Coming from the small town of Mexia, Texas, with no backing of family money or power, Robert Allen Stanford reached the pinnacle of success in the world of finance with his Stanford Financial Group. But the bubble of success burst when the Securities and Exchange Commission (SEC) charged his bank - the Stanford International Bank (SIB) in Antigua with "massive ongoing fraud". This report is about the financial fraud that was perpetuated in the SIB by its sole stake holder - Robert Allen Stanford.
SIB was established in 1985 at Montserrat. Its parent company was Stanford financial Group (SFG) which controls various other affiliated financial services entities established by Allen Stanford. The SIB was initially called as the 'Guardian Bank', but then, it was soon rechristened as the Stanford International Bank and its principal banking location was moved to Antigua. Then, in the year 1995, the Stanford Group Company (SGC) was started and with it, started the saga of this financial fraud. By the end of 2008, SIB had 30,000 clients from 131 countries and had $7.2 billion assets under its management.
- Posting of extraordinary returns and interest rates for its clients. In December 2008, SIB released a statement stating that its "diversified investment portfolio" lost only 1.3% in 2008, at a time in which S&P 500 lost 39% and the Dow Jones STOXX Europe 500 Fund lost 41%.
- Very high interest rates that the bank offered for its self styled 'Certificates of Deposit' (CD). For a one year deposit, the bank offers 7.5% rate, when the standard rates offered in the US was only around 4.5-5% (this recently went down to 3% due to the financial crisis).
- Phenomenal growth in the deposit - from $624 million in 1999 to $8.4 billion in 2008, totalling an average compound growth rate of 34%. Usually, this very high amount of deposits is considered a 'red flag' because it is difficult for the bank to invest them profitably.
- By the end of 2008, Pershing refused to do wire transfers from SGC to SIB for the purchase of CD as it found the operations carried out by SIB and SGC lacking transparency.
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SIB takes deposits from investors all over the world by selling them their certificate of deposit (CD). The money is then supposedly invested in highly liquid, high return investments like stocks, bonds, hedge funds, metals and currencies. These CD's were sold through the SGC, whose agents received a very high trailing commission of 1-1.5% throughout the term of the CD. SGC also receives 3% of the CD value as its processing charge and advice fee.
Also, the bank had practically no service revenue as it never gave out loans, nor did it widely undertake any other businesses that will generate revenue like underwritings, brokerage etc.The lies:
- The money, instead of being invested in 'liquid portfolios', was tied up in real estate, whose value had crashed during the crisis, in private equity and $1 billion of debt notes of Allen Stanford. $4.8 billion of the total $8 billion assets reported in the monthly statement of December 2008 were grossly inflated 'island properties' that was in the name of Allen Stanford.
- The investments was touted to be managed by a team of 20 analysts, but actually, only Allen Stanford and James M. David, the Chief Financial Officer of SIB knew where 90% of the money was invested, which was in a 'black box', shielded from any outside inspection.
- Also, the while selling the CD's to customers, SGC showed high returns on their investments, while the returns were actually not that high.
- SIB assured its investors that their investments were safe as SIB was inspected every year by the Antiguan Financial Services Regulatory Commission (FSRC). But SIB accounts were overseen by a very small Antiguan auditing firm called C.A.S Hewlett&Co.
SIB is not registered with the SEC, but SGC is registered with the SEC, Financial Industry Regulatory Agency (FIRA) and the Securities Investor Protection Insurance Corporation (SIPIC). Even though the CDs of SIB were not insured by the SIPIC or the Federal Deposit Insurance Corporation (FDIC), the sale of these CDs was made exclusively through SGC, by filing Form D with SEC. Regulation D permits the sale of unregistered securities (CDs) under certain circumstances, to accredited investors in the US. Had SIB registered with the SEC, then SEC would have been able to investigate those entities concerning SIB's investment portfolio.The whistle blowers:
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The SEC has been investigating the SFG from 2005. The investigation was however hindered due to jurisdictional issues. In December of 2007, former SFG financial advisers, Charles Rawl and Mark Tidwell quit their job and publicly raised their doubts about the investment policies practiced by SFG and SIB. In Jan 2009, VenEconomy published the now famous 'Ducktales' written by Alex Dalmady, a Venezuelan financial analyst who investigated the SIB for a friend who wanted to invest there.
On 16th February 2009, SEC filed charges of fraud against 3 companies - Stanford International Bank Ltd, Stanford Group Company and Stanford Capital Management LLC and against 3 individuals, Robert Allen Stanford, Laura Pendergest Holt (Chief Investment Officer, SIB) and James M. David (Chief Financial Officer, SIB). The assets of SIB and Allen Stanford were freezed.Current situation:
The investors panicked and crowded the bank to withdraw their investments. SIB is now currently under the receivership of court appointed receiver Ralph Janvey, whose team of consultants have recovered $81 million. The money of the investors isn't likely to be returned anytime soon. The defendants are undergoing trial at the Housten court and Allen Stanford is currently in the Texas jail.
