Another Billion-Dollar Investment Advisory Fraud Unfolds

The Securities and Exchange Commission (SEC) Tuesday charged Robert Allen Stanford and three of his companies—including the broker/dealer and investment adviser arms—for orchestrating a massive fraud.

The SEC said Stanford and his close circle of family and friends perpetrated a fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program. Furthermore, the SEC alleges a $1.2 billion scheme of a proprietary mutual fund wrap program sold by advisers.

Companies charged by the SEC include Antiguan-based Stanford International Bank (SIB); Houston-based broker/dealer and investment adviser Stanford Group Company (SGC); and investment adviser Stanford Capital Management, the SEC said in a release.

The SEC complaint, filed in federal court in Dallas, alleges that the offshore bank sold approximately $8 billion of so-called “certificates of deposit’ through a network of SGC advisers. Investors were promised “improbable and unsubstantiated’ high-interest rates, the SEC said. The rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

The SEC also charged SIB Chief Financial Officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action.

“We are alleging a fraud of shocking magnitude that has spread its tentacles throughout the world,’ said Rose Romero, regional director of the SEC’s Fort Worth Regional Office, in the release.

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

SIB is operated by a close circle of Stanford’s family and friends, the SEC said. SIB’s investment committee, responsible for the management of the bank’s multi-billion dollar portfolio of assets, is composed of Stanford; Stanford’s father who resides in Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales; Pendergest-Holt, who prior to joining SFG had no financial services or securities industry experience; and Davis, who was Stanford’s college roommate.

Mutual Fund Wrap

The SEC’s complaint also alleges an additional scheme relating to $1.2 billion in sales by SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data. According to the complaint, the false data helped SGC grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in 2007 and 2008. The fraudulent SAS performance was used to recruit registered investment advisers (RIAs) with significant books of business, who were then heavily incentivized to reallocate their clients’ assets to SIB’s CD program, the SEC said.

The SEC’s complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act, and registration provisions of the Investment Company Act.

In response to the SEC’s request, U.S. District Judge Reed O’Connor entered a temporary restraining order, froze the defendants’ assets, and appointed a receiver to marshal those assets, according to the release. In addition to the emergency relief, the SEC seeks a final judgment “permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest,’ the agency said.

The Wall Street Journal reported that investors have been flocking to the island of Antigua, seeking to withdrawal their funds.