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Extreme prejudice

"Extreme prejudice" Continued...

Issue: "The schools that Arne built," April 11, 2009

David Baglia is chair of the department of accounting at Grove City College. He said that such affinities are not necessarily unusual, or improper, but they do sometimes lead to sloppiness in the due diligence process. "We're comfortable working with people we know and have an affinity with," Baglia said. "But that does not absolve us of the responsibility of due diligence. In auditing, we talk about the 'smell test.' If something doesn't smell right, that doesn't mean it's rotten, but it does mean you should do a bit more sniffing around."

Baglia also said that it was unusual for Pendergest-Holt to have such a senior position at such a large firm without having the normal professional designations. Pendergest-Holt was not a certified public accountant, nor did she hold the Chartered Financial Analyst, or CFA, designation. "The requirements for these are rigorous, but they're fairly common for this level of responsibility. The fact that the chief investment officer at such a large firm didn't have these designations, or other similar designations, is unusual."

In retrospect, Baglia said, all of these circumstances should have been warning signs. But he said that when you're on the "inside" and the money is flowing, human nature makes it tough to ask hard questions. "That's what happened in the Madoff scandal, as well," Baglia said, referring to Bernard Madoff, who used his ties to the Jewish community to create a Ponzi scheme that defrauded thousands of people out of at least $60 billion. "Our accounting society has a T-shirt that says, 'In God We Trust. All Others Subject To Audit.' That's good advice, even when you're dealing with Christians."

So what's next in the Stanford mess? A few insiders might end up bringing the entire Stanford empire down. According to the Feb. 17 civil complaint that first made the alleged fraud public, a tantalizing but so far incomplete story emerges. At a February meeting in an airport hangar in Miami, three Stanford employees who are now cooperating witnesses met with Pendergest-Holt, two unnamed Stanford executives, and an attorney. Pendergest-Holt revealed to these employees that assets in one portion of Stanford's portfolio had decreased in value from $850 million to just $350 million in about seven months.

At another meeting several days later, one of the cooperating witnesses "broke down crying because of the revelations" at the earlier meeting and threatened to go to authorities.

On the day the complaint containing this story was made public, Allen Stanford went missing. A nationwide search eventually found him in Fredericksburg, Va., three days later, where his attorneys said he had "relocated" with his girlfriend. (Stanford is not divorced from his wife Susan, whom he married in 1975 and with whom he has a grown daughter. However, they have been separated for more than a decade.)

Stanford has not, so far, been charged, but according to a press release from the Justice Department, the case is being investigated by the FBI's Houston Field Office, the Internal Revenue Service-Criminal Investigations, and the U.S. Postal Inspection Service. And it is being prosecuted by attorneys from the Washington, D.C., Criminal Division's Fraud Section.

James Davis, for his part, is remaining tight-lipped in apparent solidarity with his old Baylor roommate. He cited his Fifth Amendment right and refused "to testify or provide an accounting . . . or produce any documents related to the matters set forth in the Commission's complaint." But attorneys for Laura Pendergest-Holt announced in early March that their client is "fully cooperating" with authorities.

If that ends up being true, it's likely that Sir Allen Stanford, who just last year was No. 205 on the Forbes list of the richest people in the world, might be wearing a very different number on his chest for years to come.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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