Adding to the case are charges against a former Antiguan official who has allegedly taken bribes from Stanford and his companies, a lawsuit against insurance group Lloyds of London by Allen Stanford, and a lawsuit by investors against Stanford’s auditing firm BDO. Despite the fact that his Chief Financial Officer testified against him in a plea bargain agreement, Stanford pleads not guilty to all charges. Adding drama to this high profile case, Stanford required medical treatment after getting beaten in prison and claims to have developed amnesia. The Stanford International Bank offered returns that were consistently double digits on its CDs.
In their pitch to investors, SIB employees claimed it was due to smart portfolio management and investment in safe, liquid securities. SIB also claimed that a team of 20 talented analysts manage the portfolios carefully. However, the SEC claims that this is all false. In its complaint filed in February 2009, the SEC described Stanford’s operation as a “massive ponzi scheme. ” The CDs were not reinvested in liquid securities – SIB’s portfolio mainly consisted of illiquid assets like real estate. The value of these assets was grossly overstated to pad the company’s financial reports.
SIB offered returns based on fabricated performance data and claiming as historical data and portfolio management was done solely by Stanford and the CFO, James Davis. In addition, Stanford misappropriated more than $1 billion of investors’ funds. The money went to a fleet of yachts and jets, hosting an international cricket match, Caribbean real estate and bribing Antiguan regulators. Another layer of Stanford’s deception was the assurance of BDO, an independent auditing firm that issued unqualified audits of Stanford’s companies. Investors have filed a $10. 7 billion suit against BDO for “ignoring signs of potential fraud. (Bloomberg) Investors also claim that BDO should have been aware that Stanford’s company “was operating as an unregistered hedge fund illegally disguising itself as a bank. ”(Bloomberg)
The complaint also calls into question BDO’s close relationship with Stanford Financial Group and raises issues about conflict of interest. The SEC claims that Stanford International Bank sold unregistered CDs. Had they been registered, the SEC would have been able to verify the value of the CDs. The SEC suggests that the scheme goes back to at least 1995 where the bank reported identical returns in consecutive years.
The SEC also charges Stanford and his companies of not cooperating with the SEC’s investigation and claims that about 90% of their investment portfolios “reside in a black box shielded from any independent oversight”( SEC v. Stanford International Bank, Ltd. , et al. ) Ironically, Stanford has sued SEC, the FBI, and members of the Justice Department for preventing redemption of CDs by investors by freezing his companies’ accounts. The SEC also took action to help compensate investors by filing suit against Securities Investor Protection Corp (SIPC) in order to force the company to pay investors.
The SEC is getting heavily involved and taking a very aggressive stance in this case likely due to heightened alert from the recent Madoff Ponzi scheme. Stanford’s assets have been seized by the authorities and are in the process of liquidation. Auditors that are reviewing financial statements of investors that were involved in the Stanford case will have difficulty assessing how much their clients can recover. It is difficult to track investors’ funds in Stanford’s portfolio since it was managed by two people who worked in secret and because the CDs were unregistered with the SEC.
The case is still undecided as Stanford is pleading not guilty. On another front, the SIPC is being coerced by SEC’s lawsuit to compensate investors but the SIPC plans to defend itself. On yet another front, some of the investors are involved in the lawsuit against BDO. In an audit of an investor involved in this case, it would be difficult to value the client’s portfolio. Some investors may face business risk contingent on the outcome of these trials. Investors seeking securities in off-shore banks should always consider the saying “if it’s too good to be true, it probably isn’t. Investors should also look into the regulatory environment of the institution.
While off-shore banks claim that savings from less regulation is translated into better returns, it should raise flags when it consistently performs above market for 15 years. BDO’s reports should have also raised flags as it did not examine Stanford’s portfolio.