US securities bodies probing Stanford group

Stanford Financial Group Co, the Houston-based investment firm led by billionaire Sir Allen Stanford, is being investigated by U.S securities regulators over certificates of deposits (CDs) issued by its Antigua-based affiliate that pay higher than average returns.

Sir Allen Stanford
Sir Allen Stanford

The financial news wires were yesterday abuzz about the investigation, which comes just as Stanford, who has been credited with reinvigorating interest in West Indies cricket, is expected to announce a major cutback of his investment in the sport in the region.

In an e-mail to staff members, Stanford said he would “fight with every breath to continue to uphold our good name” in the face of investigations, which are reported to have predated the investigation of money manager Bernard Madoff, who was arrested in December after allegedly bilking high profile investors out of $50 billion in a pyramid scheme that promised yields that were too good to be true. Stanford International Bank (SIB) recently told depositors in a letter posted on its website that it had no exposure to Madoff funds and that it was in compliance with financial regulators in Antigua.

On Wednesday, BusinessWeek broke the story, reporting that the U.S Securities and Exchange Commission (SEC), the Florida Office of the Financial Regulation and the Financial Industry Regula-tory Authority (Finra), a major private-sector oversight body, are all investigating how St. John’s-based Stanford International Bank Ltd. has been able to offer high returns on CDs, while investing in stocks, real estate, hedge funds and precious metals, many of which have lost value in recent months. While investors have suffered huge losses, Stanford Financial Group has claimed to have boosted the assets it oversees by 30%, to more than US$50 billion.

“We are all aware that former disgruntled employees have gone to the regulators questioning our work and our processes,” Stanford wrote to staff members yesterday, in an e-mail that was obtained by Bloomberg News. He said visits to Stanford Group’s offices were routine examinations. “On the issue of Stanford International Bank, I want to be very clear,” Stanford added, “SIB remains a strong institution, and even without the benefit of billions in U.S. taxpayers’ dollars we are taking a number of decisive steps to reinforce our financial strength. We will take the necessary actions to protect our depositors.” Earlier, Stanford spokesman Brian Bertsch, told Reuters that the BusinessWeek story was a rehash of old gossip and unsubstantiated allegations. “The Stanford Financial Group is vigorously managed and fully compliant with all U.S. regulations,” he said.

Finra investigators are reported to have visited six Stanford Group offices last month, downloaded information from computer hard drives and looked through files, while the SEC questioned two former Stanford financial advisers. Bloomberg said former employees were questioned about SIB’s stated returns on investment, which ranged between 10.3% and 15.1% every year, from 1995 until last year. SIB has US$8.5 billion in assets and 30,000 clients, according to its website, growing from $624 million in 1999. “Those returns are just incredible, in the sense that I don’t believe them,”

Bloomberg quoted Alex Dalmady, an independent financial analyst based in Weston, Florida, who has examined Stanford’s investment strategy and published an article in VenEconomia Monthly, published by Caracas-based economic consulting firm VenEconomia.

Dalmady wrote that the bank offered rates on CDs of 7.5% on a one-year deposit of at least US$100,000 in fall 2007, when U.S. banks were offering 4 to 5%. Its gains on investments were consistently above average, ranging from 10 to 14% from 2003 to 2007. The company also said it had a gain of 6% in 2008, while many other firms had significant losses, Dalmady pointed out. The Group, however, has disputed his findings.

Meanwhile, four former investment advisers interviewed by Bloomberg said the Stanford Group offers incentives for those who steer their clients’ money into the bank CDs. The company paid a 1 percent fee to the advisers, held contests and offered trips and bonuses of up to US$125,000, based on how much money went into Stanford International Bank, according to the former employees and e-mails provided to Bloomberg News. Those incentives weren’t paid for investments in other securities, they said.

In November 2007, Stanford Group Co. was fined $20,000 for failing to adequately state the risks involved in the CD investments and to disclose that an affiliation between the broker-dealer and the bank could pose a conflict of interest. Stanford consented to the sanctions without admitting or denying wrongdoing, according to Finra.

Stanford International Bank says on its website it is able to pay higher interest to depositors “by channeling available resources into profitable activity,” through investing. It added that it doesn’t lend proceeds and instead invests in a mix of equities, metals, currencies and derivatives. L. Burke Files, President of a Tempe, Arizona-based due diligence firm that specialises in offshore financial organisations, told the Associated Press that he steered a client away from Stanford in part because the bank’s CD rates were two to five times higher than the competition, and because the returns seemed to avoid the market swings that show up in the accounts of even the best investors. “The consistency of returns gave me significant pause,” Files said.


Stanford, 58, a Texas-born billionaire with a personal fortune estimated by Forbes at US$2.2 billion, was knighted by Antigua, where he has been based for more than 25 years. He is known by the moniker “Sir Allen” throughout the region, where he launched a million-dollar regional Twenty20 tournament that is largely credited with reinvigorating interest in West Indies cricket. The eponymous Stanford Twenty20 was launched in 2006, when the Guyana team emerged as champions.

However, Stanford last year announced a review of cricket operations, citing contractual issues with the West Indies Cricket Board which arose prior to the start of the Stanford Super Series. The series consisted of five Twenty20 matches between England and a collective of Stanford Superstars drawn from the best of the best players from the Twenty20 tournament, culminating in a single match for US$20 million-the richest team prize in history for a single sporting match. The series was, however, marred by controversy from the start when Stanford sat the pregnant wife of England wicketkeeper Matt Prior on his lap. He later issued an apology while the England Board announced it was reviewing the five year US$100 million deal with Stanford. The series ended in one sided match where England was thrashed by 10 wickets.

In December, Stanford announced a review and sacked a board of legends, which included Sir Viv Richards and Sir Garfield Sobers, and closed his office in Antigua. “I think he’s done well right through the Caribbean. Credit must be given when it’s due,” West Indies Captain Chris Gayle told the AP as he prepared for the start of the second test against England in Antigua today. “It would be disappointing if he actually walked out. He has done a lot for us.” He noted that the Stanford tournament has brought a lot of supporters out. “We’re just trying to rebuild in the region right now,” Gayle said. “Our cricket has been down for quite some time so obviously we need as much as we can get to actually come alive again.”

Stanford has since announced the scrapping of the US$20M match, but has entered into negotiations with the England and Wales Cricket Board (ECB) for an annual quadrangular tournament at Lord’s featuring his Stanford Superstars XI. Telegraph Sport reported that the new contract will replace the existing US$100 million five-year deal he signed with the board last June, although Stanford’s quadrangular tournament is expected to be held at Lord’s in May. Meanwhile, last evening there was speculation in the UK press that the U.S investigation could jeopardise a future deal with the ECB.

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