Lawmakers rebuff pleas to return funds from alleged Ponzi schemer

May 16, 2011

While Allen Stanford was flying high, he and his colleagues spent more than $10 million on campaign contributions and lobbying payments to curry favor in Washington. But all that money was diverted from investors in what authorities have called an elaborate Ponzi scheme, second only to Bernard Madoff’s in U.S. history, according to court documents.

Since Stanford’s arrest in 2009, a court-appointed receiver for the Houston-based Stanford Financial Group has been struggling to reclaim investor funds paid out to in-house and contract lobbyists, financial advisers and others whose services may have helped enable the scheme.

The receiver, Dallas lawyer Ralph S. Janvey, has been able to recover only about 5 percent of the political contributions he has targeted. Four of the principal national Republican and Democratic fundraising committees took in $1.6 million in Stanford donations, but they are vigorously fighting demands that they return it.

At least 50 members of the House and Senate have either ignored restitution demands or donated some of Stanford’s campaign contributions to charity instead, according to the receiver and a survey by The Washington Post. Included are House Majority Leader Eric Cantor (R-Va.); Senate Rules Committee Chairman Charles E. Schumer (D-N.Y.); Sen. Bill Nelson (D-Fla.), who chairs a Finance Committee subcommittee; and Sen. John Cornyn (R-Tex.), a member of the Judiciary Committee.

After questioning by The Post, a few of the lawmakers say they are having second thoughts. “We’re prepared to send the money back if they’re prepared to send us a release,” a spokesman for Cantor’s fundraising committee said.


Billionaire Allen Stanford is escorted into the federal courthouse June 25, 2009. (David J. Phillip/AP)

“A check will be cut shortly,” Nelson’s spokesman said, explaining that the senator earlier donated matching funds to charity in keeping with his practice for “individuals who run afoul of the law.”

Kevin M. Sadler, an Austin-based lawyer who speaks for Janvey, said no one in Washington has argued that Stanford, who is in federal custody while awaiting trial, is innocent. Instead, they have challenged the receiver’s legal standing or argued that he waited too long to litigate. “Such indifference to the victims of a massive fraud scheme is difficult to understand,” Sadler said.

Thus far, Janvey has filed 45 lawsuits as part of his global scramble to recover a fraction of the more than $7 billion that prosecutors allege Stanford stole from investors in 114 countries. His authority has been upheld twice in federal civil court, where an appellate panel affirmed last December that there was considerable evidence that “the Stanford enterprise operated as a Ponzi scheme.” It cited in particular the August 2009 guilty plea of Stanford aide James Davis, who said the firm had routinely reported false returns and used new income to pay client debts.

Noting this confession, Janvey forged a legal strategy that includes pursuing payments to lobbyists and advisers, arguing that the money represented fraudulent transfers and therefore is eligible for seizure.

Many of those sued have contested this theory, with the political party committees leading the pack; they have complained in legal documents about being asked to use new donations to pay back funds they spent long ago.

While the civil cases play out, Stanford still awaits a criminal trial. He pleaded not guilty to fraud charges, and his court-appointed lawyer Ali Fazel predicted “a vigorous and hotly contested trial.” He declined to comment further because of a gag order.

Many fooled

If the government’s assertions are true, Stanford fooled many in Washington, or at least got them to look the other way, by cloaking himself as a wealthy businessman with estates in Florida, Texas and the Caribbean and a fleet of corporate jets that he loaned to lawmakers.

His business efforts secured high-level endorsements, with President Bush praising Stanford’s company in a 2008 letter for “helping more Americans build a solid foundation for the future.” Multiple investors said they relied on Bush’s endorsement in deciding to buy worthless certificates of deposit, according to a Securities and Exchange Commission report last year.

Stanford courted prominent figures to give his business extra gravitas. Former World Bank president Paul Wolfowitz collected $15,000 in 2008 for speaking to a Stanford board meeting in Washington, company records show. “It seemed like a perfectly normal board,” Wolfowitz said.

Former congressman Michael Oxley (R-Ohio) — then vice chairman of the Nasdaq Stock Market and a member of Stanford’s advisory board — was among the attendees. Oxley, now a lobbyist for the Financial Industry Regulatory Authority, has not returned the $3,000 he collected from Stanford in 2004 while chairing the Financial Services Committee.

Oxley spokeswoman Peggy Peterson said Oxley was unaware of a request the receiver says he made in February 2010.

Federal campaign law generally does not oblige politicians to vet contributors, according to campaign finance lawyers. But troublesome signs were evident for those who looked carefully. Stanford had, for example, previously bankrupted a Texas health club chain, a matter of public record.

His Antigua-based Stanford International Bank, which would eventually attract billions of dollars in deposits, caught the eyes of SEC examiners as early as 1997. Relying primarily on public information, they concluded that year — and then again in 2002, 2004 and 2006 — that Stanford was probably running a Ponzi scheme, according to a report last year by the SEC’s inspector general.

One of Stanford’s top bank officers was his former college roommate, with no previous banking experience. Its auditor was an unknown company in Antigua, prompting an investor’s warning to the SEC in 2002 that another Enron scandal was in the making.

In the same year, the Democratic Congressional Campaign Committee accepted $125,000 from Stanford’s firm, the Democratic Senatorial Campaign Committee accepted $750,000 and the National Republican Congressional Committee accepted $175,000. Stanford has previously said he was trying at the time to influence legislation against money laundering that he feared would boost his company’s expenses; the legislation did not pass.

