Stanford Financial Investigated

Investors Flunk “Too Good To Be True” Test Again

“You only find out who is swimming naked when the tide goes out” – Warren Buffet

The tide has been going out for several years now and we are discovering that many of the biggest players never owned bathing attire.   Tight credit and massive erosion in asset values have exposed the mismanaged or fraudulently run operations that previously papered over their flaws with more credit.    Investors in Stanford Financial, who apparently ignored the common sense rule of “if it’s too good to be true it’s probably not” are likely to be in for a massive shock of reality this week.

According to BusinessWeek, The Stanford Group may hold as much as $50 billion in assets.

Is Stanford’s Financial Offer To Good To Be True?

Financier R. Allen Stanford makes investors an enticing offer: He sells supposedly super-safe certificates of deposit with interest rates more than twice the market average. His firm says it generates the impressive returns by investing the CD money largely in corporate stocks, real estate, hedge funds, and precious metals.

But skeptical federal and state regulators are now taking a hard look at Stanford’s operation—especially those CDs, whose underlying investments seem questionable. Over the past 12 months, the stock market and hedge funds have lost huge amounts of value even as Houston-based Stanford Financial Group continued to pay out above-average returns and claimed to have boosted the assets it oversees by 30%, to more than $50 billion.

BusinessWeek has learned that the Securities & Exchange Commission, the Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority, a major private-sector oversight body, are all investigating Stanford Financial. The probes focus on the high-yield CDs and the investment strategy behind them. According to people close to the investigations, the three agencies are also looking at how Stanford Financial could afford to give employees large bonuses, luxury cars, and expensive vacations. Selling CDs typically is a low-margin business.

Jittery

In the wake of Bernard Madoff’s alleged $50 billion Ponzi scheme, regulators and investors around the world are increasingly jittery about money-management firms that promise consistently higher-than-normal returns.

Stanford’s CDs, which require a minimum investment of $50,000, offer tantalizing interest rates. The current rate on a one-year CD is roughly 4.5%, according to the bank’s Web site. The average at U.S. banks is about 2%, notes research firm Bankrate.com (RATE). A year ago, the offshore bank sold five-year CDs that yielded 7.03%; the industry average hovered around 3.9%.

The firm suggests in marketing material that it can offer substantially higher rates because the bank benefits from Antigua’s low taxes and modest overhead costs, among other factors. The bank invests in a “well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies, and major international banks,” the marketing literature says.

But Stanford Financial and its affiliated bank, both of which are owned by Allen Stanford, offer few details about the nature of those holdings. According to the bank’s 2007 annual report, stocks, precious metals, and alternative investments—such as hedge funds and real estate—account for 75% of the bank’s portfolio.

Stanford’s CDs lack the government insurance that backs certificates issued by U.S. banks.

The financials of the offshore bank are audited by a tiny accounting firm (14 employees) in Antigua called C.A.S. Hewlett & Co.

The offshore bank’s seven-member board of directors is dominated by Stanford insiders, family, and friends.

Stanford brokers who sold at least $2 million of CDs in a quarter kept 2% of the assets, says Hazlett. That’s much more than competitors generally pay their sales forces on such investments. “The primary thing they cared about were CDs,” says Hazlett. “That was all they talked about in meetings with brokers.” But the high yields “never made any sense to me,” he adds. “I never understood how they could generate the performance to justify those rates.”

Funding Commitments Pulled, CD Redemptions Delayed, Assets Invested In Illiquid Securities

An offshore bank at the center of two U.S. federal investigations recently curtailed financing commitments to two small American companies, regulatory filings show.

Some Stanford International representatives have been recently advising clients that they can’t redeem their CDs for two months, a person familiar with the matter said.

But SEC filings show that the Antigua bank also holds majority stakes in a handful of thinly traded American firms.

