Stanford Receivership Woes Torpedo Equity Traders

Yet another scandal explodes and yet another trading desk is gone.

Equity and sales traders have taken another hit with this week’s closing of the Stanford Group Co., which sent more than 20 institutional trading pros out of work and into the street. This follows the closure of Bernard L. Madoff Investment Securities in December, which put dozens of trading veterans out of work.

“I feel bad for the people there. I knew them really well,” said one trader, who didn’t want to be quoted by name.

Stanford Group was one of the companies of the recently suspended private wealth manager Stanford International Bank, which is owned by Robert Allen Stanford. Regulators charged it with committing “massive” billion-dollar fraud through its offshore operations. But Stanford also had strong research and institutional trading operations, several trading executives told Traders Magazine.

Stanford Group was “very good in market making,” said one trading executive at a buyside firm. It was part of its comprehensive approach to building both an institutional trading arm and a strong private wealth management business, he said.

The firm’s web site lists 15 trading employees in the New York office–eight traders and seven sales traders. There were also three sales traders in Boston, three sales traders in San Francisco, and one sales trader in Dallas.

And the firm had been growing in recent years, sources said. The Houston-based firm established itself in the institutional trading space in Dallas roughly 10 years ago. Stanford was making markets in 242 stocks, according to its web site.

It executed trades for institutions on an agency basis in Nasdaq large- and small-caps as well as bulletin board and Pink Sheets trading. The firm was supported by its Washington Research Group (WRG) unit.

“I went to the Washington Research Group conferences and you could learn a lot about equity analysis,” said the trading executive. Useful conference topics included industry-specific analysis on regulatory policies as well as analysis of various sectors, the trading executive added.

Sources also said the firm was a strong player in institutional research for years and had become much bigger four years ago.

In March 2005, Stanford purchased the WRG from Charles Schwab & Co., which had decided to give up on institutional trading. WRG offered institutional investors insights into how actions in Congress and Washington, D.C., can impact stocks and the broader economy, said traders who had attended some of the conferences.

WRG has been a big research player for several decades. It was founded in 1974 as the Washington Forum. It has been owned by Drexel Burnham Lambert, the infamous junk bond firm of Michael Milken that regulators closed down in the 1990s, and several other institutional brokerages.

According to the Stanford web site, the research operation has “consistently ranked in the top four for Macro/Washington research by Institutional Investor Magazine.”

WRG was “very strong on soft-dollar research. They also tended to recruit big-time journalists from papers like the Washington Post who wrote in a journalistic, non-technical style, about issues such as soft dollars,” said a former employee of WRG who now works as a Washington lobbyist. “Washington Research Group is an excellent product,” added a veteran trader.

Calls to Stanford were referred to the SEC regional headquarters for comment. SEC officials were not available for comment yesterday.

Stanford companies include Antiguan-based Stanford International Bank. SEC officials, in the compliant, contend that Stanford “spread its tentacles throughout the world.”

Yet the firm’s foreign operations in the Caribbean are what spooked a number of potential trading partners.

“We were impressed by the company but wanted nothing to do with them because we feared what was going on with their offshore operations,” said one buyside trading executive.

The SEC’s Enforcement Division said that Stanford, along with friends and family, defrauded clients, “based of false promises and fabricated historical return data to prey on investors.”

The firm and several of its subsidiaries were put in receivership on Tuesday by a federal district court judge after a complaint filed by the SEC officials. They charged that Stanford and several of its subsidiaries had operated offshore, perpetrating “a fraudulent multi-billion billion scheme centering on an $8 billion CD program.”

The buyside trading executive said “no one should be surprised by this.” He said that rumors had been spreading around the trading industry for the last six months or so that Stanford was under SEC investigation.

Traders Magazine contacted one Stanford former employee who was told not to report to work on Wednesday, along with all of the firm’s other employees. He said he was unaware of the rumors about the SEC investigation. He also said he was saddened by the allegations.

“It was the best job I ever had,” said Ronald Segal, a senior vice president and veteran sales trader. He said his boss, Richard Parker, at Stanford “was the best person in the world to work for.” No one answered the phone at Stanford’s New York office. Segal said he is unsure if he would retire or find another job in the industry. “I’ve been talking to my clients all day,” he added.

So what happens now to the research operation, the trading desk and the rest of the Stanford businesses that a court has put under receivership protection?

“In receivership, an official is appointed to take control of the assets and determine what they are,” according to Steve Nelson, a securities attorney who founded his own law firm in White Plains, New York.

Assets are frozen, he explained. The receiver cannot execute transactions, he added. “The receiver’s job is to protect the assets, not to run the company,” according to Nelson.

After the assets have been secured, assets might be sold off, Nelson said. That is, he said, if a court determines the best interests of the investors might be the sale of part or the entire firm.