ohomen171's Journey Through Life

Stanford’s sugar-crusted show
By FT Reporters
Published: March 3 2009 19:41 | Last updated: March 3 2009 19:41

Accused by the SEC of overseeing a $1.6bn fraud: Sir Allen Stanford
Prospective investors in Stanford Financial Group could expect to receive a regal wooing. For their appointment at the Houston headquarters, they were whisked to upper floors where the decor of mahogany and dark green was set off by tapestries and oriental carpets. After a film about the history of the company, they would be shown to lunch in the intimate Eagle Room of 10 or so tables.

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SEC alerted about Stanford in 2003 - Feb-27

One potential client who ate there twice described the food prepared by chef Allan Levine and his team as “one of the best in Houston” – a city whose dining is frequently named as among America’s finest. “He made the best crème brûlée I’ve ever had” is the investor’s wistful memory.

Unfortunately for those who bought into the empire of Sir Allen Stanford, large parts of its success story are now suspected of being as confected as its trademark desserts.

Just months after unveiling the alleged fraud of up to $50bn (£35bn, €40bn) perpetrated by Bernard Madoff, the US Securities and Exchange Commission has brought a civil claim accusing Sir Allen of misappropriating at least $1.6bn in a decade-long pyramid scheme. If the allegations are true, the world has again been hit by a scam that suggests the architecture of international investment is in urgent need of overhaul.

Below: Regulators’ role ... ‘Whatever the reason, someone has to explain the delay’

Whether or not Sir Allen is found eventually to have done anything wrong, his case has raised many of the same kind of troubling questions that surround the Madoff affair. Law enforcement authorities and watchdogs – particularly the SEC and the Financial Industry Regulatory Authority (Finra), the US securities sector’s self-policing regulator – face scrutiny as to whether they should have picked up a series of signs that might have led to further investigation.

Three areas in particular are becoming the focus of attention on whether regulators were doing their jobs. One was Sir Allen’s investment portfolio, a second concerned allegations made previously against his companies, and the third was the way his pan-American conglomerate was run in good part by a small coterie of acquaintances.

Anatomy of an empire: See the geographical spread of the Stanford business network in an interactive map

Sir Allen’s tale seems a familiar one of a tycoon who was charismatic but had untransparent and sometimes peculiar business relationships, most notably his commercial dominion over the tiny Caribbean island of Antigua. Whatever the eventual verdict on his conduct, the suspicions now highlighted by the SEC suggest he was an emblem for our times. Too many people may have been dazzled by the glitz around him, neglecting to ask pertinent questions.

At root, suggests one former broker for the company, the Stanford group – like many other businesses that have stumbled or failed of late through mismanagement or something more sinister – “was all about image”.

That image now lies in shreds. Key companies in the group – which claims to have more than $50bn “under advisement” and is spread over the southern US, the Caribbean and Latin America – have been under the control of a receiver since the SEC made its first allegations last month.

Late last week, the regulator accused Sir Allen and James Davis, group financial officer, of overseeing a fraud involving Stanford International Bank, Stanford Group Company and Stanford Capital Management. Laura Pendergest-Holt, chief investment officer, appeared in a Houston court on a separate criminal charge of obstructing justice. The watchdog alleges that Sir Allen and Mr Davis misappropriated vast sums by making “bogus personal loans” to Sir Allen and ploughing an undetermined amount into “speculative, unprofitable private businesses” controlled by the tycoon (no criminal charges have been brought against either man).

ASSET SHUFFLE:

Obscure deal at ForeFront

One example of complex investments in sometimes recherché companies that Stanford Financial was making involves ForeFront Holdings, a golfing equipment business.

ForeFront was majority owned by Stanford International Bank and was lent millions of dollars by Stanford Venture Capital Holdings. Last year, under a deal structured by SIB, it was to sell its golf assets to Stanford Venture Capital.

The rump of ForeFront would then enter into a reverse merger with Qingdao Hisense, a Chinese electronics company, and Ligent International, a US fibre optics specialist. According to documents seen by the FT, the business was to be based in the British Virgin Islands, a tax haven across the water from Sir Allen’s Caribbean island base of St Croix, with the intention of selling cable and broadband set-top boxes. The plan collapsed in August after Chinese authorities refused to sanction it.

