SEC takes its time with Stanford's $8 billion fraud

As you read about the $8 billion Stanford scandal, you may experience deja vu. It's like the Madoff scandal done Latin American style. Where Madoff targeted Jews in his affinity investing scheme, Allen Stanford preyed on the Latin American community with his CDs sold as investments through his bank in Antigua. For investors there were two key clues something wasn't kosher:

* The CDs were not insured by the FDIC.

* The promised returns were at least double what was being offered by most other banks.

But the returns, especially on five-year CDs of 7.05 percent sold in 2007, looked too good to pass up by many investors. The minimum deposit was $50,000. It now appears that most of the funds were invested in private equity and real estate at the top of the bubble, so initial suspicions are that most of that money is gone. The full extent of the scandal is still emerging because, like Madoff, Stanford CDs were distributed through a number of channels aside from his own, including family offices and feeder fund-type entities.

Also, reminiscent of the Madoff scandal, Standford had run-ins with numerous U.S. agencies dating back to the late 1980s. One of the first major investigations of the Stanford International Bank and its affiliates was in 1997 when the Drug Enforcement Administration probed the bank's involvement in laundering of narcotics proceeds by a Mexican cartel. The bank cooperated with DEA and wasn't charged.

In 1999, the State Department raised a red flag because it suspected potential money laundering in Antigua by the Russian mafia and other criminal syndicates. Standford was one of the banks cited as a potential problem at the time. The State Department believed then that the financial companies being regulated by an Antiguan regulator were in fact controlling the regulator, according to a report in the Wall Street Journal.

The first warning the SEC got that Stanford International Bank might be involved in a Ponzi scheme related to a 2005 lawsuit filed by two Venezuelans who alleged in their suit that the bank "knowingly aided and abetted . . . a classic Ponzi scheme." This case was settled out of court.

In 2006, former Stanford employee Lawrence J. DeMaria filed suit against Stanford in Florida state court alleging that the firm was operating a Ponzi scheme -- taking in money to its offshore bank, laundering the money and using it to finance its growing brokerage business, which did not have profits. That suit was also settled.

While reports indicated that some complaints reached U.S. regulators as early as 2001, FINRA did not take action until April 2007. In fact, in one report the SEC started investigating the bank in 2006 from its Fort Worth Texas office, but "was told by another arm of government to call off its dogs. Mysteriously, the official wouldn't say who gave that order and why."

Looks like it's time for the SEC to open an investigation into this case as well. When the Wall Street Journal asked about the length of time for the investigation started in 2006, an SEC spokesman told the Journal that the SEC had to address jurisdictional issues and work to avoid impairing criminal authorities room to maneuver.

Another striking similarity to the Madoff scandal is that it appears Stanford kept most of his employees in the dark about the bank's investments. The bank's chief financial officer told the Telegraph (a UK newspaper) that she can't answer questions about the bank's investments. It appears from initial reports that only Standford and a colleague oversaw all investments, even though he told investors he had a team of 20 portfolio managers.

One major difference is that Stanford is nowhere to be found, while Madoff stays "imprisoned" is his multi-million dollar condo in New York City.

The key lessons to learn from both scandals are actually nothing new -- if it sounds too good to be true, it probably is. If you want to invest in safety, do your homework and be sure you understand exactly what type of investment you are buying. Don't just buy on the advice of a friend or adviser. Do your own research, too.

Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies" (newly reduced second edition).


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