George S. May Business Blog

Robert Stanford along with other Stanford Financial Group execs accused of massive ongoing fraud

Robert Stanford, (left), chief of the Houston-based Stanford Financial Group, has been accused by the Securities and Exchange Commission (SEC) of conducting a “massive ongoing fraud”. Federal agents along with U.S. Marshals, about forty in total, were seen entering the Stanford Financial bank in Antigua this morning.

The complaint, filed in Federal District Court in Dallas, pointed the finger toward Robert Stanford and two associates in particular – James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate, and Laura Pendergest-Holt, the chief investment officer for both Stanford Financial and the bank. The three were charged with misrepresenting safety and the liquidity of uninsured CD’s.

From the NY Times:

“The C.D.’s were sold by Stanford International Bank through the firm’s registered broker-dealer and investment adviser, which are in Houston. Both the bank, which claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit, which operates about 30 offices in the United States, were named in the S.E.C. suit. Stanford Financial asserts that it advises about $50 billion in assets.”

The SEC maintains that it has not been able to account for the $8 million in assets that sit in the Antigua bank, despite issuing subpoenas for the Stanford group’s bank records.

The officers raided the Stanford group headquarters at approximately 10 a.m. Central time. As many of the agents entered the building with large black briefcases, several hung up white signs outside the Stanford group’s building that read “The company is still in operation but under the management of a receiver”. Robert Stanford, James Davis and the bank’s president all were called to testify, but failed to show up in court. Ms. Pendergest-Holt did appear however, (much to Stanford and Davis’ dismay I’m sure) testifying that she could not account for the assets. She held that Robert Stanford and James Davis were the only people with access to that information.

The S.E.C., in their complaint, accused the bank of making “improbable, if not impossible” claims, quoting rates that were 2 to three percent higher than competing American banks. The filing declares that the bank recently offered rates upwards of 10 percent on five year CD’s. The S.E.C. also accused the bank and its affiliates of falsely stating in marketing materials that client funds were placed in liquid financial instruments, when in fact they were invested in private equity funds and real estate.

 Additionally, the S.E.C. accused Stanford Capital Management, another Houston-based investment advisory unit, of inflating the performance of its $1.2 billion-asset Stanford Allocation Strategy mutual fund in promoting it to prospective investors.

The complaint also accused the offshore banking unit and the Houston-based broker dealer of violating provisions of the Investment Company Act of 1940 in failing to register as an investment company.

The S.E.C. has requested that for now Robert Stanford and the other defendants’ assets be frozen. They asked for a receiver to be appointed to take control of the business operations in the meantime. The S.E.C. further requested that Robert. Stanford and the other execs named surrender their passports and that the assets of the bank and other offshore units be repatriated.

This is really unfortunate as the timing of this news could not be worse. Because of the state of our market, even if Stanford and company are proven to be conducting completely legitimate operation, the last thing that our market wants to take is a big scare. Investors are already so nervous and in turn we can expect this news to have quite a negative impact on Wall Street.

We know that this big bust comes partly as a response to all the heat the S.E.C. took for continually overlooking the operations of Bernie Madoff. While investigators have been looking at Mr. Stanford and his financial empire’s activities for many months, the scrutiny into the too-good-to-be-true returns on the C.D.’s increased substantially after the Madoff case. What I think is a bit comical however, is that the Antigua-bank actually suffered at the hands of Madoff. It is estimated that the bank lost a near $400,000 through investments known as feeder funds. In turn, this becomes another assertion of how much money Madoff was accountable for/connected to in some way.

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