The SEC’s claims reflect in part what a careful study of Stanford group interests might have revealed some time ago: that his empire involved many curious investments in offbeat companies and obscure places. The most striking example was his relationship with the state of Antigua and Barbuda, whose annual gross domestic product of about $1.6bn is equivalent to only a few per cent of the assets the tycoon’s network claimed. His ambitions there were founded on his strong relationship with the dynastic Bird family, who controlled local politics on the island of fewer than 100,000 people for more than three decades. Antigua’s government knighted him in 2006.

Sir Allen’s starburst of local businesses had come to range from the Antigua Sun newspaper to leisure interests centred on the game of cricket. He owned a restaurant called The Sticky Wicket – a term for a damp cricket pitch that visits the kind of torment on batsmen now being delivered to him by the US authorities. Most importantly, the island was the home of SIB, his flagship investment vehicle, with claimed assets of well over $8bn.

St John’s, the Antiguan capital, still shows few public indications of trouble in Sir Allen’s island paradise. Groundsmen tend to the lavish tropical landscaping that forms the backdrop to SIB’s building. The Stanford Cricket Grounds are being kept freshly watered and, over at the luxurious Antigua Athletic Club, employees say it is business as usual.

“We are running as normal and we have not been advised otherwise,” says one senior employee, whose crisp white T-shirt bears the golden Stanford eagle pin worn by staff across the network. Long service would be rewarded with the addition of a tiny diamond to the employee’s pin. “If you lost it, you’d have to pay $41 for another,” one worker recalls. “More if you’d been given a diamond.”

At least as distinctive as Sir Allen’s staff insignia was his choice of auditor. CAS Hewlett – an Antigua firm whose international network consisted mainly of a one-room office in a converted terraced house in Enfield, a north London suburb – is said by critics to be one of many portents that should have prompted further enquiries about the tycoon’s interests.

At CAS Hewlett’s offices in St John’s, Eugene Parry, the manager, says he cannot comment on how many qualified accountants the firm employed locally or in the UK. It is far from clear whether CAS Hewlett – whose founder, Charlesworth Hewlett, was reported dead in January – had any clients other than Sir Allen’s SIB and his onshore and retail-focused Bank of Antigua.

Stanford International Bank was one of two main businesses – the other was Houston-based Stanford Venture Capital Holdings – that oversaw many of the conglomerate’s investments. They operated through a web of derivative transactions and holding companies. The businesses they were involved with as investors and creditors were sometimes tiny, yet the dealings could criss-cross the globe with a complexity more normally associated with a takeover deal between large multinationals.


The offices of the Stanford Trust Company in St John’s, capital of the Caribbean state of Antigua and Barbuda
Paul Ross, chief executive of Par III, a finance business based in Tulsa, Oklahoma, which last year launched a lawsuit against Stanford Financial Group, is one of many who says he has found it tough to unravel the company’s structures. “We don’t know exactly who has what and who owns what,” he says. Mr Ross’s concerns about the Stanford businesses were among many raised during the years before US regulators acted. At least a dozen employees and clients went either to the US law courts or to Finra to make allegations against various parts of the conglomerate.

Stanford Financial is hardly alone in the business world in facing accusations brought by former employees or clients with a grievance, but taken together the claims of fraud, mis-statements and misrepresentation – over investments ranging from technology shares to Dominican Republic finance bonds – look in hindsight as if they should have given rise to further investigation.

Perhaps the most striking accusation was the one made by Leyla Basagoitia in a 2003 employment dispute before the arbitration panel of the National Association of Securities Dealers, Finra’s forerunner. In a nine-point critique, the Houston-based financial adviser made many claims that mirror concerns cited by the SEC in its charges last month against Sir Allen’s businesses. Those include the lack of a credible auditor, mis-selling of products and the promise of consistently high investment returns that did not “correspond to the reality of the markets”.

She even accused one of the key investment companies of being involved in an illegal Ponzi scheme to defraud its clients – the substance of the amended allegations unveiled by the agency last week. Her lawyer, Michael Falick, says she approached the watchdog with her allegations at about the same time as she took up the tribunal case.

Ms Basagoitia’s allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay $107,782 in reimbursement of a loan advanced to her while employed by the company.



The SEC has declined to comment on whether it received previous complaints against Stanford Financial Group. The agency said last week it had started looking at the empire as early as the spring of 2005, some 18 months prior to when some officials had originally suggested. Finra has also declined to comment.

