Stanford's Rocky Start

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It didn't take long for Stanford to set out on a new course and reinvent himself—this time as an offshore banker with a wealth of experience in the financial-services industry. In 1985, during an extended stay in the Caribbean, where he was giving scuba diving lessons and looking for investors in a Houston-based real estate venture, Stanford met up with Frans Vingerhoedt, a European living in Aruba. The two men became fast friends and came up with the idea of starting an offshore bank in the nearby British territory of Montserrat, say people familiar with Stanford. Vingerhoedt, who has been at Stanford's side ever since the bank opened for business, declined to comment. The SEC hasn't accused Vingerhoedt of any wrongdoing.

The Latin Strategy

In early 1986, Stanford's Guardian International Bank officially opened for business on the tiny island of Montserrat. Stanford's father, James, provided $6 million in seed money and became the bank's first chairman. A former mayor of Mexia, James made some of his money by buying up distressed Texas real estate, sources say. The elder Stanford appears in photos for early annual reports and, with his gray hair, looked the part of a veteran banker. But it was his son, Allen, fresh off his bankruptcy filing, who became the driving force behind the fledgling bank.

Guardian International almost exclusively targeted Latin American customers, running advertisements in Spanish-language newspapers featuring a woman in a bathing suit under the banner, "enjoy the pleasures of life." Next to the woman, in large type, appeared the numbers 10.75%, the lofty yield on the bank's CDs.

It was during those early days on Montserrat that Stanford developed the history that the bank's roots went back to 1932—to a financial-services company started by his grandfather, Lodis. There was no mention of Stanford's failed effort at trying to run a string of health clubs in Texas, nor the two then-recent bankruptcy filings. Instead, all the bank's early marketing material focused on Lodis Stanford and "the wise guidance of our parent company, The Stanford Financial Group." In 1992, a year after Guardian relocated to Antigua and was rechristened Stanford International, the bank put out a brochure that said the company was "celebrating our 60th anniversary" in helping customers find "conservative yet lucrative investments."

Adopting Old Roots

Says a former employee who worked with Stanford more than a dozen years ago: "Allen decided to make his grandfather the anchor of the company history and ordered a picture of Grandpa to be placed in every office." It was a tradition that continued until the SEC filed its charges on Feb. 17. By the time Stanford's offshore bank had become an $8 billion institution in December 2008, it was long taken as gospel within the company that the firm's roots went back more than 70 years.

But the truth appears far different. His grandfather was a barber in Mexia who later started a small insurance brokerage called Stanford Financial. The brokerage was eventually sold to a larger company. People familiar with Stanford said there's no evidence of any continuous link between the grandfather's insurance business and the offshore bank and brokerage firm founded by the younger Stanford in the 1980s.

In later years, Stanford would continue to embellish his family story. For years, he would describe himself as a distant relative of Leland Stanford, the former California governor who founded Stanford University. But university officials have long said there's no evidence of any familial link between the college and Allen Stanford's family.

The stories about the famous family lineage and the firm's longtime experience in financial services all served Stanford well and helped him expand his business quickly. Now, as securities regulators begin pulling back the curtains on Stanford's failed financial empire, it's likely that more of these efforts at myth-making will start coming to light.

Goldstein is a senior writer at BusinessWeek. With Susan Zegel