# Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

## SEC confirms Dalmady analysis on Stanford

February 18, 2009

Posted by on Within hours of my posting about Dalmady’s analysis of

possible fraud at Stanford International Bank, I received a comment

on my blog telling me that I was spreading lies and that I should

recant:

Try to do some investigative work instead of building upon lies

… When you want something successful to fail you present the

perception, associate it with something negative (Madoff) and watch

the masses panic … You have now created the reality … I hope you

put as much energy in recanting this story as you do posting them

…

I did not lose sleep over this comment because by the time I read

that comment, the SEC had filed its complaint

against Stanford confirming most of what Dalmady had surmised.

I found the SEC complaint short on hard facts. Did I really know

anything more on reading this complaint than I did after reading

Dalmady? I am not sure.

And, there were some things in the complaint that did not sound

right to me like the assertion that it is “impossible” for

a large portfolio to produce identical returns of exactly 15.71% in

two successive years. If exact means that there was no rounding at all

in arriving at 15.71%, then it is in fact almost impossible. But then

it is quite improbable that a really large portfolio would produce a

return which is exact to two decimal places (with no rounding error)

in even *one* year. The return on a $8 billion portfolio at

around 15% would be over a billion dollars and would therefore have

twelve significant digits when measured in dollars and cents. Suppose

that the return in percent is also computed to twelve significant

digits. The probability that only the first four significant digits

(1, 5, 7, 1) are non zero and the other eight significant digits are

zero would then be about 10^(-8) or about 1 in 100 million. Quite

improbable!

But if what they mean is that the return rounded to two places was

15.71%, then that is not impossible at all. If the range of returns is

say 5% (500 basis points), then the probability of the return being

the same as the previous year’s return to two decimal places

(one basis point) is 1/500 or 0.2%. Since the SEC examined at least 10

years of data (their example is of 1995 and 1996 returns), the

probability that they would find at least one year in which this

happened is 1/50 or 2%. Certainly, 2% is not my idea of impossible or

even improbable.

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Thank you SIR!

Well, all of us should be thanking you for blowing the lid off this scam!

Unfortunately, looks like Elandia’s Pete Pizarro will not be redeeming any shares of stock since there will be no influx of cash. According to press releases, American Samoa will not be loaning the $16m after all. THEREFORE, looks like Elandia wll NOT be getting their bailout??? It also sounds like Am Samoa is not going to help Elandia wiggle out of a prior loan they gave them. It sounds like it all amounts to one huge SCAM!!! and the Scammers just got scammed themselves! Guess there is no honor among thieves after all