Stanford collapse jeopardizes utility association’s funds

Magnolia Electric Power Association of McComb invested $5.3 million during 2008 with the now-defunct Stanford Financial Group and its bank in Antigua, federal audit records show.
Late Friday, MEPA General Manager Darrell Smith said the six-county business has regained about $3 million of its original investment and expects the rest to come back.
But he and its board of directors won’t know for months, perhaps years, as lawyers and accountants wade through financial records and retake Stanford assets from around the world.
But the financial experience has brought some changes at Magnolia:
n A new financial adviser.
n An investment attorney.
n A new, conservative investment policy.
“This was the first and only time Magnolia Electric had any investments with Stanford,” Smith said.
Who’s to be held accountable for any losses is still a lingering question, even after Smith’s response to the disclosure from records obtained by the Daily Journal.
Apparently, no other EPA in Mississippi made Stanford investments, but Magnolia Electric’s experience also raises questions about the finances of electric power associations and what they should do with their extra money.
Earlier this year, thousands of investors lost their life savings and retirement funds when the Stanford financial empire collapsed under the weight of a U.S. Securities & Exchange Commission investigation.
The SEC calls it a $7.2 billion Ponzi scheme, and federal prosecutions are under way.
“We won’t hide anything from anybody,” said Hollis Alford, MEPA’s board president and a longtime South Pike County leader on Friday, when asked about the Stanford investments.
Answers from Smith came only after days of repeated calls from the Daily Journal. MEPA’s board attorney, Ralph Peeples of Brookhaven, declined to answer questions across several days, claiming client confidentiality.
“We can have an answer on Monday,” Peeples said. But Smith responded by e-mailed letter before the close of business Friday.
Magnolia serves 34,313 electrical customers across 4,377 miles in all or parts of Amite, Pike, Walthall, Lincoln, Franklin and Lawrence in southwest Mississippi.
It’s one of 25 such organizations in Mississippi. They are private, member-owned corporations created by an act of Congress and provide electric power to their jurisdictions. They are governed by local boards of directors elected annually by the membership of the rural utility’s customers.
Magnolia’s investment decisions came to light through a public records search by the Daily Journal, which had heard about possible EPA-Stanford financial problems after an Oct. 5 investors’ meeting in Jackson.
Federal and state officials with some jurisdiction over EPAs say they are disturbed to learn of Magnolia’s possible losses.
“This money should have gone back to the people,” said Brandon Presley of Nettleton, Public Service commissioner for the Northern District.
Presley has been critical recently of Mississippi EPAs, especially of what he’s termed the secretive ways they operate.
“State law says any extra money is to be refunded to customers,” he said Friday. “No one would argue against having some reserve funds, but this is where the PSC needs to step in.”
Don Stone of Brandon is the state’s general field director for the U.S. Department of Agriculture’s Rural Utilities Service. He, too, voiced concerns when told about Magnolia’s Stanford investments and possible losses.
“Oh, yes,” he said Friday about Magnolia. “We have an interest because we have a mortgage on their system.
“Their losses are a concern from a security standpoint.” He means it’s a concern related to Magnolia’s ability to repay that mortgage.
Darrell Smith said some $2 million of MEPA’s money is still controlled by Stanford’s court-appointed receiver.
He said they will pursue legally whatever funds aren’t returned to the company.
Among the unanswered questions:
n Who’s accountable, if there are losses?
n Is there any oversight, beyond local EPAs, for investments like this?
Magnolia EPA may be the only one caught up in the Stanford scandal, but most of the state’s other EPAs have investments.
In letters dated Oct. 6, the Daily Journal asked each of Mississippi’s 25 EPAs to report if they had any investments with Stanford. Of the 23 that responded, none reported any connections with the defunct financial company, except Prentiss County EPA.
Prentiss said Stanford’s receiver continues to pay electric bills for the home of former Stanford executive James M. Davis west of Booneville. Davis’ assets are frozen and he pleaded guilty Aug. 27 for his part in the financial scandal.
At the only other EPA that didn’t respond, North East of Oxford, a representative said Friday she was certain they did not make Stanford investments.
A look at Magnolia’s Form 990 to the U.S. Internal Revenue Service shows the company ended 2007 with $6.54 million invested in publicly traded securities. December 2008 ended with $5.58 million in investments.
Magnolia did not respond to the Oct. 6 letter, but multiple documents obtained by the Daily Journal show Magnolia’s ending 2007 with $6.59 million invested in what it called SSB Mutual Bonds. The slight difference in totals isn’t yet explained.
Magnolia’s 2008 Financial and Statistical Report to the U.S. Department of Agriculture shows it changed its investment mix – moving most of $5.58 million to Stanford.
Each year, EPAs submit the F&S report to the USDA’s Rural Utilities Service.
The multi-page reports show operating revenues, debt, expenses and numerous other aspects of finances and operations at the local association.
Magnolia’s December 2008 report shows the company listed $5,585,755 in the “temporary investments” category.
On a subsequent page, investments were listed:
n Stanford Financial Group – $3,878,982.
n Stanford International Bank – $1,438,322.
n SSB Mutual Bonds – $268,451.
“There was certainly nothing we could see that said this investment company had any problems,” Smith wrote Friday.
For 2008, Magnolia reported $73 million in operating revenue and $1.8 million cash on hand. Total assets and debits were $93.75 million with $24 million in long-term debt.
In its 2008 Form 990 IRS tax report, Magnolia’s tax-filer Wilson & Biggs PLLC of Ridgeland answered “yes” to the question of whether the EPA had a financial account in a foreign country.
The foreign country code is listed as “AC” – for Antigua & Barbuda, according to www.irs.gov.
On its 2006 F&S report, Magnolia shows $6.244 million in temporary investments, but doesn’t list with whom.
“A lot of people were taken in by Stanford,” Presley said, “but there’s got to be more oversight for things like this.”

Patsy R. Brumfied/NEMS Daily Journal