Is Stanford Financial's Offer Too Good to Be True?

Regulators are eyeing the high-flying firm, whose CDs offer returns more than double the market average

By Matthew Goldstein

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Stanford Financial headquarters in Houston; its offshore affiliate issues CDs Craig Hartley/Bloomberg News

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Billionaire banker Stanford in Antigua, where his firm benefits from low taxes Brian Smith

Financier R. Allen Stanford makes investors an enticing offer: He sells supposedly super-safe certificates of deposit with interest rates more than twice the market average. His firm says it generates the impressive returns by investing the CD money largely in corporate stocks, real estate, hedge funds, and precious metals.

But skeptical federal and state regulators are now taking a hard look at Stanford's operation—especially those CDs, whose underlying investments seem questionable. Over the past 12 months, the stock market and hedge funds have lost huge amounts of value even as Houston-based Stanford Financial Group continued to pay out above-average returns and claimed to have boosted the assets it oversees by 30%, to more than $50 billion.

BusinessWeek has learned that the Securities & Exchange Commission, the Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority, a major private-sector oversight body, are all investigating Stanford Financial. The probes focus on the high-yield CDs and the investment strategy behind them. According to people close to the investigations, the three agencies are also looking at how Stanford Financial could afford to give employees large bonuses, luxury cars, and expensive vacations. Selling CDs typically is a low-margin business.

Stanford Financial vigorously defends its practices. "All three [agencies] have stated to us they were visiting our offices as part of routine examinations," says company spokesman Brian Bertsch. The firm, he adds, "follows industry standards for marketing and generating sales."

Allen Stanford, 58, has emerged in recent years as a prominent figure on Wall Street, with a fortune estimated to top $2.2 billion, according to Forbes' annual list of the richest people in the U.S. Stanford Financial says it caters to roughly 50,000 wealthy investors, mostly in the U.S., the Caribbean, and Latin America. The firm declined to make Allen Stanford available for comment.

Jittery

In the wake of Bernard Madoff's alleged $50 billion Ponzi scheme, regulators and investors around the world are increasingly jittery about money-management firms that promise consistently higher-than-normal returns. Stanford Financial sells clients an array of investments, from stocks and bonds to mutual funds and rare coins. Even as the firm's client list has expanded, CDs have remained a central product. Stanford International Bank, an Antigua-based affiliate that issues the CDs, had just $1 billion of assets in 2001. Today, the bank says it has $8.5 billion.

Stanford's CDs, which require a minimum investment of $50,000, offer tantalizing interest rates. The current rate on a one-year CD is roughly 4.5%, according to the bank's Web site. The average at U.S. banks is about 2%, notes research firm Bankrate.com (RATE). A year ago, the offshore bank sold five-year CDs that yielded 7.03%; the industry average hovered around 3.9%.

The firm suggests in marketing material that it can offer substantially higher rates because the bank benefits from Antigua's low taxes and modest overhead costs, among other factors. The bank invests in a "well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies, and major international banks," the marketing literature says.

But Stanford Financial and its affiliated bank, both of which are owned by Allen Stanford, offer few details about the nature of those holdings. According to the bank's 2007 annual report, stocks, precious metals, and alternative investments—such as hedge funds and real estate—account for 75% of the bank's portfolio. There aren't many specifics in the bank's SEC filings over the past two years, either. It lists a smattering of investments, mainly the stocks of small companies such as eLandia Group International (ELAN) and Health Systems Solutions (HSSO). This is an unusual array of investments to back CDs. Most issuers of certificates of deposit invest CD money in higher-yielding U.S. Treasury bonds or similarly conservative instruments.