and Today

• FedEx: Then, share price $118; now, share price $47, salary cuts, suspension of company 401(k) contribution.

• International Paper: Then, share price $40; now, layoffs, share price $6.

• First Horizon: Then, share price $44; now, elimination of cash dividend, share price $8.60.

• SunTrust Bank: Then, share price $85; now, share price $8.

• Regions Financial: Then, share price $36; now, share price $2.84.

• Longleaf Partners, a Memphis-based mutual fund: Then, $12 billion in assets, $38 per share; now, $5.7 billion in assets, $14 per share.

• Stanford Financial: Then, generous benefactor; now, SEC alleges "a fraud of shocking magnitude that has spread its tentacles throughout the world."

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