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Ex-Employees at Heart of Stanford Financial Probe

Billionaire R. Allen Stanford's worst enemies may be some of the former employees who once worked for his $50 billion Stanford Financial Group.

For months now, securities regulators have interviewed dozens of former employees of Stanford Financial, trying to get to the bottom of the firm's staple investment product: a high-yielding certificate of deposit issued by Stanford's offshore banking affiliate in the Caribbean island nation of Antigua. Over the past 12 months, the stock market and hedge funds have lost huge amounts of value even as Houston-based Stanford Financial continued to pay out above-average returns

A number of former brokers that regulators are talking to are ones who previously filed industry arbitration claims, alleging that they were forced out of the fast-growing firm after questioning the ability of Stanford International Bank to justify those high CD rates. Indeed, it appears the firm had a habit of playing hardball with anyone who criticized the business model and took exception with its aggressive practice of selling CDs to wealthy investors in the U.S., the Caribbean, and Latin America. Several former brokers say they were often told to stop asking questions whenever they pressed for more information about the bank's investment strategy for the money it took in from depositors.

Lawsuit Alleged a "Ponzi scheme"

One former employee even went so far as to file a so-called private whistleblower lawsuit in 2006 against the 58-year-old Stanford and his firm. The lawsuit filed by Lawrence J. De Maria alleged a myriad of wrongdoing at Stanford Financial and its Antigua-based bank. De Maria, who had been hired in 2003 to edit the firm's internal corporate magazine, a glossy publication called Stanford Eagle, claimed he was fired "for objecting to and raising concerns" about the firm's practices that he believed "violated federal and state laws."

Specifically, De Maria, a former newspaper journalist, charged the firm "was operating a Ponzi scheme or pyramid scheme" by using money from the offshore bank "to finance its growing brokerage business." The lawsuit, filed in in 2006 in Miami-Dade County Circuit Court in Florida, also charged the firm was attracting clients to the bank by selling CDs with "artificially high yields." De Maria, also a former president of the Staten Island Chamber of Commerce in New York, said in his suit that the more questions he asked about the company's business practices, the more "marginalized" he became. De Maria was dismissed on Dec. 6, 2004.

Stanford and his firm vigorously litigated the lawsuit and denied the allegations. But on the eve of trial, the case settled on Dec. 12, 2007, for an undisclosed sum of money. The firm, which had not shown a willingness to settle the case, apparently became interested in resolving the matter after the judge gave De Maria's lawyer permission to depose Stanford. "Mr. Stanford was initially a party to the lawsuit, but he was dropped from the lawsuit by the plaintiff," says a firm spokesman, who also pointed out that De Maria was not involved with any financial activities at the firm. Dana Gallup, the Hollywood (Fla.)-based lawyer who represented De Maria, says both he and his client are barred from discussing the settlement.

SEC Investigation Goes Back Three Years

BusinessWeek previously reported that the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Florida Office of Financial Regulation all are investigating the high-yielding CDs sold by Stanford's offshore bank, as well as the investment strategy behind them. FINRA and Florida regulators began investigating Stanford Financial and its banks within the past several months. But people familiar with the probes say the SEC investigation goes back at least three years and possibly longer. A Stanford Financial spokesman, meanwhile, has characterized the investigations as "routine." The company also has said that former disgruntled employees are trying to fuel the investigations.

It's not clear if De Maria is one of the former employees that regulators have interviewed. But due diligence expert Randy Shain says De Maria's lawsuit was one of the many red flags to turn up during an investigation of Stanford's bank that he did on behalf of a client. Shain, vice-president of First Advantage Investigative Services, says the client was considering investing some money in the CDs sold by Stanford bank. Shain says the allegations in the lawsuit mirrored too many of the concerns raised by other former employees of Stanford Financial.

"There was a tremendous amount of people saying the same thing," says Shain. "This warranted our client taking a much closer look." It appears regulators are doing much the same themselves.

Goldstein is a senior writer at BusinessWeek.

Goldstein is a senior writer at BusinessWeek.

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