Stanford Financial Gets More Scrutiny – FBI and SEC Investigate

An investigation into wealthy financier R. Allen Stanford’s operations is intensifying, with the FBI looking into his financial group in the U.S. and regulators in Antigua scheduled to visit his bank there.

Another person familiar with the investigation said the SEC has been looking at the certificate-of-deposit business since at least 2007.

Those people say the agencies now are focusing on certificates of deposit, which are marketed by the financial group’s wealth-management arm and sold by Mr. Stanford’s Antiguan bank. The CDs offer unusually high returns; for example, as of Nov. 28, a one-year, $100,000 CD paid 4.5%.

“The first thing that grabs your eye is the business model,” says Alex Dalmady, an analyst who unveiled concerns about Stanford International Bank in the magazine VenEconomy Monthly but isn’t involved in the investigation. “Taking deposits and playing the stock market — this is way too risky. “

Stanford Blames “Disgruntled Workers”

Feb. 13 (Bloomberg) — R. Allen Stanford, the billionaire chairman of Houston-based investment firm Stanford Group Co., blamed “former disgruntled employees” for stoking regulatory probes into his firm.

Stanford Group pushed its financial advisers to steer clients’ money into the offshore CDs, paying a 1 percent bonus commission and offering prizes including trips and cash for the best producers, according to four former advisers who asked not to be identified.

Marketing material for Stanford Group CDs raised red flags, said Bob Parrish, a financial planner and accountant in Longboat Key, Florida.

The use of the term “CD” to describe the investment was misleading because most investors associate it with a safe, FDIC- insured instrument, Parrish said.

SIB describes the CDs in its disclosure statement as traditional bank deposits. The bank doesn’t lend proceeds and instead invests in a mix of equities, metals, currencies and derivatives, according to its Web site and CD disclosures.

Warning Signs Ignored By All

Yields offered at twice the market average, offshore accounts, huge commissions paid to brokers to draw in more cash, SEC investigation since 2007, extravagant corporate lifestyles, assets invested in hedge funds, real estate, stocks and alternative (illiquid) investments which have all fallen 40 – 50% in value, frantic efforts to raise additional funds, previous regulatory investigations and risky business model.  It is not hard to see the ending to this story.  Once again regulators and investors have shown extraordinary carelessness and disregard of information that was readily available for scrutiny.

This is probably not another Ponzi scheme similar to Bernard Madoff.  It seems more like a case of poor asset management leading to large losses which management then attempted to cover up with additional investor funding.   The end result, however, will be the same as for those who invested with Madoff – a significant loss on their investments.

2 Responses to “Stanford Financial Investigated”

  1. As a former Stanford employee, I have seen a lot of half-truths and some outright lies thrown around regarding Stanford International Bank (SIB). There have been many facts that have not been reported that might interest investors, the public in general, and particularly the media, which seem to rely on bloggers for their sources without doing any fact checking.

    Over the last 18 months, there have been unprecedented challenges which have confronted the global financial industry and have led to heightened scrutiny by regulatory bodies, the public and the media. Although Stanford Financial Group has not been the beneficiary of any government bailout money, they are not immune from this crisis; however any comparisons to recently defaulted institutions and scandals are not relevant to the organization and are a disservice to Stanford employees and clients worldwide.

    One analyst’s opinion regarding Stanford International Bank has been picked up by numerous blogs and reputable news outlets and printed “as fact.” These facts need to be known: Stanford International Bank was able to show a positive return for doing what U.S, banks did NOT do: –SIB does not make loans, they have no loan loss reserves, they took no markdowns to capital and had no exposure to subprime. If U.S. Banks had followed this strategy — chances are they might have shown positive returns.

    Has anyone bothered to check out the Analyst — one Alex Dalmady — who is he, what is his track record? It is easy to point fingers and make broad statements — what expertise does this guy have? I would hope the more reputable outlets did this homework, but they seem to have picked his words up verbatim and did no “fact checking” on the source of all of this at all.

