SEC charges Texan in alleged $8 bn fraud

A U.S. Marshal in the lobby of Stanford Financial Group's offices in Houston, Texas, U.S., on Tuesday, Feb. 17, 2009. Photographer: Craig Hartley/Bloomberg News

by Frank James

Warren Buffet has famously said only when the tide goes out do you see who's swimming naked, meaning financial booms cover a multitude of sins while busts expose them.

That's what happened with Bernard Madoff's alleged Ponzi scheme. And now the Securities and Exchange Commission believes it's found some pretty serious naked swimming in Texas. It filed charges against financier R. Allen Stanford who it accuses of an $8 billion fraud.

The SEC said a company associated with Stanford:

... Sold approximately $8 billion of self-styled "certificates of deposits" by promising high return rates that exceed those available through true certificates of deposits offered by traditional banks.

The promise of higher than market returns is always a red flag which many investors willingly ignore when greed overwhelms common sense.

Continuing with the SEC complaint, ever more red flags appear:

3. SIB claims that its unique investment strategy has allowed it to achieve double-digit returns on its investments over the past 15 years, allowing it offer high yields to CD purchasers. Indeed, SIB claims that its "diversified portfolio ofinvestments" lost only 1.3% in 2008, a time during which the S&P 500 lost 39% and the Dow Jones STOXX Europe 500 Fund lost 41 %.

4.Perhaps even more strange, SIB reports identical returns in 1995 and 1996 of exactly 15.71%. As Pendergest-Holt -- SIB investment committee member and the chief investment officer of Stanford Group Financial (a Stanford affiliate) - admits, it is simply "improbable" that SIB could have managed a "global diversified" portfolio of investments in a way that returned identical results in consecutive years. A performance reporting consultant hired by SGC, when asked about these "improbable" returns, responded simply that it is "impossible" to achieve identical results on a diversified investment portfolio in consecutive years. Yet, SIB continues to promote its CDs using these improbable returns.

7. In fact, far from "cooperating" with the Commission's enforcement investigation (which Stanford has reportedly tried to characterize as only involving routine examinations), SOC appears to have used press reports speculating about the Commission's investigation as way to further mislead investors, falsely telling at least one customer during the week of February 9, 2009, that his multi-million dollar SIB CD could not be redeemed because ''the SEC had frozen the account for two months." At least one other customer who recently inquired about redeeming a multi-million dollar CD claims that he was informed that, contrary to representations made at the time of purchase that the CD could be redeemed early upon payment of a penalty, R. Allen Stanford had ordered a two-month moratorium on CD redemptions.

There are plenty of other charges that raise suspicions, including Stanford's assurances to clients that he didn't have exposure to the alleged Madoff scheme. The SEC indicates he did.

Also, the agency says Stanford was invested in real estate and corporate stocks, not the near-cash assets his company claimed to be investing in. Oh, and his company has moved $178 million recently, according to the SEC.

The SEC also isn't impressed with the background of Stanford's managers. This is from the agency's press release:

According to the SEC's complaint, SIB is operated by a close circle of Stanford's family and friends. SIB's investment committee, responsible for the management of the bank's multi-billion dollar portfolio of assets, is comprised of Stanford; 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 SFG had no financial services or securities industry experience; and Davis, who was Stanford's college roommate.