Consecutive Identical Returns and the Stanford Group Scandal

Abstract

As one piece of evidence in the prosecution of fraud and Ponzi scheme charges against R. Allen Stanford, James M. Davis, and Laura Pendergest-Holt of the Stanford International Bank, Ltd., the Stanford Group Company, and Stanford Capital Management, LLC, the Securities and Exchange Commission noted that the firm had reported consecutive identical four-digit returns of 15.71% in 1995 and 1996. An unidentified expert and Ms. Pendergest-Holt asserted that this result was unlikely, and the SEC has viewed it as evidence of long-term fraudulent activity. This paper examines the likelihood of consecutive identical four digit returns using simulation over a variety of market parameters with both equity and interest rate volatility and several general types of investment strategies. Given our results on the frequency of this event and the fact that there are about 300,000 investment managers in the United States, it is quite possible that many investment managers experience consecutive identical four-digit returns over a two-year period. In low risk environments and following low risk strategies, there could easily be more than 100. The combination of consecutive identical four-digit returns with evidence of fraud may be inculpatory evidence but the former, by itself, should not be considered unusual for the totality of investment managers in the market.