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The Securities & Exchange Commission took action on Feb. 17 against R. Allen Stanford's financial empire, alleging that he and his companies were "orchestrating" a massive $8 billion fraud.
Regulators charged Stanford, a 58-year-old Texas-born billionaire, with misleading investors about the security of high-yielding certificates of deposit sold by an offshore bank in Antigua that he controls. That outfit, Stanford International Bank, is at the heart of Stanford's empire and purports to have more than $8 billion in assets.
Federal securities regulators filed an emergency action in federal court in Dallas, getting a judge to freeze the company's assets and appointing a receiver to take control of the firm's Houston-based brokerage arm. A source says the receiver appointed by the U.S. District Court is Ralph Janvey, a Dallas lawyer. Meanwhile, U.S. marshals swarmed the Houston headquarters of Stanford Financial in a bid to secure documents and evidence.
The action by the SEC comes a week after BusinessWeek reported that authorities were moving quickly in their investigation of the firm and its offshore Antigua-based bank, which has sold a high-yielding certificate of deposit to wealthy investors in the U.S. and Latin America. The FBI also is investigating Stanford and his companies. Officials with the agency's Houston office declined to comment.
A Stanford spokesman said the company was referring all inquiries to the SEC. Rose Romero, the SEC's Fort Worth regional director, says, "We are alleging a fraud of shocking magnitude that has spread its tentacles around the world." The SEC investigation is being led by Kevin Edmundson. "We won't stop until we can account for all investor funds," says Edmundson.
Also charged by the SEC was Stanford CFO Jim Davis and Chief Investment Officer Laura Pendergest-Holt. Davis is a longtime friend of Allen Stanford's, and the men were college buddies during their days at Baylor University.
The charges against Stanford come just two months following the alleged massive Ponzi scheme at Bernard Madoff's firm. The SEC, according to people familiar with the matter, has been investigating Stanford's business for about two years. Securities regulators are focusing their investigation on three main Stanford offices in the U.S.: in Memphis, Houston, and Tupelo, Miss. Regulators believe that is where the heart of Stanford's operation was located. Davis, the CFO, was based for many years in Memphis, recently relocating to Tupelo.
Stanford also has big office in Miami, from which many of its brokers worked.
The firm claims to have 30,000 customers, all of them wealthy, in 130 countries, with most investors in the U.S. and Latin America. In recent days, investors have tried to get their money back from Stanford, but many were turned away. One U.S. investor, who declined to be named, said he just recently rolled over his CD that he had bought from Stanford's bank. His broker told him last week that the firm wasn't currently honoring any redemption requests.
Randy Pulman, a San Antonio lawyer, says he is representing a client with at least $1 million invested in CDs issued by the bank. The client was in the process of trying to get money back from Stanford when the SEC action unfolded. Pulman says he is not certain whether the client will get any money back now without pursuing litigation.
The filing of the SEC action was particularly welcomed by the lawyer for two former Stanford brokers, whose lawsuit last summer helped alert regulators to what allegedly was going on at the firm. "The SEC enforcement action vindicates the reasons my clients left Stanford over a year ago," says attorney Mike O'Brien of Houston.
It's not known where Allen Stanford, the sole shareholder of Stanford Financial, is at the moment. The Texas-born billionaire lives in St. Croix in the U.S. Virgin Islands but also has homes in South Florida and Texas.
A lavish spender, Stanford owns a number of private jets. His companies have been big corporate sponsors of professional sports teams and charitable causes. Stanford and his employees also have contributed heavily to political campaigns over the years. The firm also has spent a great deal on its many offices—and refers to some of them as "temples of finance."
Former brokers say they never understood where the company got all the money to pay for the sponsorships and fancy office digs. In fact, the most recent audit of Stanford's brokerage arm, a copy of which was filed with the SEC and obtained by BusinessWeek, shows that the division had incurred losses for many years. As of the end of 2007, it had an accumulated deficit of $77 million. The same audit also shows that the SEC had been requesting documents from the firm as far back as 2006.
Other regulatory filings show that Stanford's brokerage arm managed about $4 billion in client money. Even adding in the $8.5 billion managed by its offshore bank, that's far less than the $50 billion that Allen Stanford claims his firm manages and advises.
It appears, if the regulators are to believed, there was a lot of smoke and mirrors at Stanford Financial.
Goldstein is a senior writer at BusinessWeek.