SEC Moves Against Stanford

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The Securities and Exchange Commission took action to move against R. Allen Stanford’s financial empire today, alleging that he and his companies were “orchestrating” a massive $8 billion fraud.

Regulators charged Stanford, a 58-year-old Texas-born billionaire, with misleading investors about the security of the high-yielding certificate of deposit sold by an offshore bank in Antigua that he controls. The bank, Stanford International Bank, is the heart of Stanford’s empire and purports to have over $8 billion in assets.

Federal securities regulators filed an emergency action in federal court in Dallas, Tx., getting a judge to freeze the company’s assets and appoining a receiver to take control of the firm’s Houston-based brokerage arm. The receiver appointed by a federal judge is Ralph Janvey, a Dallas lawyer.

Meanwhile, US Marshals, early Tuesday morning, entered the Houston headquarters of Stanford Financial and were moving to protect documents and evidence

The action by the SEC comes a week after BusinessWeek reported that authorities were moving quickly in their investigation of the firm and its offshore Antigua-based bank, which has sold a high-yielding certificate of deposit to wealthy investors in the US and Latin America.

A Stanford spokesman was not available for comment. Rose Romero, the SEC’s Fort Worth regional director, says, “We are alleging a fraud of shocking magnitude that has spread its tentacles around the world.” the SEC investigation is being led by Kevin Edmundson.

Also charged by the SEC was Stanford’s CFO Jim Davis and the firm’s Chief Investment Officer Laura Pendergest-Holt. Davis is a longtime friend of Allen Stanford’s. The two men were college buddies during their days at Baylor University.

The charges against Stanford come just two months following the alleged massive Ponzi scheme at Bernard Madoff’s firm. The SEC, sources say, has been investigating Stanford’s business for about two years.

The FBI also is investigating Stanford and his companies. But officials with the agency’s Houston office declined to comment.

Securities regulators are focusing their investigation on three main Stanford offices in the US in Memphis, Houston and Tupelo, Miss. Regulators believe that is where the heart of Stanford’s operation was located. Davis, the CFO, was based for many years in Memphis, recently relocating to the Tupelo location.

Stanford also has a big office in Miami, from which many of its brokers worked.

The firms claims to have 30,000 customers, all of them wealhty, in 130 countries. Most investors come from the US and Latin America. In recent days, investors have tried to get their money back from Stanford but many were turned away. One US investor, who declined to be named, said he just recently rolled over his CD that he had bought from Stanford’s bank. His broker told him last week that the firm wasn’t honoring any redemption requests right now.

Randy Pulman, a Texas lawyer, says he is representing a client with at least $1 million invested in CDs issued by the bank. The client was in the process of trying to get their money back when the SEC action unfolded. He’s not certain whether the client will get any money back now without pursuing litigation.

The filing of the SEC action was particularly welcomed by the lawyer for two former Stanford brokers, whose lawsuit last summer helped alert regulators to what allegedly was going on at the firm. “The SEC Enforcement action vindicates the reasons my clients left Stanford over a year ago,” says attorney Mike O’Brien.

It’s not known where Allen Stanford, the sole shareholder of Stanford Financial is. The Texas-born billionaire lives in St. Croix in the US Virgin Islands but also has homes in south Florida and Texas.

A bigger spender, Stanford owns a number of private jets. His companies have been big corporate sponsors of professional sports teams and charitable causes. Stanford and his employees also have been big contributors to political campaigns over the years. The firm has spent heavily on its many offices.

Former brokers say they never could understand where the company got all the money to pay for the sponsorships and fancy office digs.

In fact, the most recent audit of Stanford’s brokerage arm, a copy of which is filed with the SEC and obtained by BusinessWeek, shows that the division had incurred losses for many years. At the end of 2007, the brokerage arm had an accumulated a deficit of $77 million. The same audit also shows that the SEC had been requesting documents from the firm as far back as 2006.

Other regulatory filings show that Stanford’s brokerage arm managed about $4 billion in client money. Even adding in the $8.5 billion managed by its offshore bank, that’s far less than the $50 billion Allen Stanford claims his firm manages and advises.

It appears, if the regulators are to believed, there was a lot of smoke and mirrors at Stanford Financial. And investors are once again the apparent victims.

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