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U.S. Accuses Texas Financial Firm of ‘Massive’ Fraud

Stopping what it called a “massive ongoing fraud,” the Securities and Exchange Commission on Tuesday accused Robert Allen Stanford, the chief of the Stanford Financial Group, of fraud in the sale of about $8 billion of high-yielding certificates of deposit held in the firm’s bank in Antigua. Also named in the suit were two other executives and some affiliates of the financial group.

In the complaint, filed in Federal District Court in Dallas, the S.E.C. accused Mr. Stanford and two associates — James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate, and Laura Pendergest-Holt, the chief investment officer of both organizations — with misrepresenting the safety and liquidity of the uninsured CDs.

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The CDs were sold by Stanford International Bank through the firm’s registered broker-dealer and investment adviser, which are in Houston.

Both the bank, which claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit, which operates about 30 offices in the United States, were named in the S.E.C. suit. Stanford Financial asserts that it advises about $50 billion in assets.

  • Federal Agents Seen Entering Stanford Offices — Story Here

In its complaint, the S.E.C. said it could not account for the $8 billion in assets that were housed in the Antigua bank after issuing subpoenas for bank records and to various witnesses.

Most witnesses, including Mr. Stanford, Mr. Davis, and the Antigua-based bank’s president, failed to appear to testify nor did they produce documents shedding light on the assets.

Ms. Pendergest-Holt said in testimony to the S.E.C. that she could not account for the assets, asserting that Mr. Stanford and Mr. Davis were the only ones with access to the bank’s assets.

In the complaint, the S.E.C. called “improbable, if not impossible” claims by the offshore bank that it paid “significantly” higher returns on its CDs because of the high quality of its investments.

The S.E.C. accused the bank and its affiliates of falsely stating in marketing materials that client funds were placed in liquid financial instruments, when in fact they were invested in private equity funds and real estate. On Nov. 28, Stanford International Bank quoted a rate of 5.375 percent on a $100,000 three-year CD, compared with rates of less than 3.2 percent at American banks. The bank recently has offered rates of more than 10 percent on five-year CDs, the filing stated.

  • Read the Complaint
  • Read the Legal Memorandum

In the complaint, the S.E.C. requested that the defendants’ assets be frozen and that a receiver be appointed to take control of business operations. It also requested that the assets of the bank and other offshore units be repatriated. And the agency asked that Mr. Stanford and the other named executives be required to surrender their passports.

The S.E.C. has come under fire in Congress and the media for ignoring repeated warnings over a period of years about the Bernard L. Madoff, who is accused of running a $50 billion Ponzi scheme. While investigators have been looking at Mr. Stanford and his financial empire’s activities for many months, the scrutiny into the too-good-to-be-true returns on the CDs increased substantially after the Madoff case.

Oddly enough, even the Stanford operation was touched by Mr. Madoff. Despite the fact the Antigua-bank assured investors in a report in December 2008 that it had no “direct or indirect” exposure Mr. Madoff’s funds, the bank suffered an estimated $400,000 in losses, apparently through investments in so-called “feeder funds.”

Additionally, the S.E.C. accused Stanford Capital Management, another Houston-based investment advisory unit, of inflating the performance of its $1.2 billion-asset Stanford Allocation Strategy mutual fund in promoting it to prospective investors.

The complaint also accused the offshore banking unit and the Houston-based broker dealer of violating provisions of the Investment Company Act of 1940 in failing to register as an investment company.

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