    The media has a responsibility to report accurately and balanced — that is not apparent in Stanford’s case. He may be flamboyant, but that is not a crime. Misleading and scaring thousands of investors is.

    And let’s not forget that ALL of this started with two disgruntled employees who owe Stanford a lot of money (Bloomberg link with what they actually owe: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNO2xKLg68_0) running to regulators accusing Stanford when they found out Stanford expected them to pay back what they owed. To date, there has been NO evidence of wrongdoing on the part of Stanford, but evidence of illegal selling practices by the two employees has been uncovered and turned over to regulators. Why has not one reputable media outlet reported this??

    Stanford International Bank has NEVER failed to make an interest payment or pay funds at maturity in the nearly 25 years of its history. That is 25 YEARS, not weeks or months. Also, while not obligated to, this Bank has always tried to help the customers who needed early withdrawals. This Bank has suspended THE Privilege of early withdrawals to ensure the protection of its entire depositor base. The media hype and continued repetition of half truths is only causing heightened anxiety, and this step has been taken in light of this barrage of negative and misleading statements.

    SIB structures, operations and higher returns are no different than other private international banks except that SIB has narrowed its products to CDs and deposit accounts, as well as ancillary products like credit cards and loans to existing clients. The rates for a 5-year jumbo CD are from 1 1/3% to 6 7/8% and are comparable to other international institutions. This information is verifiable on bankrate.com.

    This analyst states that it is near to impossible for SIB to show a positive return — implying there must be fraud for this to occur. Plenty of financial investment vehicles had positive returns — including more than 1,600 hedge funds. The characterization that positive must be fraudlent is simply false and sensationalism.

    Are we going to launch investigations of all firms who did NOT lose money for their investors last year?

    Madoff/ponzi characterization — Separately, at Stanford Group Company, clients assets are held at Pershing LLC, a subsidiary of Bank of New York Mellon—one of the largest custodian organizations in the world. Clients’ brokerage account assets are insured and segregated to assure return of their assets in the event of any catastrophic events like the ones that have occurred to world class financial institutions in the last two years. Madoff was his own custodian…..more sensationalism. Report the truth…report the Pershing relationship. There has not been one fact proving that Stanford International Bank’s custodian relationships are not holding sigificant assets or that their independent money managers are not managing significant amounts for the bank.

    Federal Agencies are “investigating” Stanford — regulators are a reality for any U.S. Broker/Dealer….the SEC and Finra were in Stanford offices as part of a routine examination. No one has confirmed or advised an “investigation is ongoing. There was an article in the New York Times earlier this week with headline “Hundreds of Regulators descend on Citi…..” Regulators are feeling the sting from their testimony to Congress, and are responding with more oversight. Stanford has no problem with this and has track record of full cooperation with regulators over the years.

    Since the first Stanford Company’s founding during the Great Depression, the Stanford Financial Group has grown into a full-service portfolio of companies servicing individuals and institutions. Stanford Financial Group is a privately held global network of independent, affiliated financial services companies including Stanford Group Company, Stanford International Bank and Stanford Trust.

    The Stanford International Bank (SIB) is but one aspect of the overall company portfolio and operates in St. John in the Caribbean Island of Antigua and Barbuda. The Bank has a prudent investment approach that it has followed for over 20 years and has over 30,000 clients in over 90 countries. It has stringent know-your customer/anti-money laundering policies and procedures and terrorist financing tracking. SIB remains a strong institution, and even without the benefit of billions in US taxpayer’s dollars SIB is taking a number of decisive steps to reinforce SIB financial strength to keep the capital base intact to protect SIB depositors.

    Stanford International Bank has used the same auditing firm for a number of years. Once the external bank auditors are selected by the Board of Directors they must be expressly approved by regulatory agencies. The regulatory framework follows international standards set forth by Basel I and II. For the record, Basel I and Basel II are the highest standards in the industry.

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