SEC accuses Stanford Group, the Duck implodes (or explodes?)

February 18, 2009

So, today the day we all thought was coming for a few years happened, as the SEC accused Allen Stanford and James Davis of massive, ongoing fraud and asked the judge to freeze their assets as well as the appointment of a receiver for them.

The announcement ends two whirlwind weeks in which the blogosphere questioned the activities of Stanford International Bank (SIB), the Antigua based affiliate of Houston’s Stanford Group, after Venezuelan analyst Alex Dalmady wrote a piece called Duck Tales in English and El Pato in Spanish.

To me this is not a surprise, for years we have been questioning Stanfords claims and high yields and as the bank revealed more and more of its supposed investment strategy, we would warn our friends about it. Then Alex Dalmady, who we knew well from the time he was the best analyst in the Caracas Stock Exchange through his monthly InvestAnalisis, wrote Duck Tales for Veneconomia Monthly, which is one of a variety of publications Veneconomia publishes regularly on the country. We published a post on it on February 9th. and little did we know the speed that it would gather until the SEC’s announcements today.

And the SEC document has incredibly strong language, charging Stanford, Davies and others with “massive fraud” and its Chief Investment Officer with “helping to preserve the appearance of safety fabricated by Stanford and by training others to mislead investors”.

As in the Madoff case, the SEC charges that only two people, Stanford and Davies, knew the details of the portfolio and that they went out of their way to to block any examination of its record. The SEC also accuses both men of not cooperating with the Commissions efforts to account for the more than US$ 8 billion in assets, the same question Alex Dalmady has been openly asking the media in his own colorful way: “Show me the money!”. In fact, the SEC calls the portfolio a “black box”, shielded from oversight.

In trying to defend itself, Stanford has not addressed the important issues over the last few weeks, hiding behind irreleveant facts, such as not having received any of the aid from the US Government for banks in problems or not having invested with Bernard Madoff. While the first one was true, simply because it was an Antigua-based bank, the SEC actually charges that Stanford didhave money invested with Madoff.

And while Stanford always assured its customers that the bank invested a substantial portion of the banks portfolio in liquid assets, the SEC charges that a large part was invested in “illiquid investments, such as real estate and private equity”. The SEC states that 90% of the portfolio was invested in such assets and 23% in private equity. SIB was in the end a hedge fund that paid improved fixed income rates, but advertised itself as a bank.

The SEC charges that fraudulent behavior may have been going on as far back as 1995, as the Bank’s portfolio’s returns were claimed to be above the 12% level year after year, paying investors always 5% above those returns (But, of course, the deposit rate was fixed before the returns were achieved). And if this was tough to believe, Stanford claimed to have lost barely 1.3% with its diversified portfolio in 2008, in a year that the S&P 500 dropped 39% and the European Dow Jones Stock Index lost 41%, while claiming to have over half the assets in stocks.

The whole fee structure of SIB was simply impossible to sustain. According to the SEC, SIB would pay Stanford Group in the US a 3% fee for the sale of the CD, financial advisers would be paid a 1% for the sale of the CD’s and would receive an additional 1% per anum in “trail” commission for the CD’s after the first year.

These are all very strong words from the SEC. The defendants are called “reckless’ repeatedly and accused of “misrepresenting” products all the time.

This is indeed a sad and tragic ending to something a lot of people have suspected for many years. In Venezuela, Stanford was extremely aggressive, with fancy offices of their “advisory” service in at least three cities and fourteen other offices through a local bank owned by Stanford Group which was supervised by the local Superintendent of Banks and thus was managed as a bank should be. In fact, many of us have suspected for a long time that this local bank was only acquired in order to give legal presence to SIB’s activities in Venezuela.

It is estimated that Venezuelans had US$ 3 billion at SIB, but today I was told that a US consulting group told a large US bank two years ago that Venezuelans had 80% of the deposits at SIB. This would imply that US$ 5-6 billion were owned by Venezuelans. Sounds large, but given that SIB pioneered its CD’s in Venezuela and began copying the structure and model elsewhere only recently, I would not be surprised if this is true. This is comparable to the size of the assets of two Florida based banks which are owned by Venezuelan financial institutions, which were not as aggressive in gathering assets or in paying high interest rates as SIB was.

And this is the tragic part. This money does not belong to very wealthy Venezuelans. Stanford targeted the middle class, the professional, those that despite the crisis have managed to save some money in hard currency in the last few years. These deposits were looked for aggressively and without registering with local authorities. The sale of such products is simply illegal in Venezuela, but it was carried out openly and visibly. It is hard to believe the authorities did not know about it. (Were they clients?)

