Robert Allen Stanford Caught

FBI agents from the bureau's Richmond, VA offices have served accused fraudster Robert Allen Stanford, chairman of the Stanford Financial Group, with papers in the Fredericksburg, Va., area.

FBI agents served Stanford with court orders related to the Securities and Exchange Commission's civil case against him and his three companies "without incident," a bureau official says.

Stanford has been charged with the second biggest securities fraud to emerge in just three months, a civil fraud case that market regulators call "massive" with "tentacles" stretching around the globe, a case that comes three months after the Ponzi-scheme charges brought against Bernard Madoff. Stanford has yet to be charged with criminal violations.

A jetsetting Texas billionaire, Stanford is an international cricket sponsor, Washington political donor and private banker to Latin America's wealthy.

Stanford also was a regular in the rarefied atmosphere of the rich and famous, those who hobnobbed in the world of polo, golf, tennis and sailing, and he also cozied up to politicians in Washington and Antigua.

Enforcement officials are also moving to seize his six private planes including his Bombardier 500 luxury jet, and potentially his yacht and mansion, both located in St. Croix, reports indicate.

Stanford has also hired high-powered attorney Brendan Sullivan of the Washington, DC firm Williams & Connolly  to defend him. Sullivan, a senior partner at the firm with more than 40 years of litigation experience, is one of the premier defense attorneys in the country and has defended Lt. Colonel Oliver North, former HUD secretary Henry Cisneros, and has worked other high-profile criminal cases.

Money Laundering?

ABC News now reports that the FBI had been tracking Stanford in a probe of whether he had been laundering money for Mexican drug cartels. The Associated Press is also reporting that Stanford owes $212 mn in federal taxes, and has four federal tax liens filed against his properties for 2007 and 2008.

The SEC alleges Stanford, who has sometimes gone by "Sir Allen" since he was knighted in 2006 by Antigua, part of the British Commonwealth, ran an $8 bn scheme through a financial empire that included an offshore private bank domiciled in Antigua, a broker dealer, and an investment advisory arm.

The Stanford Empire

Stanford's empire grew out of an insurance and real estate company that his company claims has its roots in the company his grandfather founded 77 years ago. However, Stanford's offshore bank was launched in 1985. Advertising itself for years as a global wealth management firm, the Stanford Financial Group claimed to have pulled in retail, wealthy and commercial investors from 136 countries on six continents. The company purported to have assets under management in excess of $50 bn.

Stanford paid staffers lucrative commissions to lure unwitting consumers into  certificates of deposits sold through Stanford International Bank in Antigua, CDs that the SEC says carried "improbable and unsubstantiated high interest rates" of return, as much as 15%, quadruple what US banks offer on similar accounts.

Stanford International Bank claimed to achieve steady, double-digit returns on its investments for the past 15 year, causing the bank's deposits to more than double from $3.8 bn in 2005 to $8.5 bn. A former executive reportedly told SEC officials that Stanford presented hypothetical investment results as actual historical data in sales pitches to clients.

In 2007, the bank paid $291.7 mn in management fees and commissions to its salesmen who pulled in CD deposits, up from $161 mn in 2005.

Bank accounts in Antigua, Venezuela, Mexico, Colombia and Ecuador linked to Stanford are being drained by the hour. Authorities raided Stanford's operations earlier this week.

Fire-Engine Red Flags

And now the same questions are emerging as those that arose with Madoff: What were the fire-engine red flags investors missed in the Stanford fraud case? And why didn't market regulators at the SEC catch Stanford, given that problems about his operations flew across their radar screen as early as 2001, says the Wall Street Journal?

Interviews with former FBI agents reveal what investors and market regulators should have caught ahead of time.

The alleged deceptions are wide ranging. Despite assuring investors they had no exposure to the Madoff scandal, at least $400,000 of the bank's assets were exposed to Madoff via feeder funds.

The SEC's complaint said Stanford International Bank [SIB] had money invested in Meridian, a New York-based hedge fund that used Tremont Partners as its asset manager. Tremont in turn invested 6% to 8% of the SIB assets with Madoff's investment advisory firm in New York City.

According to the SEC, Stanford representatives told people who bought CDs from Stanford International Bank that it was putting their CD money in easy-to-trade assets; had more than 20 analysts monitoring the portfolio; underwent yearly audits by Antiguan regulators, and that investors had  no exposure to the Madoff scandal.

But in reality, the SEC charges, the bulk of the money went into illiquid assets such as real estate and private equity, and the investments were reviewed by only two people: Stanford himself, and James M. Davis, the bank's chief financial officer and Stanford's onetime classmate at Baylor University.

The SEC said Stanford International Bank suffered losses in the alleged Madoff fraud, contrary to its past assurances to investors. According to the SEC, Messrs. Stanford and Davis were told on Dec. 15 that the bank lost roughly $400,000 based on indirect exposure to Mr. Madoff.

On the bank's investment committee sat Stanford's father, Davis, his college roommate, and an executive who had no more experience in business than being a cattle rancher and a car sales man.

Former FBI official Kenneth Springer, an executive at the consulting firm Corporate Resolutions, say one fire engine red flag to investors were the supercharged CD rates of return.