An early warning

In December 2003, a North Carolina lawyer who was born in Antigua wrote to all 13 House members from the state, warning that Stanford appeared to be bribing Antiguan officials and engaging in illegal transactions, according to the letter.

One recipient was Rep. Sue Myrick (R.), then a top NRCC official. Two other recipients forwarded the letter to the Justice Department, which promised “appropriate investigative steps.” Myrick did not respond to phone calls and e-mails seeking comment.

The letter did not stop the NRCC from accepting $5,000 from Stanford in 2004, and $32,000 more in 2005 and 2008.

SEC examiners concluded again in 2004 that Stanford’s advertised rates of return were so improbably high that the bank appeared to be a “very large Ponzi scheme.”

The same year, Stanford hosted Cornyn on what the senator told the Senate secretary was a “fact-finding mission” to the company’s Antigua headquarters. The Texas Republican has repeatedly declined to comment on the trip, which he reported cost Stanford’s company $5,362. People do not say that “somehow an elected representative is responsible for the actions of every donor,” Cornyn told a newspaper in 2009.

In 2003 and 2007, Stanford-related groups gave Cornyn $4,000 in campaign funds; in 2004, they gave $25,000 more to the Republican National Committee. Cornyn also helped host a 2009 black-tie ball funded partly by Stanford’s firm.

Cornyn’s office said he donated the funds to a charity after the scandal erupted; asked why they were not sent to the receiver, spokesman Kevin McLaughlin said, “We have no further comment.” A victims group says that 1,300 Texans who invested in Stanford’s firms lost $582 million. Cornyn now chairs the National Republican Senatorial Committee, which is fighting a receiver lawsuit demanding the return of $83,345.

Cornyn flew on one of Stanford’s jets once, his office states, while then-House Majority Leader Tom DeLay flew about a dozen times, according to an aide. In 2004, DeLay (R-Tex.) and four other congressmen wrote to a top Venezuelan banking official attesting to Stanford’s honesty; the government there subsequently allowed Stanford to open more than a dozen branches that attracted more than $1.5 billion. His Venezuelan bank’s collapse led to a government takeover and huge losses by accountholders.

DeLay attorney Brian Wice said that “if the government can prove to a jury . . . that the allegations about the scope of Mr. Stanford’s Ponzi scheme are true, then Mr. DeLay wasn’t the only individual whom Mr. Stanford was able to deceive.”

The SEC did not act firmly against Stanford until 2009, after the Madoff scandal broke, a lapse that the inspector general blamed largely on decision-making at the SEC’s Fort Worth office, including obstruction by an official there who later sought to represent Stanford.

But some public officials figured out earlier that Stanford should be avoided. In 2006, for example, the U.S. ambassador to Barbados sent a cable to the State Department in which she noted that Stanford’s “companies are rumored to engage in bribery, money laundering, and political manipulation,” and noted that she avoided being caught in photos with him during a chance encounter, according to a copy disclosed by WikiLeaks.

Janvey and his colleagues have been merciless in pursuing misspent funds: They have frozen dozens of bank accounts, sued hundreds of investors who took early profits and asked three sports teams to return more than $2.8 million.

Their services have not come cheap — they have collected legal fees of $47.9 million for thousands of hours of legal work through the end of last year. Sadler said that the fees were discounted and noted that the judge who appointed the lawyers has been holding back 20 percent of the amount billed for review later.

Tight grip on funds

Janvey’s battle to “claw back” funds from Washington includes a claim against the Center for Strategic and International Studies, which got $52,000 from Stanford, and its longtime senior adviser Luis E. Giusti, a former Venezuealan oil executive who was on Stanford’s advisory board and received checks totaling $2.6 million at his CSIS office, according to the receiver.

CSIS spokesman H. Andrew Schwartz declined to say whether the money will be returned. He said CSIS “acted ethically” and had no knowledge of the Stanford firm’s illegal activities or of Giusti’s dealings with “Stanford entities.”

Giusti attorney Kerry Peter­sen said he spent eight years speaking to investor groups at Stanford’s request in return for a yearly “honorarium” and does not plan to return the funds.

Janvey has also sued prominent Democratic lobbyist Ben Barnes — 2004 presidential candidate John F. Kerry’s chief fundraiser — demanding the return of more than $5 million in fees. Lawyers and aides for Barnes, a former Texas lieutenant governor, have responded that he provided “valuable services to Stanford,” for monthly charges that reached $265,000, and that Barnes has no legal obligation to return the funds.

Regarding Stanford’s hefty donations to the four principal Democratic and Republican congressional campaign committees, Sadler said “we asked for it back nicely, and they ignored us. We asked them again, and they ignored us. So we sued them. . . . They want to push the day of reckoning past the 2012 election cycle.”

Spokesmen for the committees all declined to state how much they have spent fighting the lawsuits. The Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee each said they disagree with Janvey’s “characterization” of events.

The Federal Election Commission recently agreed to let the committees finance their continuing fight against Janvey from special pools of donor funds ostensibly meant to finance election recounts. Melanie Sloan, director of Citizens for Responsibility and Ethics in Washington, said “this seems to be a rare case” where politicians are resisting the return of tainted funds, perhaps because Stanford and his history are still not well known.

“Members,” she said, “would rather keep the money, but only if they think their constituents won’t care.”

Staff researcher Lucy Shackelford contributed to this report.

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