Prosecutors point to 20 years of deception
By Stacy-Marie Ishmael in London
Published: August 28 2009 03:00 | Last updated: August 28 2009 03:00
James Davis and Sir Allen Stanford first hatched a plot to mislead investors and regulators more than 20 years ago, according to court documents filed by the US Department of Justice.
A haggard-looking Mr Davis, former chief financial officer of the Stanford Financial group, had earlier pleaded guilty to fraud and obstruction charges related to an alleged $7bn Ponzi scheme conducted through Stanford International Bank (SIB).
But federal prosecutors claimed in court filings that a pattern of fraud at the group could be traced back to "at least 1988" and the Montserrat-based Guardian International Bank, which later became SIB.
As then-controller of Guardian International, Mr Davis - at Sir Allen's behest - made false entries into the bank's books "for the purpose of reporting false revenues and false investment balances to the banking regulators", prosecutors claimed.
Sir Allen closed Guardian International in 1989, in part due to his concern over "heightened scrutiny" of the bank, according to the filings.
When he reopened shop, in the form of SIB, in lightly regulated Antigua the following year, he and Mr Davis continued making "false entries . . . related to revenues and revenue balances", the documents alleged.
Also, according to federal prosecutors, Mr Davis admitted to defrauding SIB's investors and misappropriating their assets.
The Antigua-based SIB was the crown jewel of the group's financial empire; it offered wealthy investors consistently market-beating returns on dollar-denominated deposit accounts in an offshore tax haven, and by the end of 2008, claimed more than $8bn in assets.
The alleged misappropriation of these assets included diverting more than $1.6bn in undisclosed loans to someone federal prosecutors described only as a "co-conspirator"; according to the civil complaint filed by the US Securities and Exchange Commission, the beneficiary was Sir Allen himself.
Sir Allen, the group's sole shareholder and chief executive, was indicted in June on 21 criminal counts. He has denied all the allegations against him.
The purported scheme involved "reverse-engineering" what prosecutors described as "bogus" annual revenue numbers in order to generate the desired return on investment figures.
Mr Davis further confessed to "misrepresenting to investors [SIB's] financial condition, its investment strategy and the extent of its regulatory oversight by Antiguan authorities", according to the filings.
In marketing documents, SIB trumpeted that it invested only in safe, liquid assets such as stocks and bonds, and that these investments were overseen by a skilled cadre of global asset managers.
In contrast, by Mr Davis's admission, 80 per cent of the bank's portfolio consisted of illiquid investments, including overvalued real estate, the documents showed. US regulators made similar allegations earlier this year.
The justice department further claimed that from 2005 through this February - when US Marshalls swooped on the group's Houston headquarters - Mr Davis and his co-conspirators "made a number of misrepresentations to the SEC in order to impair and impede the SEC's investigation".
SIB also attempted to sway Antiguan regulators. In June, federal prosecutors accused Leroy King, the former head of the Antiguan Financial Services Regulatory Commission (FSRC), of accepting more than $100,000 in bribes.
Mr Davis also admitted to funnelling payments to the regulator to ensure the FSRC would not "properly examine" the bank's financial statements, the documents said.
The lack of regulatory oversight at the bank was further compounded by the absence of stringent auditing.
In its civil complaint, the SEC claimed the bank's books were audited by CAS Hewlett, a tiny local firm located in the Antiguan capital of St John's. The firm's founder and only known accountant, Charles Hewlett, died in January.
A report prepared by a forensic accountant at the request of the Stanford group's court-appointed receiver, Ralph Janvey, cast doubt on the reliability of the firm's audits.
The forensic report claimed SIB paid the auditors $222,000 in 2007 and $274,000 in 2008 for "professional services". The funds were taken from a company account held at Trustmark Bank in Houston.
But the firm also received payments of up to £20,000 ($32,542) monthly, "over and above" the payments for its auditing services, from a separate Swiss bank account. "It appears that CAS Hewlett's independence as an auditor of SIB was compromised," the report, which was included in court filings, said.
CAS Hewlett did not respond to requests for comment.
Frozen funds trigger counsel crisis
While Sir Allen has pleaded not guilty to all the allegations against him, his attempts to mount a defence have been complicated by difficulties retaining legal counsel.
The businessman's assets, estimated at more than $2bn, have been frozen since February and he has not been able to pay his legal team.
Dick DeGuerin, who had led Sir Allen's criminal defence, asked to withdraw, partly because he was "unwilling to go forward without the assurance of being paid for work in the future," according to court documents.
Judge David Hittner, who is presiding over this case, said he would only consider Mr DeGuerin's request if his replacements as Sir Allen's counsel filed a "simultaneous unconditional" motion for substitution of counsel. In other words, the substitute attorney would have to agree to take on the mantle without demanding payment.
But the attorney mooted as a replacement - Robert Luskin of Washington firm Patton Boggs - has so far declined. Mr Luskin is willing to represent Sir Allen only if he can guarantee to pay his legal fees.
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