Undisclosed Stanford Loans Prove Fraud, Examiner Says

Stanford International Bank Ltd.’s $1.7 billion in undisclosed loans to its owner, indicted financier R. Allen Stanford, are proof of the bank’s involvement in fraud, an examiner said in a U.S. court trial in Houston.

“There’s a complete disconnect between what the bank is saying, that it has fully liquid, short-term, fully monetized assets, and the fact a third of these assets are loans to the shareholder,” fraud accountant Mark Berenblut said today.

Berenblut, testifying for a second day in a civil trial over whether Lloyd’s of London Underwriters will have to cover Stanford’s legal defense costs, said there was a gap between the claimed assets and what Stanford International Bank had on hand when regulators seized it.

“That money went somewhere, and very likely to the primary shareholder,” said Berenblut, who was asked to testify by Lloyd’s.

Lloyd’s is arguing that Stanford’s companies’ alleged criminal conduct voids the directors’ and officers’ they bought.

Berenblut said his examination showed two large loan balances on Stanford International Bank’s books -- one for $1.7 billion to Stanford himself and another for $1.8 billion to Stanford-related companies. The examiner testified both items should have been disclosed to investors and were not.

Photographer: F. Carter Smith/Bloomberg

Indicted financier R. Allen Stanford arrives at the Bob Casey Federal Courthouse in Houston, Texas on Aug. 24, 2010. Close

Indicted financier R. Allen Stanford arrives at the Bob Casey Federal Courthouse in... Read More

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Photographer: F. Carter Smith/Bloomberg

Indicted financier R. Allen Stanford arrives at the Bob Casey Federal Courthouse in Houston, Texas on Aug. 24, 2010.

Accounting Entries

Stanford’s lawyers have repeatedly claimed Berenblut is misinterpreting the accounting entries. They say the two loan balances refer to the same money, because Stanford claims he assumed personal responsibility for loans the bank made to the related companies, which then recorded the funds on their balance sheets as capital contributions from Stanford.

“You’re making the assumption that whoever recorded it did it wrongly,” Berenblut said today, when asked about the two balances by Kirk Kennedy, one of Stanford’s lawyers.

Robert S. Bennett, another attorney for Stanford, challenged Berenblut’s testimony that many parts of the bank’s financial records included “fictitious information.”

“Have you seen any direct communications from Allen Stanford to Kuhrt, Lopez, Davis or Holt that you consider to be fictitious information?” Bennett asked, referring to Stanford’s co-defendants.

“No,” Berenblut replied.

Antiguan Bank

Investors bought more than $7 billion in certificates of deposit from the Antiguan bank, which Stanford controlled as sole shareholder until the U.S. Securities and Exchange Commission sued the financier in February 2009, and seized his businesses.

Stanford and three other executives were indicted by a federal grand jury in Houston in June 2009 on charges they had run fraud scheme centered on the certificates of deposit. They pleaded not guilty.

Investors were told the bank’s portfolio consisted of conservative, highly liquid investments that offered above- market returns.

Forensic accountant Alan Westheimer, who was hired by comptroller Mark Kuhrt and chief accountant Gilbert Lopez to examine Stanford’s financial statements, testified today that Berenblut was wrong that there were separate loans outstanding to Allen Stanford and to the related companies.

‘One Basket’

“There’s one basket, not two,” Westheimer said. “And there’s a number of documents that support that conclusion.”

U.S. District Judge Nancy Atlas told the lawyers she was less concerned with the number of loans to Allen Stanford than that the size and nature of them weren’t disclosed.

“It wasn’t consistent with the investment promotional materials for the CDs,” she said.

The Stanford defendants claim they can’t afford to hire defense lawyers without the Lloyd’s proceeds because their assets were frozen by court order when the SEC filed suit.

Lloyd’s last year rejected the executives’ pleas for coverage under the $100 million worth of insurance bought by the business after Stanford Group Cos. Chief Financial Officer James M. Davis pleaded guilty to charges he aided in the scheme.

Atlas today said she would admit into evidence part of Davis’s plea agreement with prosecutors.

”I am really only accepting Davis’s statements against his own conduct,” not what he says about others he claims were involved in the scheme, she said.

The trial, now in its third day, will continue tomorrow.

The case is Laura Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 4:09-cv-03712, U.S. District Court, Southern District of Texas (Houston).

The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).

To contact the reporters on this story: Laurel Brubaker Calkins in Houston at laurel@calkins.us.com; Andrew M. Harris in Chicago at aharris16@bloomberg.net.

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