Stanford: Signs That Should Have Worried Investors

The Stanford scandal also raises questions as to whether the SEC, which had been investigating the firm for three years, should have acted sooner

R. Allen Stanford can blame Bernard Madoff for bringing down his financial empire.

Regulators had been looking at Stanford's firm and its suspiciously high-yielding certificates of deposit on and off for at least three years. But it wasn't until late December—the week after authorities learned about Madoff's alleged $50 billion Ponzi scheme—that the Securities & Exchange Commission bore down on Stanford Financial Group. The timing isn't coincidental, say people close to the probes. After the Madoff scandal erupted, the SEC quickly assigned a seasoned attorney to Stanford's case. That investigator worked around the clock. Less than two months later, the SEC charged Stanford with running an $8 billion scam. A spokesperson for Stanford Financial directed inquires to the SEC.

With each new scandal, regulators are taking heat for not moving fast enough to protect investors. Madoff's operation first raised red flags more than a decade before the SEC brought charges.

There were warning signs about Stanford as far back as the early 1990s. In the course of the SEC's three-year investigation, a number of former employees at Stanford Financial voiced concerns about the firm in lawsuits and public arbitration cases. In a 2006 lawsuit, one accused Stanford of running a "Ponzi scheme, or pyramid scheme." The suit was settled for an undisclosed sum. Says New York securities lawyer Ross Intelisano: "A speedier complaint would have saved a lot of investors."

That's almost certainly true. Stanford Financial posted strong growth during that three-year period. Investors poured at least $2.5 billion into the affiliated offshore bank that issued the CDs from 2006 to 2008. "They eventually found [problems]," says Houston securities lawyer Thomas Ajame, who is fielding calls from Stanford Financial investors considering suing the firm. "But [Stanford Financial] was ready to collapse."

A Fine Line

Regulators defend their practices, saying they have to balance the needs of investors with those of financial firms. If the SEC acts too soon, it can damage the reputation of a firm that has done nothing wrong. If it acts too late, it risks harming investors. The SEC says it didn't get solid information about the case until late last year. "We have to walk a fine line," says Rose Romero, an SEC regional director in Fort Worth. "We don't want a run on the bank."

To the outside world, Allen Stanford portrayed an image of wealth and respectability. The larger-than-life Texan, who was knighted by the government of Antigua in 2006, shelled out big bucks to get his firm's name plastered on tennis tournaments, cricket matches, and even PGA golfer Vijay Singh's wardrobe. Stanford treated top clients to trips to Antigua on the corporate jet.

Tomas Morales, a 35-year-old resident of Venezuela, first started investing with Stanford Financial three years ago. He says one of its bankers told him the account would protect him from possible upheaval in the country since the money would be held by an offshore bank. "I thought Stanford was a good name, a bank in which I could [have] confidence," says Morales. "I doubt I will ever see my money again."

The entire operation may have been nothing more than a well-crafted illusion. It doesn't take more than some cursory Web research to discover the dubious roots of Stanford Financial's affiliated bank that issued the questionable CDs. The offshore bank—then called Guardian International Bank—first started operating from the British territory of Montserrat in the Caribbean. Back then it focused mainly on Latin American investors, offering them a three-year CD with an annual yield of 10.25%. In 1991 the local government moved to revoke Guardian's banking license under hazy circumstances. Following the incident, Stanford relocated to Antigua and renamed the affiliate Stanford International Bank.

Some basic digging yields other troubling details about Stanford Financial and its offshore bank. The board that oversaw the bank was dominated by insiders—either friends or relatives of Stanford. The bank's annual reports offered few specifics about the CDs sold by Stanford Financial. And even though its assets had grown exponentially, the offshore bank continued to rely on the same tiny auditor it used in Montserrat, C.A.S. Hewlett. Hewlett didn't return calls for comment.

The firm had also had prior run-ins with regulators. In November 2007, the Financial Industry Regulatory Authority, a major private-sector oversight body, slapped Stanford's brokerage group with a $10,000 fine. The firm hadn't properly disclosed that some of its brokers sold the CDs of the affiliated bank. Regulators saw this as a potential conflict of interest. Now they're alleging there was much more.

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