Pressure Builds on Stanford Financial

Stanford Financial is beginning to feel the fallout from an investigation by securities regulators and federal authorities into the firm's business practices.

Over the past week, the firm controlled by Texas-born billionaire R. Allen Stanford has laid off about two-dozen people at its Houston headquarters, say people familiar with the situation. The layoffs included a number of auditors, clerical workers, and workers in the firm's glitzy company dining room, a place where brokers often wine and dine deep-pocketed investors. The layoffs could be the first of many at Stanford Financial, which also has big offices in Miami, Memphis, Baton Rouge, La., New York, and Tupelo, Miss.

The dismissals come on the heels of the revelation that the Securities & Exchange Commission and other securities regulators are investigating Stanford Financial's offshore bank in Antigua, which specializes in selling high-yielding certificates of deposits to wealthy investors. The Wall Street Journal reports that the FBI is also making inquiries. This week investigators from the SEC are scheduled to travel to Antigua to meet with banking regulators in the Caribbean island nation to discuss the situation at Stanford International Bank, which claims to have $8.5 billion in assets.

Confusion About Redemption Rules

Word of the investigation is causing some investors with money socked away in the bank's CDs to look to withdraw their money. Sources say there's confusion about whether Stanford Financial is honoring early redemptions. The firm is apparently granting early redemptions for some Latin American customers, but denying similar requests from U.S. clients. People familiar with Stanford say the contracts with U.S. customers give the firm the power to deny or delay an early redemption request but that the contracts for foreign customers contain no such provision.

Stanford Financial, whose offices in the U.S. were officially closed on Feb. 16 in honor of the President's Day holiday, says "bank depositors may withdraw funds in accordance with the terms of their accounts."

Company spokesman Brian Bertsch declined to comment on whether the firm has laid off any workers. "In the current economic situation, we are doing what every responsible company is doing: undertaking a number of expense-management measures and reallocating capital and resources where they can have the greatest impact," he says.

The biggest buyers of CDs from Stanford's offshore bank are believed to live in Venezuela, Ecuador, Mexico, and the U.S.—mainly South Florida and the Gulf Coast. As recently as November 2007, Stanford's offshore Antiguan bank registered with the SEC to sell up to $2 billion in CDs to investors in the US. As of the date of the registration statement, the bank reported selling nearly $900 million in CDs in the offering. Over the past decade, Stanford's bank has registered to sell CDs in the U.S. on two other occasions. But the dollar value of those offerings could not be immediately determined.

Stanford's Claimed Assets In Question

The SEC and other investigators are trying to figure out how Stanford's offshore bank can sell CDs that carry yields at twice the market average—even as the values for many of the main assets the bank claims to invest in have cratered over the past two years. Investigators also are looking into the lavish bonuses the firm doles out to brokers at the firm's U.S. brokerage arm, which is the bank's primary vehicle for selling CDs. The SEC, sources said, has been investigating Stanford Financial and its bank for at least three years.

Meanwhile, fresh questions are being raised about other claims made by the fast-growing financial firm. On its Web site, Stanford Financial, a network of companies all controlled by the 58-year-old Stanford, purports to have $50 billion in assets under management or advisement. But several former employees question the $50 billion number, especially since Stanford Financial reported having about $26 billion under management and advisement as recently as three years ago.

Indeed, filings with the SEC for Stanford's U.S.-based brokerage arm and investment advisory unit report managing a combined $5 billion in assets. Add that to the $8.5 billion in assets Stanford's bank manages and it comes to a little under $14 billion.

"Selling the Bank"

Former brokers, all of whom declined to be identified, say the U.S. brokerage division was largely a vehicle for selling the bank's CDs. Internally, the push to sell CDs was referred as "selling the bank." These former brokers, as well as other former employees, say the brokerage arm wasn't profitable during their time with the firm. And the brokerage division never generated enough revenues to justify the lavish bonuses that Stanford Financial routinely showered on brokers who were top sellers of CDs.

So far, Stanford Financial is dismissing much of the controversy as mere allegations stirred up by disgruntled former employees.

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