Another is the fact that this was a private offshore bank domiciled in Antigua. Still another are layers upon layers of companies in Stanford's network, making it difficult to track money flows

And another warning sign: Stanford bank's auditor is a smaller unknown firm.

Another red flag: The Stanford Group Company failed to register with the SEC.

Yet another signal: The bank reported identical portfolio returns of 15.71% for two straight years, 1995 and 1996, according to the federal complaint.

And Stanford's company claimed losses of only 1.3% in 2008, a year when numerous market indices got crushed, with the S&P 500 down 39%.  

Even the chief investment officer of Stanford Group Financial confessed to law enforcement that "it is simply ‘improbable' that the company could have managed a ‘global diversified' portfolio of investments in a way that returned identical results in consecutive years." 

Balked At Cooperating With Authorities

In its case against Stanford, and the company have also "wholly failed to cooperate" with the SEC's efforts to account for the $8 bn of investor funds purportedly held by the company. In short, approximately 90% of the company's "claimed investment portfolio resides in a ‘black box' shielded from any independent oversight," company officials told the SEC.

And far from cooperating" with the SEC's "enforcement investigation (which Stanford has reportedly tried to characterize as only involving routine examinations)," the SEC says the company "appears to have used press reports speculating about the commission's investigation as way to further mislead investors, falsely telling at least one customer during the week of February 9, 2009, that his multi-million dollar CD could not be redeemed because ‘the SEC had frozen the account for two months,'" the SEC says.

When the end was near, Stanford International Bank tried to liquidate $178 mn out of its bank accounts. It's unclear whether law enforcement got to it in time to stop it.

And it's still unclear whether the $8 bn can be found. Stanford's assets as well as those of his companies have since been frozen and placed into receivership by a U.S. federal judge

Regulators' Faulty Radar Screen

Stanford's network of companies had drawn the attention of regulators for years.

Complaints about Stanford's financial practices began crossing the desks of U.S. regulators as early as 2001, a review of records of the Financial Industry Regulatory Authority shows, says the Financial Times. Finra didn't take action until April 2007, when it issued the first of four fines totaling $70,000, the paper says.

The Wall Street Journal reports that "two years earlier, in October 2006, the SEC's Fort Worth, Texas, office had opened a formal investigation into Stanford's sale of certificates of deposit, which eventually led to the civil charges on Tuesday against Stanford and associates by the SEC.

The Journal adds that "the 2006 probe followed a lawsuit, filed earlier that year in Florida state court, in which a former Stanford executive accused the company of operating a Ponzi scheme. That suit was settled."

Another earlier probe into Stanford International Bank and its units came in 1997 as part of a Drug Enforcement Administration probe into the laundering of narcotics proceeds by a Mexican drug cartel, the Journal reports, based on DEA records.

The Stanford bank cooperated with the DEA and handed over millions of dollars, the paper says, based on court records. The bank wasn't charged, the Journal adds.

In 2005, two Venezuelans alleged in US District Court in Florida that Stanford International Bank "knowingly aided and abetted ... a classic Ponzi scheme" targeting current and former residents of Venezuela, the Journal says. The case was settled out of court by the bank.

In 2006, former Stanford employee Lawrence J. DeMaria filed suit against Stanford in Florida state court, the Journal says. He alleged that the firm "was operating a 'Ponzi' or pyramid scheme, taking new money to its offshore bank, laundering the money and using the money to finance its growing brokerage business, which did not have any profits of its own," the paper says.

The suit was settled, said Mr. DeMaria's lawyer, who declined to comment further, the Journal says.

A Berlin Wall?

It's clear now, given how the Securities and Exchange Commission ignored the Bernie Madoff whistleblower, market regulators mounted the cavalry and rode off in the wrong direction.

But could the SEC have caught both Stanford and Madoff?

Both the SEC and FINRA have market oversight responsibilities here. However, Stanford eluded detection via his private offshore bank, domiciled in Antigua. His investment advisory arm never registered with the SEC. Madoff's investment advisory firm only registered with the SEC in September 2006. Neither were hedge funds, which are not regulated.

But does the SEC, the stock market's first responder, have any rules that force it to give the FBI the tips it sees to prosecute criminal white collar fraud cases, such as the alleged Bernie Madoff $50 bn Ponzi scam?

Answer: No, say law enforcement officials. Unofficially, they do share info. But the real problem is a potential Berlin Wall between the two agencies.

Top officials aver there is no problem similar to the pre-9/11 absurdity, whereby US intelligence agencies did not share tips with each other about terrorism and other potential crimes.

Lower level enforcement officials, however, say the SEC should be sending more tips, like the Madoff scam, the FBI's way.

"The SEC does a good job, but I'd always like to see more information, of course," says the FBI's head of its criminal division, David Cardona, in an interview, adding the bureau "would like to see more sharing of information between the SEC and the FBI."

Although Madoff did not run a hedge fund, Cardona sees a bigger problem in that "no regulatory agency really oversees the hedge fund industry," which numbers around 8,000 hedge funds with $1.87 tn in assets under management. The hedge fund industry has gone so far as to sue the SEC to stop its oversight.