Patterns in Asset Management Returns:
Evidence of Fraud in the Stanford Group Scandal?

Abstract

Patterns in asset management returns provide red flags that managers could be manipulating performance data. As one piece of evidence in the prosecution of fraud and Ponzi scheme charges against R. Allen Stanford, two of his associates, and his firm, the Securities and Exchange Commission (SEC) noted that the firm had reported consecutive, identical four-digit returns of 15.71% in 1995 and 1996. The SEC has viewed this as evidence suggestive of long-term fraudulent activity. This article 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 the authors’ results on the frequency of this event and the fact that approximately 300,000 investment managers are active in the United States, that at least one manager in the United States would achieve consecutive, identical four-digit returns is a virtual certainty, and the expected number is likely to be a few hundred. 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.