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SEC Alleges $8 Billion Savings Fraud
Allen Stanford, Colleagues Lied About Investments, CD Return Rates, Agency Says

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, February 18, 2009

The Securities and Exchange Commission yesterday charged R. Allen Stanford, a prominent Texas businessman, and three companies under his control with carrying out a "massive, ongoing fraud" involving the sale of $8 billion in certificates of deposit.

The case is one of the largest alleged financial frauds in U.S. history and comes just two months after the SEC accused New York financier Bernard L. Madoff of orchestrating a Ponzi scheme of up to $50 billion.

Stanford and two colleagues, operating through a web of firms based in Houston and the Caribbean, lied to customers about how their money was being invested and how the firms' investment portfolios had performed in the past, the SEC said in a civil complaint filed in federal court in Dallas.

Antigua-based Stanford International Bank and related firms promised "improbable, if not impossible" returns to investors on certificates of deposit, the SEC added, often many percentage points higher than what rivals offered.

CDs, popular savings products, promise fixed returns to investors, who usually agree to deposit their money for a set period of time. Stanford clients were told their deposits were safe, invested in easily sellable securities. In fact, the SEC said, the funds were largely invested in illiquid real estate and private equity holdings.

"We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world," Rose Romero, director of the SEC's Fort Worth office, said in a statement.

In addition to Allen Stanford, the SEC charged Stanford International Bank; two affiliates in Houston, Stanford Group and Stanford Capital Management; and two top executives, James M. Davis and Laura Pendergest-Holt.

The SEC acted after Stanford moved to liquidate some of its holdings, including $178 million from the bank's accounts, over the past two weeks.

Yesterday, federal agents raided Stanford office buildings in Houston, posting a sign on the door: "The company is still in operation but under the management of a receiver."

The fate of customer deposits -- largely from wealthy investors -- wasn't immediately clear. Stanford had 50,000 CD accounts as of 2007, with customers around the world, according to the SEC.

A federal judge in North Texas yesterday froze Stanford Bank's assets. The SEC said Allen Stanford and his associates refused to help account for the funds. "People are not going to get their money immediately," said Julie Preuitt, an SEC official in Fort Worth. "The receiver has to determine where all the assets are and how much they're worth and do their best to distribute the funds."

No lawyer representing Allen Stanford or other defendants could be identified yesterday. Executives at Stanford Group referred inquiries to the SEC. The SEC said it is continuing its investigation.

The investigation into Stanford Group, which has involved Florida regulators and the Financial Industry Regulatory Authority, has been ongoing for at least several months. The firm recently acknowledged the probes, which it called routine.

The case comes just two months after the SEC filed charges against Madoff. After that case was exposed, the SEC faced criticism from commentators and lawmakers that its oversight and enforcement operations were ineffective.

"The SEC has been under a tremendous amount of scrutiny and it probably has sensitized the staff both to red flags and to the timeliness of bringing the case," said Don Walker, a former SEC official and now at FTI Consulting.

The SEC said Stanford International Bank offered CDs paying anywhere from 7.45 percent to 10 percent annual interest rates, often more than double what rivals offered. The SEC said Stanford Group advisers, who were paid hefty commission fees, aggressively marketed these CDs to investors around the world.

The bank told customers that it invested their money in highly liquid securities such as equities or cash and that it had been able to post double-digit returns consistently over the past 15 years, the SEC said. Customers were told that investments were overseen by a team of more than 20 research analysts. In fact, the SEC said, much of the investment was in illiquid assets, such as private equity or real estate, and managed just by Allen Stanford and Davis.

More recently, the firms falsely told customers that they were not exposed to losses related to the Madoff case, the SEC said, when executives knew of $400,000 tied to Madoff.

Stanford Group has nearly $50 billion under management or advisement, according to the SEC. The SEC also alleged that a $1.2 billion mutual fund program was sold to investors based on false information about its historical returns.

Allen Stanford, with citizenship in the United States and Antigua & Barbuda, is one of the world's richest men, with an estimated worth of $2 billion, according to Forbes magazine. The Antiguan government knighted him; he now uses the honorific "sir."

Stanford has given campaign contributions to some of the nation's top lawmakers. A Stanford Group political action committee contributed more than $100,000 to various causes last year.

Staff researcher Julie Tate contributed to this report.

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