Billionaire Stanford Charged With Fraud

Hoping to halt what it called "a fraud of shocking magnitude that has spread its tentacles throughout the world," the Securities and Exchange Commission charged billionaire R. Allen Stanford and other executives at his massive financial services company, Stanford Financial Group, with operating a multibillion-dollar fraudulent investment scheme.

In a complaint filed early Tuesday in U.S. District Court in Dallas, the SEC alleged Antigua-based Stanford International Bank (SIB) fabricated investment returns in order to market and sell high-yielding certificates of deposits.

The complaint charged SIB with selling approximately $8 billion of CDs to investors by promising improbable and unsubstantiated interest rates.

The bank falsely claimed it was able to pay high interest rates because of its unique investment strategy, which allowed it to achieve double-digit returns on its investments for the past 15 years, according to the complaint.

Earlier Tuesday federal agents raided Stanford Financial Group's offices in Houston. A sign hanging outside the office reads: "Now under management of a receiver."

The SEC says it has frozen Stanford's assets. He had no comment.

Also charged by the SEC: James Davis, SIB's chief financial officer, and Laura Pendergest-Holt, chief investment officer of SIB and its parent company, Stanford Financial Group.

In a statement posted on the SEC's Web site, Linda Chatman Thomsen, director of the regulator's Division of Enforcement, said "we are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

According to the SEC complaint, Stanford and the officers of his company lied to CD purchasers by leading them to believe the bank re-invested their deposits primarily in liquid financial instruments, monitored those funds with a team of 20-plus analysts and subjected the portfolio to yearly audits by Antiguan regulators.

Late last year, SIB promised its customers 12-month certificates of deposit paying interest rates of 4.5%. That rate represented a 3.5% premium over two-year U.S. Treasury bonds (which were paying just below 1%) and dwarfed what other banks were offering on CDs at the time.

In June of 2005, SIB was offering CDs paying a staggering 7.45%.

According to the SEC complaint, SIB claimed a 1.3% loss on its investments last year while the S&P; 500 declined 39%.

SIB is operated by a close-knit group of family and friends. The firm's investment committee, which oversees the bank's portfolio, is made up of Stanford; his father, who lives in Mexia, Texas; Pendergest-Holt, who, the SEC says, had no financial services experience prior to joining Stanford Financial Group; and Davis, who was Stanford's college roommate.

The SEC says Stanford also lied to customers about the firm's exposure to alleged Ponzi scheme perpetrator Bernard Madoff. The complaint says in a December 2008 report the bank told investors that SIB had no direct or indirect exposure to Madoff's investments.

However, on Dec. 15 an analyst informed Stanford, Pendergest-Holt and Davis that the bank had lost roughly $400,000 based on indirect exposure to Madoff.

The complaint also alleges Stanford used false historical performance data to add $1.2 billion in revenues to a "proprietary mutual fund wrap program" called Stanford Allocation Strategy. The fraudulent financial data helped grow the SAS program from less than $10 million in sales in 2004 to more than $1 billion, generating approximately $25 million in fees in 2007 and 2008 for Stanford and his company.

The complaint says the false SAS performance was used to recruit financial advisers (and their clients) from other firms, who were paid handsomely to reallocate their clients' assets to SIB's CD program.

Last week, Stanford admitted in a letter to clients that SIB had recently received visits from regulatory officers.

Stanford claimed the global recession and recent financial scandals have forced regulators to increase their oversight, drawing them to his offices for what he claims investigators told him were "routine examinations."

"We have been fully cooperative with the regulators," he wrote, adding that the firm is "focused on upholding industry guidelines and standards."