Stanford: It's Now a Criminal Case

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The investigation into the alleged $8 billion fraud at R. Allen Stanford’s financial empire is officially a criminal matter.

Late Thursday, federal authorities in Houston arrested Laura Pendergest-Holt, the investment firm’s chief investment officer, and charged her with obstruction of justice. Holt is being held overnight in federal custody and is expected to be arraigned Friday before US Magistrate Judge Mary Milloy in a Houston federal courtroom.

The criminal charge against Pendergest-Holt is the first to emerge from the fast-growing scandal. On Feb. 17, the Securities and Exchange Commission filed civil fraud charges in the investigation against Stanford, Pendergest-Holt and the firm’s chief financial officer, Jim Davis. The SEC charged that Stanford and his top deputies orchestrated a long-running fraud involving the sale of high-yielding certificates of deposit from an offshore bank in Antigua.

Federal prosecutors, in a 15-page complaint and FBI affidavit, charged Pendergest-Holt with obstructing the SEC’s investigation by giving misleading statements to investigators. Authorities allege that Pendergest-Holt “made several misrepresentations” in response to questions from SEC investigators on Feb. 10 and Feb. 17.

For instance, prosecutors charged that Pendergest-Holt denied having any knowledge of the main investment portfolio that the offshore bank invested the customers’ money in. The portfolio that investigators were asking about controlled 81% of the bank’s investments. The complaint alleges those investments were largely sunk into ”unknown assets.”

Elsewhere in the complaint, one of those “unknown assets” is described as a $1.6 billion “loan to shareholder.” The shareholder is identified in the complaint as Stanford Financial “Executive A.” That executive is believed to be Stanford, since he is the sole shareholder of Stanford Financial and it’s offshore Antiguan bank.

A spokeswoman for the Houston divison of the FBI said the arrest went without incident. Pendergest-Holt’s lawyer was not immediately available for comment. But earlier in the day he confirmed that he was in Houston, where Pendergest-Holt was arrested.

The SEC has been investigating Stanford Financial since the spring of 2005. The criminal complaint says the FBI and other law enforcement agencies joined the investigation last summer. SEC Deputy Enforcement Director Scott Friestad said: “We appreciate the quick and decisive action of the Department of Justice and the FBI, and thank them for their fine work and cooperation in this matter.”

It’s not uncommon for prosecutors seeking to build a criminal case to pursue charges against lower level officials before targeting the top executives. It’s possible that in bringing an obstruction of justice charge against Pendergest-Holt, prosecutors hope to secure a quick guilty plea from her. With a plea deal in hand, prosecutors could then use her as a witness against Stanford and Davis.

Stanford, a 58-year-old Texas billionaire who is also a citizen of Antigua, is the public face of Stanford Financial and the firm’s sole shareholder. But people familiar with the firm say Davis, Stanford’s college buddy from Baylor University, is a close confidant and the brains of the operation.

The complaint notes that federal authorities have already secured the cooperation of at least three confidential witnesses.

It looks like the Stanford investigation is quickly escalating into an even more serious matter than it appeared to be just a week ago.

Updated Feb. 27, 2009

OK folks, you can now officially call the alleged fraud at Stanford Financial a Ponzi scheme. In an amended civil complaint filed on Friday, the SEC now says Stanford and his top deputies carried out a “massive Ponzi scheme.”

Of course, the SEC designation isn’t news to many people who have worked for Stanford Financial. For years, former employees have charged the firm’s push to sell more and more CDs was the byproduct of a Ponzi scheme.

Bernard Madoff, you’ve got company.

Meanwhile, Laura Pendergest-Holt was released from custody after posting a $300,000 bond and pleading innocent to the obstruction of justice charge.

I’m also posting a link to the Stanford receiver’s website because of the growing controversy about some of his work. Stanford Financial investors who didn’t have any money with the offshore bank are angered that they still can’t get access to their money. And some of Stanford Financial’s 5,000 employees are mad they haven’t gotten paid since the SEC action on Feb. 17.

The receiver, Dallas lawyer Ralph Janvey, hasn’t been returning phone calls. But he is posting communications on the website. Concerned investors and Stanford employees may want to check the website several times a day.

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