$8B Stanford Fraud Case Will Take Years to Clean Up

Feb 2009 // InvestmentNews

By Charles Paikert
February 22, 2009

The $8 billion fraud case involving Texas financier R. Allen Stanford — with its toxic stew of frozen assets, growing stack of lawsuits and hundreds of furious investors and advisers — is shaping up to be a long-running nightmare that could take years to unravel.

Investors’ accounts in financial companies controlled by him may remain frozen for more than two years, according to Walter Pagano, head of the forensic-accounting division of Eisner LLP in New York and a former revenue agent with the Department of the Treasury.

What’s more, the roughly 250 advisers who work for Stanford companies face uncertain futures since they’ve become ensnared in what the Securities and Exchange Commission described as “a massive, ongoing fraud” in a complaint brought against Mr. Stanford last week.

The SEC’s civil investigation into Stanford International Bank Ltd. of St. John’s, Antigua, and Stanford Group Co. and Stanford Capital Management, both of Houston, “could take more than six months to 27 months on average,” Mr. Pagano said.

Meanwhile, Mr. Stanford was found Thursday in Virginia, where FBI agents acting at the SEC’s behest served him with legal documents. He was not arrested and has not been charged with any crime, though federal agents continue to investigate the case.

A federal court ordered that Stanford’s assets be frozen last week and appointed attorney Ralph Janvey of Dallas as receiver. Mr. Janvey, a partner in the Dallas law firm Krage & Janvey LLP, did not return calls seeking comment, but securities attorneys said it is unlikely that he will unfreeze the assets before a thorough investigation is conducted.

Financial-fraud attorney Thomas Ajamie, managing partner for Ajamie LLP of Houston, who represents several Stanford clients, said he does not expect assets to be unfrozen for at least 90 days, “and possibly much longer.”


Meanwhile, investors have started to file what is expected to be numerous lawsuits against Mr. Stanford, his financial companies and top Stanford executives, including James Davis, a director and chief financial officer of Stanford International Bank and Laura Pendergest-Holt, chief investment officer of the bank and its affiliate, Stanford Financial Group of Houston.

Stanford’s media relations department referred all inquires to the SEC, which in turn referred calls to Mr. Janvey.

Although financial advisers have not yet been named as defendants in the lawsuits, it is possible that they will be, securities fraud attorneys said.

The Stanford advisers’ difficulties stem from the sale of certificates of deposit with suspiciously high returns and a proprietary mutual fund wrap program called Stanford Allocation Strategy.

According to the SEC complaint, Stanford Group advisers have sold more than $1 billion worth of the mutual funds “by using materially false and misleading historical performance data.”

Stanford expanded the mutual fund program, using the false data, from less than $10 million in 2004 to more than $1.2 billion, according to the SEC. That generated more than $25 million in fees, the complaint said.

What’s more, the fraudulent performance of the wrap program “was used to recruit registered financial advisers with significant books of business, who were then heavily incentivized to reallocate their clients’ assets to Stanford International Bank’s CD program,” according to the SEC complaint.

The unusually high returns of the CDs touted by Stanford were in fact illusory, the SEC complaint alleges. What’s more, according to the SEC, investments in the CDs were not placed in liquid financial instruments as promised but rather in illiquid assets such as real estate and private equity.

Financial advisers received a 1% commission when they sold the CDs, and they were eligible to receive as much as a 1% trailing commission throughout the terms of the CD.

In addition, according to the SEC complaint, Stanford advisers were trained to “provide security to clients” by describing the CDs as liquid investments, when they were not.

In 2007, Stanford International Bank sold $6.7 billion worth of CDs to 50,000 customers, according to the SEC.

Asked about the company’s Caribbean-based bank product in an interview with InvestmentNews last November, Jason Green, president of Stanford Financial Group’s private-client group, described it as a proprietary “time deposit” offered through a Regulation D offering, an SEC form which allows the sale of unregistered securities to accredited investors in the United States under certain circumstances.

The “time deposit” had no Federal Deposit Insurance Corp. insurance, Mr. Green said, but offered “competitive” returns based on a “global portfolio.”

“It’s a good, unique product,” he said during the interview.

Stanford clients who filed a class action against a number of Stanford companies last week in U.S. District Court in Dallas were told by their advisers that the CDs were “a very safe vehicle for investment,” according to Chris Fonville, an attorney for Fleming & Associates LLP of Houston, which is representing the plaintiffs.

Any Stanford adviser who recommended an investment in a Stanford Bank CD that was “clearly unsuitable under New York Stock Exchange or Finra rules” may face a lawsuit from one of his clients, said James Dunlap, a securities litigation attorney with an eponymous firm in Atlanta. The Financial Industry Regulatory Authority Inc. is based in New York and Washington.

Mr. Dunlap is representing Johan Dahler, a Stanford client who filed a civil complaint against the company in Harris County, Texas, district court last week.


The “disproportionately large” commission given to Stanford advisers who sold the CDs may be cited in a complaint brought against them, Mr. Dunlap said.

A 1% commission for the sale of a CD and possible 1% trailing fee is considered unusually high, industry insiders said.

One independent registered adviser in Texas, who asked not to be identified, said the amount “is too high. We get a few basis points for that kind of business.”

The adviser said Stanford’s “bank product” was popular when he interviewed with Stanford Financial Group several years ago.

“It sounded like a CD, but it paid 8.5% and was backed up by a bank in the Caribbean. It just didn’t sound right,” the adviser said.

A 1% upfront and trailing commission is “a very, very rich payout for a cash product,” said Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy LLC, a wealth management industry consultant.

“Typically, the commission is zero or minimal basis points.” he said.

In addition to potential lawsuits, Stanford advisers likely will have to deal with angry clients who can’t get their money and, as Mr. Dunlap put it, “may not be able to get it for a very long time.”

“Clients are furious,” said Rick Peterson, president of an eponymous Houston-based recruiting firm. “They’re telling advisers to do your due diligence and find us a respectable home ASAP or we’re taking our business elsewhere.”

Stanford advisers are “utterly shellshocked, according to Tim White, another Houston-area industry veteran. “They are devastated. This is like death for these guys,” Mr. White said.

The Stanford Financial Group’s wealth management unit inspired great loyalty, he said. “They have a lot of pride and an esprit de corps that is difficult to match in the business” Mr. White said.

While Stanford advisers may be reluctant to leave the company, they may have no choice, according to Mr. White, who is a partner in executive-recruiting firm Kaye/Bassman International Corp. of Plano, Texas. He has worked with Stanford.

“If the situation is not resolved to the client’s satisfaction, then they will be compelled to move [to follow the client]. The client calls the tune in this business,” Mr. White said.

And to make matters even worse, several attorneys involved in lawsuits against Stanford said they were told that Mr. Janvey, the court-appointed receiver, has instructed Stanford advisers not to talk to their clients for the time being.

“They’re in limbo, and that’s a tough position for an adviser to be in,” Mr. Ajamie said.

Comparisons to the Stanford case and the alleged Ponzi scheme run by New York investment manager Bernard Madoff intensified last week when The Wall Street Journal reported that federal prosecutors are investigating whether Mr. Stanford was operating a Ponzi scheme de-frauding investors around the world.

“The difference is that Madoff investors came from a close-knit circle, while anyone off the street could walk in and open a Stanford ac-count,” Mr. Dunlap said.

Additional reporting by Dan Jamieson.

E-mail Charles Paikert at cpaikert@investmentnews.com.

View the original article written in Investment News.