Stanford Financial Charged with $8 Billion Fraud

The Securities and Exchange Commission reported Tuesday that it has charged Robert Allen Stanford from Texas and three of his companies for orchestrating a fraudulent scheme centering on an $8 billion CD program.

The affiliate companies within Stanford Financial Group that are alleged to be involved in the fraud include Antiguan-based Stanford International Bank, Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management.

The SEC also charged Stanford International Bank chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group, in the enforcement action.

"As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

The SEC reported that U.S. District Judge Reed O'Connor entered a temporary restraining order, froze the defendants' assets, and appointed a receiver to marshal those assets "pursuant to the SEC's request for emergency relief for the benefit of defrauded investors."

Rose Romero, Regional Director of the SEC's Fort Worth Regional Office, added, "We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world."

The SEC's complaint, filed in federal court in Dallas, alleges that Stanford International Bank has sold approximately $8 billion of so-called "certificates of deposit" to investors by promising improbable and unsubstantiated high interest rates. This was made possible by acting through a network of Stanford Group Company financial advisers.

These rates were supposedly earned through Stanford International Bank's unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

According to the SEC's complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in "liquid" financial instruments, monitors the portfolio through a team of 20-plus analysts, and is subject to yearly audits by Antiguan regulators.

After the market took in the news of the recent Bernard Madoff fraud, Stanford International Bank attempted to calm its own investors by falsely claiming the bank has no "direct or indirect" exposure to the Bernie Madoff Ponzi scheme. The SEC reports that the bank actually lost approximately $400,000 through indirect investments with Madoff.

According to the SEC's complaint, Stanford International Bank is operated by a close circle of Stanford's family and friends. The bank's investment committee, responsible for the management of the bank's multi-billion dollar portfolio of assets, is comprised of Stanford himself; Stanford's father who resides in Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales; Pendergest-Holt, who prior to joining Stanford Financial Group had no financial services or securities industry experience; and Davis, who was Stanford's college roommate.

The SEC's complaint also alleges an additional scheme relating to $1.2 billion in sales by Stanford Group Company advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data.

According to the complaint, the false data helped Stanford Group Company grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for the company (and ultimately Stanford) of approximately $25 million in 2007 and 2008.

The fraudulent Stanford Allocation Strategy performance was used to recruit registered investment advisers with significant books of business, who were paid heavy incentives to move their clients' assets to Stanford International Bank's CD program.

The SEC's report states that "the Commission continues to seek, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil money penalties."

Just five months ago, Forbes magazine named R. Allen Stanford, with a net worth of $2.2 billion, as number 205 of the 400 richest Americans. Stanford expanded the insurance and real estate company that his grandfather founded in 1932 into a global wealth management firm. Stanford Financial Group's clients are affluent investors, institutions, and emerging growth companies from 136 countries on six continents, with over $50 billion in assets under the company's management or advisement.



Sources:
U.S. Securities and Exchange Commission
Forbes.com