The Stanford Financial empire is crumbling. And it is a very, very messy collapse. Not only do American regulators face the problem of the group’s size and complexity; they are also faced with the fact that the bulk of the Stanford companies are spread outside of the Unites States.

And what’s more, each individual company is not necessarily subordinate to any other Stanford company: there is no single company that can be targeted to bring in all the others.

Or, as the SEC’s Rose Romero more colourfully put it to the FT:

[it is a fraud] of shocking magnitude that has spread its tentacles throughout the world.

Right at the centre of the allegations is the $8bn fraud the SEC claims has been perpetrated by the Stanford International Bank, based in Antigua.

The SEC and other US Federal agencies have no small degree of interest in its operations because a large number of the certificates of deposit (CDs) that Stanford sold were denominated in dollars (around $3.5bn, of them, as far as we can see – the great part of which were only sold relatively recently in 2007) and pushed to clients by its US-based brokerage, Stanford Group Co.

But Stanford Financial makes another boast: that , as a group as a whole, it has more than $50bn of assets under management.

Try as we might, however, we here at FT Alphaville can’t seem to find them. We suppose we shouldn’t be too shocked.

We detailed the structure of the Stanford Financial Group in a post here yesterday, and from it, we think we might have the answer. In fact, it’s something Felix Salmon noted from a commenter earlier this week:

Big Al, a commenter at Clusterstock, has an interesting theory:“The $50b number is smoke and mirrors. Its $8.5B at the bank and about $6.5b at the b/d (best as i can figure). The rest is ‘under advisement’ which is a game of semantics Allen plays. He has a broker in Houston calling on public taxing authorities. In total, those taxing authorities have about $35b of annual tax revenues. Stanford counts all this tax revenue as being “under advisement” and adds it to his AUM. Allegedly. In my opinion.”

We believe that the “billions” may well be derived from funds “under advisement” at the Stanford Group Company – the Stanford group’s broker and one of many identikit “asset management” outfits – even though that company only has around $147m of assets.

The careful language in the above – “advisement”, not “management” – is where the truth lies.

Stanford Group Company was in fact, a white-label asset management firm.

It simply served as a “introductory broker” to other, real firms – Pershing (Bank of New York) and Bear Stearns – who took on the actual financial risk of managing Stanford clients’ money. Stanford itself got a fee from the bigger New York firms for channelling clients money their way.

The relationship is detailed, obliquely, in a Stanford Group Co filing:

The company has agreements (hereinafter referred to as “the Agreements”) with Bear Stearns Security Corp and Pershing LLC (collectively, Clearing brokers) to clear securities transactions, carry customers’ accounts on a fully disclosed basis and perform record keeping functions. Accordingly the company operates under the exemptive provisions of SEC rule 15c3-3(k)(2)(ii). Bear Stearns and Pershing LLC provide investor protection for the net equity of customer funds and securities positions held by these clearing brokers.

Our reading of that suggests clients’ money put to work in this way was not actually consolidated on Stanford’s books.

So unless the $50 billion are actually elsewhere – in another company under the aegis of the Stanford group – it might well be that, notwithstanding the $8bn at SIB, the $50bn might not exist.

This entry was posted by Sam Jones on Wednesday, February 18th, 2009 at 12:55 and is filed under Capital markets, People. Tagged with Sir Allen Stanford, Stanford Financial, Stanford International Bank. Edit this entry.