For nearly a decade there were whispers. Something about the high-yielding certificates of deposit offered by Stanford Financial Group just didn’t add up. Where exactly was the money invested once it left Stanford’s own bank in Antigua? How was it that the CD not only performed well, but regularly obliterated market averages? What truly was the risk exposure for clients?
In short, the CDs being sold by Stanford International Bank offended the sensibilities of an investment world where pushing the envelope is standard operating procedure. Piece together the hushed allegations and you’re left with this basic question: Was the investment a low-risk, high-yield CD or a high-risk, low-yield hedge fund?
Stanford’s financial advisers dismissed the rumblings, saying rival brokers and anyone else questioning the lucrative CDs simply didn’t understand how they worked. And when clients asked, they were told the eye-catching rates were attributed to 1) a favorable tax status due to the bank’s Antigua headquarters, 2) their money going into easy-to-trade assets, 3) an all-star lineup of more than 20 analysts monitoring the portfolio, and 4) the exceptional investment skills of James Davis, a long-time friend of billionaire owner Robert Allen Stanford and the firm’s director and chief financial officer. Moreover, Antiguan regulators did yearly audits, clients were told, to ensure the big returns were legit.
Three local investors in the CD, who asked to remain anonymous, say any lingering concerns were assuaged by the consistently high returns. Consequently, once a client bought in [for a minimum of $50,000], rarely did they cash out at maturity, opting instead to keep the returns rolling.
“I have been warning people for years about the Stanford CD,” says a local financial broker with a national firm. “I have friends at Stanford and [I] told them what they were selling didn’t smell right. They tried to explain [it to me] but when I kept asking questions they just smiled and told me I didn’t understand.”
Suspicious minds, it appears, understood all too well.
On Feb. 17, the Securities and Exchange Commission, accompanied by U.S. marshals, raided the firm’s Houston headquarters, charging the flamboyant Stanford, Davis and Laura Pendergest-Holt, the company’s chief investment officer, with fraud in connection with the sale of more than $8 billion of the high-yielding CDs. Authorities charge the firm, whose investment roots were born in Baton Rouge in the 1990s, orchestrated a “fraud of shocking magnitude,” stretching from the Gulf Coast to the Caribbean, and around the world.
Essentially the SEC is saying much of what advisers told potential clients was either exaggerated or false. The most egregious allegations are that the investments were far riskier—and more complicated—than advertised and that the only people who monitored the portfolio were Stanford and Davis.
The Treasury department, dating back to 1999, expressed concern that the regulator tasked with regulating Stanford International Bank was actually controlled by bank executives.
SEC officials say its investigation dates back to October 2006 but was “stood down” until December of last year at the request of another unnamed federal agency, prompting a columnist with Portfolio.com to suggest far more serious charges may follow. Federal authorities, in the late 1990s, looked into money laundering charges against the Stanford bank.
A Stanford spokesman, who three days prior to charges being filed told Business Report the entire matter was nothing more than a “routine examination,” declined comment, referring all questions to the SEC.
It’s not clear how much advisers in Baton Rouge knew about what was allegedly transpiring in Houston and Antigua. But, like their clients, the money and lavish bonuses may have been good enough to keep them from asking too many questions. According to SEC filings, financial advisers would earn 1%, both upfront and as a trailing commission, meaning an adviser who booked $50 million in these CDs could earn as much as $500,000 annually if clients elected to renew their investments at maturity. Compare that to a one-time fee of $25,000 that a competing adviser would make for selling $50 million worth of conventional CDs and it’s easy to understand why this was a popular vehicle for Stanford brokers to sell.
Also unknown is how much Baton Rouge investor money is tied up in Stanford’s now frozen assets, including those not affiliated with the CD. Area financial brokers estimate between $200 million and $300 million are invested in the CDs but that Stanford’s total Baton Rouge book is close to $1 billion.
While investors will eventually recover their non-CD holdings, it’s possible the money invested in the CDs is gone. “The best case scenario,” says a financial executive of more than 30 years, “is that they might get 25 or 30 cents on the dollar.”
Until then, scores of local Stanford clients are looking for lawyers.
“The lesson here,” says the executive, “is if it’s too good to be true, it’s too good to be true.”
Click here for a chart outlining the details behind the fraud. (PDF)
Click here for a chart outlining the basis for the SEC’s complaint. (PDF)