Then, behind the convoluted business dealings, there are the questions about the character of the man himself and his associates. R. Allen Stanford’s empire appears to have had a tightly-knit quality that at times verged on the cultish. His flourishing ego may hardly have been unique among top business executives but he seems to have stamped it on the world around him with less subtlety than most. A former broker in Houston says staff “treated Allen like the Queen of England”.

Two of his children – the subject of a paternity suit in the Florida courts that details his vast personal wealth, including a Florida castle and a $100m aircraft fleet – are even called R. Allen Stanford and R. Allena Stanford.

Chief among Sir Allen’s top lieutenants – who, like him, could not be reached for comment – was a group known internally as the “Baldwyn set” after their home town of Baldwyn, Mississippi (population 3,321, according to the latest US census). Some of these executives, led by Mr Davis and Ms Pendergest-Holt, oversaw a big part of the company’s operations from Tupelo, just down the road, where Elvis Presley was born.

Indeed, some who worked at Stanford speak of it as a family, which they feared might lose its treasured intimacy as it expanded to serve clients in 136 countries on six continents.

Along with family values, Christianity hung heavily in the air in the southern US network of the Stanford operations, former employees say. The SEC says Sir Allen and Mr Davis were classmates at Baylor University, a private Baptist higher education institution in Waco, Texas, while Mr Davis and Ms Pendergest-Holt allegedly met through their church in Baldwyn. Another former employee sums the way the group was run: “Everything was a little bit mysterious.”

Now that the Stanford empire has proved as brittle as the topping of its noted brûlée, the focus is on whether the many hints and half-formed suspicions should have been investigated earlier. The former employee who spoke of the mystery around what went on amid the mahogany trappings of the Houston office is convinced there were a series of “yellow lights” that should have prompted investigation before last month’s implosion. As she puts it: “If it’s sprinkling outside, you would think it was going to rain.’’



REGULATORS’ ROLE: ‘WHATEVER THE REASON, SOMEONE HAS TO EXPLAIN THE DELAY’

Investigators had Sir Allen Stanford’s web of companies on their radar for nearly four years but it was only last month that his alleged Ponzi scheme was shut by the US Securities and Exchange Commission.

The case, which comes on the heels of the Ponzi scheme allegedly perpetrated by Bernard Madoff, has sparked fresh concerns about the abilities and aggressiveness of enforcement officials. It has cast a harsh light on both the Securities and Exchange Commission and the Financial Industry Regulatory Authority, the industry organisation that oversees US broker-dealers.

The SEC says it began its investigation in spring 2005. But officials add that it stood down at the request of another federal agency in the spring of 2008 – and urgently resumed the inquiry last December in the wake of the alleged Madoff fraud.

“Whatever the reason for this delay ... someone has to explain what happened,” says John Coffee, law professor at Columbia University.

Some worry whether enforcement officials have the right mix of skills. Harry Markopolos, a former money manager who had tried for nine years to expose Mr Madoff, partly blames SEC staff incompetence, saying most officials “did not understand the 29 red flags I handed them”.

The Stanford empire consists of at least 175 entities with operations in more than 100 locations across the southern US, Canada, Europe, Latin America and the Caribbean, according to the receiver liquidating the businesses. These include a securities brokerage and operations offering investment advice and financial planning. “Finra has only limited jurisdiction and could not examine the bank in Antigua or the investment adviser side of Stanford,” says Prof Coffee. Yet Finra did slap fines totalling $70,000 (£49,800, €55,700) on the broker-dealer from April 2007, including one involving the promotion of certificates of deposit by a “bank affiliate”.

Others see a different problem. “There is a lot of movement back and forth between the regulatory agencies and the industry,” says James Cox, law professor at Duke University. “At the least there is a perception of conflict of interest ... with a shared culture and background and level of understanding that is inconsistent with zealous enforcement.” Prof Cox describes the relationships between the regulatory world and the regulated industry, particularly broker-dealers, as having become “incestuous” over the years.

At least five serving Stanford employees simultaneously held unpaid positions on Finra committees over the past decade, of whom at least two served in Texas, the US hub of Sir Allen’s empire. Finra says the number of Stanford connections was “absolutely unexceptional” for a company of its size and there were no conflicts of interest.

Copyright The Financial Times Limited 2009

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