Tomorrow, we will begin hearing tragic personal tales of wiped out savings and suffering. Hopefully investors will be able to recover something, but I am not optimistic. The only good news is that the amount held at SIB by my fellow countrymen, or anyone for that matter, will no longer grow at the 20% clip per year that it had been growing, catching even more people.

The duck did indeed implode (or explode?) very fast, I had been expecting it for a long time, but when I first wrote about it a week ago, I cold not imagine the speed at which everything would develop.

Hats off to Alex Dalmady, whose blog is now back live!!!

5 Responses to “SEC accuses Stanford Group, the Duck implodes (or explodes?)”

  1. […] The Devil’s Excrement wrote an interesting post today on SEC intervenes Stanford Group, the Duck implodes (or explodes?)Here’s a quick excerpt … ny of the aid from the US Government for bank in problem or not having invested with Bernard Madoff….As in the Madoff case, the SEC charges that only two people, Stanford and Davies, knew the details of the portfolio and hat they went out of their way to to block a ny examination of the record….While the first one was true, simply because it was an Antigua-based bank, the SEC actually charges that Stanford did invest with Madoff…. […]

  2. Ken Price Says:

    More on Stanford

    Cricket tycoon Sir Allen Stanford ‘attempts to leave US’
    Fraud investigators are searching for Sir Allen Stanford, the Texan cricket tycoon facing multi-billion pound fraud charges in the United States, after he made an aborted attempt to leave the country on a private jet.

    By Nick Allen
    Last Updated: 10:14PM GMT 18 Feb 2009
    1 of 2 Images
    Sir Allen Stanford’s ‘attempt flight’ thwarted as credit card refused
    Who’s first? People seeking to withdraw funds line up outside the Bank of Antigua, part of Sir Allen Stanford’s business empire Photo: REUTERS
    Allen Stanford
    Allen Stanford

    The billionaire businessman was attempting to fly from Houston in Texas to Antigua, where panic erupted on Wednesday with more than 600 people launching a run on one of the banks he controls.

    The tycoon was reportedly blocked from leaving the US after the private jet company refused to accept his credit card.

    The US Securities and Exchange Commission, which has alleged a £5.6 billion fraud against him, said it had no information about the whereabouts of the brash, 58-year-old financier and US marshals have been unable to serve him with court orders.

    The alleged fraud centres on “false promises” of improbably high interest rates made through the sale of certificates of deposit from his Antiguan affiliate, Stanford International Bank Ltd (SIB).

    In London, the Serious Fraud Office said it was “monitoring” developments but has yet to launch a full investigation.

    It is understood to be liaising with the SEC after it emerged that Sir Allen’s bank, which claimed to control more than £35 billion in assets, was audited by a small accountancy firm based in north London.

    An SFO spokesman said: “We are aware of the reported links through auditing activities with our jurisdiction in the UK.

    “It is our intention to touch base and to make an assessment of the practice which appears to be involved.”

    In the twin-island state of Antigua and Barbuda, where Sir Allen is the biggest private employer, Prime Minister Baldwin Spencer said the charges against him could have “catastrophic” consequences but urged the public not to panic.

    There were also runs on banks connected with Sir Allen in Venezuela and Panama, with hundreds of people queuing to get their money out.

    Venezuelans have about £1.75 billion invested in SIB and investors besieged its local offices in Caracas.

    Sir Allen had become famous in the cricket world for a $20 million (£14 million) game between England and his own team of West Indian players last November.

    He had been in now-suspended talks with the England and Wales Cricket Board, over a five-year deal for England to play against the Stanford Superstars.

    Senior figures in the game are now describing the £70 million link up plan with Sir Allen as a “fiasco”.

    The SEC said Sir Allen had failed to respond to subpoenas seeking testimony and had not produced “a single document.”

    He has homes in Antigua, Miami, and the US Virgin Islands but spends less than 90 days a year in the US for tax reasons.

    A judge has frozen froze Stanford’s £1.4 billion of his assets.

    Two police officers stood watch at the Bank of Antigua as hundreds of people stood in a line stretching around a street corner, despite assurances from regional monetary authorities that the bank had sufficient reserves.

    Andrea Lamar, 28, who joined the line with a friend on a street popular with tourists in the state capital, St. John’s said: “I’m worried and I’d like to get my money out.”

    Richard Dwyer, 29, from Boston, said: “It’s all my student loan money. I owe interest on top of it so I hope I can pull it out.”

    The Eastern Caribbean Central Bank said many depositors had started to withdraw funds “causing some anxiety”.