With this scandal, the Antiguan govt is planning to enforce stricter banking laws. Antigua's top financial regulator, Leroy King, was fired after U.S. authorities accused him of accepting more than $100,000 in bribes to ignore Stanford's activities and of providing false information to the SEC.Conclusion:
Had the SEC not filed the charges, SIB would have still continued with the scheme. What can be inferred here is that, the investments made by Allen Stanford in real estate went sour when the subprime crisis hit. To cover that up, the money from new investors was used to pay the returns to the old ones, similar to Ponzi scheme.
With a $2 billion net worth and a few more billions spent on cricket, like sponsoring the $100 million Stanford 20/20 cricket extravaganza, it is evident that Stanford used the investor's money for amassing personal wealth.
By posting inflated assets, false high profits and using false historical data to lure new customers, Stanford did manage to keep his investors in the dark about his mangling of the funds. Had there been no subprime crisis, chances are there that the investments would have actually reaped good returns.
Stanford played on the greed of the investors to make more money by promising astonishing returns, and the investors also blindly paid up, without properly investigating about the Bank or the CDs.Courtesy: The Financial Times Journal (USA)
Thus it evident from the above presented figures that SIB was highly successful in mobilizing huge deposits in a short period of time, compared to other banks that operated in the same segment as SIB. The fall towards the later end of the decade is the period during which the sub-prime crisis hit the USA upfront and made the real estate sector take a hard hit due to which the bank was forced to turn to unscrupulous activities to keep its performance over the years, intact, which proved to be the final undoing for the Bank as well as Allen Stanford.
- Securities and Exchange Commission, "Stanfordcomplaint" [online], available from http://www.sec.gov/litigation/complaints/2009/comp20901.pdf, updated on 16th Feb 2009 [accessed on 18th Nov 2009]
- Chron Blogs, "stanfordindict" [online], available from http://blogs.chron.com/stanford/StanfordIndict.pdf , updated on 20th June 2009 [accessed on 17th Nov 2009]
- Alex Dalmady, "ducktales", Chron Blog [online], available from http://blogs.chron.com/stanford/0901Duck%20Tales.pdf , updated on 6th January 2009 [accessed on 17th Nov 2009]
- Ian King, "Allen Stanford facing fresh questions over his empire", [online] Timesonline, available from http://www.timesonline.co.uk/tol/sport/cricket/article5721437.ece, updated on 17th February 2009 [accessed on [19th November 2009]
- Andrew Alderson, Philip Sherwell in New York, and Patrick Sawer, "Sir Allen Stanford: how the small-town Texas boy evaded scrutiny to become a big-time 'fraudster'", [online] Telegraph, available from http://www.telegraph.co.uk/finance/financetopics/sir-allen-stanford/4742924/Sir-Allen-Stanford-how-the-small-town-Texas-boy-evaded-scrutiny-to-become-a-big-time-fraudster.html, updated on 21st February 2009 [accessed on 16th November 2009]
- MSNBC, "Stanford case another black eye for SEC" [online], available from http://www.msnbc.msn.com/id/29334590/, updated on 23rd February 2009 [accessed on 20th November 2009]
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- Housten trial lawyer, "Stanford investment fraud whistle blowers" [online], Housten trial lawyer blog, available from http://www.houstontriallawyerblog.com/tags/charles-rawl/ , updated on 26th February 2009 [accessed on 21st November 2009]
- Chron, "Receiver running Stanford's firms asks for $9M more" [online], available from http://www.chron.com/disp/story.mpl/business/stanford/6654752.html, updated on 10th October 2009 [accessed on 21st November 2009]
- By Andrew M. Harris and Laurel Brubaker Calkins, "Stanford Receiver Says $1 Billion Can't Be Found (Update2)" [online], Bloomberg, available from http://www.bloomberg.com/apps/news?pid=20601087&sid=a7WCDdOcsJRM&refer=home, updated on 23rd April 2009 [accessed on 20th November 2009]
- Bill McQuillen, Justin Blum and Laurel Brubaker Calkins, "Allen Stanford Indicted by U.S. in $7 Billion Scam (Update2)" [online], Bloomberg, available from http://www.bloomberg.com/apps/news?pid=20601087&sid=aMEDm0Rhcnbo, updated on 19th June 2009 [accessed on 20th November 2009]
- Adam Shapiro, "Latest Developments in Stanford Saga Throw Actions of SEC, DOJ Into Question", [online] Fox Business, available from http://www.foxbusiness.com/story/markets/justice-department-asked-sec-stand-stanford-probe-report-finds/, updated on 28th July 2009 [accessed on 23rd November 2009]
- Business week, "Antigua seeks stricter laws to ban Stanford repeat", [online], available from http://www.businessweek.com/ap/financialnews/D9C5IMQ80.htm, updated on 23rd November 2009 [accessed on 24th November 2009]
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