Another Day, Another Billionaire Charged With Fraud

Dallas, TXAs time goes on, it seems that more and more financial giants are either filing bankruptcy or being linked to fraud. Investors are willing to accept some risk, and many are not surprised to learn about stockbroker fraud or other illegal activities that lead to stockbroker arbitration claims being filed. However, very few investors expect that the people at the top of the industry, those who run billion-dollar enterprises, could act so unethically.

That said, yet another billionaire has been charged with defrauding investors of billions of dollars. This time, the alleged mastermind is R. Allen Stanford, whom the Securities and Exchange Commission (SEC) has charged with operating a multibillion-dollar fraudulent investment scheme.

The complaint was filed on February 17, 2009, by the SEC, who alleged that Stanford's financial services companies, including Stanford International Bank, lied about investment returns to market and sell high-yielding certificates of deposits. According to the complaint, Stanford International Bank sold approximately $8 billion of CDs by promising high interest rates that were "improbable, if not impossible". This makes the scheme one of the largest financial frauds ever in the US.

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

In its marketing, Stanford International Bank claimed its high interest rates were possible because the bank used a unique investment strategy. That strategy, the bank claimed, gave the bank double-digit investment returns for the past 15 years. The SEC further alleges that Stanford International Bank told CD investors that the bank re-invested deposits mainly in liquid financial instruments, put the portfolio through yearly audits by Antiguan regulators and employed a team of 20 research analysts to monitor the funds. The SEC maintains that the majority of the investments were managed only by Stanford and one other person.

Certificates of deposits, often known as CDs, generally promise fixed returns for investors. Those investors usually deposit their money for a set period. Of course, investors were told that their deposits were safe and highly liquid, when in fact they were invested in private equity holdings and real estate.

The SEC has frozen Stanford's assets. Also charged by the SEC in the scheme are James Davis, Chief Financial Officer at Stanford International Bank, and Laura Pendergest-Holt, Chief Investment Officer of both Standard International Bank and the bank's parent company, Stanford Financial Group.

Stanford's alleged scheme may also have ties to Bernard Madoff's infamous Ponzi scheme. Although Stanford told customers that Stanford International Bank had no indirect or direct exposure to Madoff's investments, executives apparently knew that the bank lost approximately $400,000 because of indirect exposure to Madoff.

According to the SEC, Stanford's scheme was also used to recruit financial advisors, who brought their clients from other firms.

So, what does all this mean to Stanford's investors? That is not yet clear. Stanford claims to have more than 30,000 clients and the company has so far not cooperated with investigators. A federal judge has frozen Stanford's assets and the notice at the firm's office buildings says the company has been taken over by a receiver.

Time will tell whether or not investors get their money back, although history does not bode well for those investors. Some investors thought that their CDs were federally insured, however their lawyers say they have not yet seen documents that prove the CDs were, in fact, insured. Allan Stanford has an estimated net worth of $2 billion, according to Forbes Magazine. That $2 billion will not even come close to covering the $8 billion involved in the scheme.

Meanwhile, clients who wanted to pull money out of Stanford's CDs after the investigation into the firm was announced a few weeks ago learned that their money was frozen. According to Reuters, they were told that there was a 60-day moratorium on withdrawing money. Many are now investigating a possible lawsuit against Stanford in an attempt to get their money back.