    As people bombarded local radio talk shows government officials tried to assure citizens that the banks were sound.

    Sir Allen lived for more than 20 years on the reef-girded island, only 9 miles (14 km) wide and 12 miles (19 km) long and with a population of 70,000.

    He owns the country’s largest newspaper and is the first American to receive a knighthood from its government.

  3. Ken Price Says:

    It get worse, and worse:

    Accused Financier Under Federal Drug Investigation
    Authorities: Stanford May Have Laundered Drug Money for Mexican Cartel

    February 18, 2009—

    The SEC’s fraud charges may be the least of accused financial scammer R. Allen Stanford’s worries. Federal authorities tell ABC News that the FBI and others have been investigating whether Stanford was involved in laundering drug money for Mexico’s notorious Gulf Cartel.

    Watch the full story tonight on World News with Charles Gibson at 6:30 p.m. ET.

    Authorities tell ABC News that as part of the investigation, which has been ongoing since last year, Mexican authorities detained one of Stanford’s private planes. According to officials, checks found inside the plane were believed to be connected to the Gulf cartel, reputed to be Mexico’s most violent gang. Authorities say Stanford could potentially face criminal charges of money laundering and bribery of foreign officials.

    Authorities say the SEC action against Stanford Tuesday may have complicated the federal drug investigation.

    The federal investigation, however, did not stop Stanford from using corporate money to become a big man at last year’s Democratic convention in Denver.

    A video posted on the firm’s web-site shows Stanford, now sought by U.S. Marshals, being hugged by Speaker of the House Nancy Pelosi and praised by former President Bill Clinton for helping to finance a convention-related forum and party put on by the National Democratic Institute.

    “I would like to thank the Stanford Financial Group for helping to underwrite this,” Clinton said to the crowd at the event.

    Stanford Financial was listed as the “lead benefactor” for the gathering, and Stanford was permitted to address the audience of several hundred.

    Stanford contributed $150,000 to underwrite the event, said NDI president Kenneth Wollack. More recently, Stanford gave $5,000 to help pay for a luncheon hosted by the group. At the time NDI had no idea of Stanford’s trouble, and it is has not had any contact with him since the December event, said Wollack.

    “We had no reason to believe that a very public company that was also engaged in philanthropic work might be suspect,” said a spokesperson for the National Democratic Institute, Amy Dudley.

    The SEC charged yesterday that Stanford was running a fraudulent investment scheme that may have bilked customers out of as much as $8 billion.

    Stanford’s whereabouts are unknown and U.S. Marshals say they are searching for him.

    Over the last decade, Stanford has spent more than $7 million on lobbyists and campaign contributions to Washington politics in both parties, although the vast majority of the money has gone to Democrats.

    Donations to Democrats Outweigh those to Republicans

    A total of $1.56 million was given to Democrats, according to Republicans received $840,000. Stanford also hired big-name lobby firms like DLA Piper and Parry, Romani and DeConcini.

    Today in Washington, many of the members of Congress who received Stanford contributions vowed to turn the money over to charity.

    Sen. Bill Nelson (D-FL) was the single biggest recipient of Stanford contributions, according to the Center for Responsive Politics. He received $45,900 from Stanford over the last 10 years.

    “I will give to charity any campaign contributions from him or his employees,” Nelson said in a statement through his spokesperson.

    Where is Stanford?

    Federal authorities say they do not know the current whereabouts of the Texas financier, who is accused of cheating 50,000 customers out of $8 billion dollars. His financial empire in Houston, Memphis, and Tupelo, Miss., were raided Tuesday.

    The Securities Exchange Commission alleges Stanford ran a fraud promising investors impossible returns, much like Bernard Madoff’s $50 billion alleged Ponzi scheme.

    Investigators Tuesday shut down and froze the assets of three of the companies Stanford controls and they say the case could grow to be as big as the Madoff scandal. Like Madoff’s clients, Stanford’s investors are in shock.

    “Initially we put our money in this institution and in a CD because we were nervous about the markets and thought it was a safe place,” said investor Brett Zagone. “I’m so upset right now I can’t even talk about it.”

    Click Here for the Investigative Homepage.

    Copyright © 2009 ABC News Internet Ventures

  4. Rafael Says:

    And don’t miss the video from the Houston ABC affiliate:

  5. Rafael Says:


    Houston media is covering the Stanford mess. The KHOU video is pretty interesting.

    Here’s a list of lawmakers who have received dough from Stanford. Names include John McCain, Hillary Clinton and whatnot:

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