DOJ/SEC Detail Stanford Fraud In New Charges: A Tale Of Lies, Theft And Bribes

Based on what sound more like a page out of Hollywood script than court actions, the Department of Justice and the SEC detailed fraud charges against financier Robert Allen Stanford and his confederates on Friday. The newly unsealed criminal charges and amended SEC complaint chronicle a years-long scam built on misleading investors, concocted financial statements, phony loans to cover the theft of investor funds, years of bribing an Antiguan official and efforts to thwart the SEC through the use of a foreign regulator even as the scheme began to unravel and ooze to the surface.

DOJ brought charges in two indictments and one criminal information. One indictment named as defendants: Robert Allen Stanford, chairman of Sanford Financial Group (“SFG”); Laura Pendergest-Holt, SFG’s chief investment officer; Gilberto Lopez, the chief accounting officer; Mark Kuhrt, global controller; and Leroy King, the former chief executive officer of the Antigua’s Financial Services Regulatory Commission (“FSRC”). The charges include one count of conspiracy to commit mail, wire and securities fraud; seven counts of wire fraud; ten counts of mail fraud; and one count of conspiracy to commit money laundering. Messrs. Stanford and King, along with Ms. Pendergest-Holt (who was previously indicted as discussed here) were also charged with conspiracy to obstruct an SEC proceeding.

In an information, James Davis, SFG’s CFO, was charged with conspiracy to commit mail, wire and securities fraud, mail fraud and conspiracy to obstruct an SEC investigation. A separate indictment charges Bruce Perraud, former SFG global security specialist with destruction of records relating to a federal investigation.

The SEC’s amended complaint adds as defendants Messrs. Kuhrt, Lopez and King. Mr. Stanford, James Davis, Laura Pendergest-Holt and various Stanford controlled entities had been named as defendants in the initial complaint (discussed here). SEC v. Stanford International Bank, Ltd., Civil Action No. 3:09-cv-0298 (N.D. Tex. Filed Feb. 17, 2009).

The fraudulent scheme had two major components, according to the court papers. In the first Defendants Stanford and Davis, operating a decade long Ponzi scheme under the guise of a bank based in Antigua, convinced investors to pore more than $7 billion into what were supposed to be bank certificates of deposit. Defendants claimed the certificates would pay investors an above average return on their investment. As bank certificates of deposit, the investment was touted as safe, conservative and monitored by banking regulators in Antigua.

A second component of the scheme involved a proprietary mutual fund wrap program. Shares in this program were sold from 2004 through 2009 based on a fraudulent track record of so-called “historical performance.” This scheme garnered over $1 billion from investors for defendants, according to the SEC’s complaint.

Central to the schemes was the bank and the profits claimed from its investment portfolio. The success of this portfolio was chronicled in regulatory filings, financial statements and the public pronouncements of various defendants. The claims however, were based not on successful investing, but reverse engineered fraud according to the court papers. As part of the scheme to make the portfolio appear profitable, a rate of return was selected for each period and then financial statements were crafted by calculating the necessary numbers back from the pre-selected result. This permitted the defendants to present the Stanford group as very successful, when in fact its financial statements were fabrications.

As the market deteriorated Mr. Stanford and his confederates realized they could not continue to report high rates of return. In late 2008, they understood that reporting a loss may require a contribution to regulatory capital. Accordingly, they announced that Mr. Stanford would make a capital contribution to the bank to ensure its soundness in the turbulent times.

In early 2009, as the markets continued to deteriorate, Mr. Stanford and others sought to reassure the markets and stem concern that the group did not experience losses related to Ponzi scheme king Bernard Madoff. Ms. Pendergest-Holt thus gave a speech assuring investors and the public that the Stanford group was financially sound. Investors were told that the group had not suffered Madoff related losses.

In fact, the Stanford bank is a Ponzi scheme, according to the SEC. Over a period of years Mr. Stanford has taken over $1 billion of investor funds for his own used, booked as loans which are not reported in the related party transaction section of filings. The 2008 capital contribution was sham. And, the group did in fact suffer Madoff-related losses through various investment funds.

As the SEC inquiry unfolded, the Commission contacted the Antiguan banking authorities. Mr. King, who had been taking bribes from Robert Stanford for years, coordinated the response to the SEC, assuring the agency that the Stanford bank was financially sound. Indeed, Mr. King had made sure over the years that the Antigua regulator has “looked the other way” as he collected bribes from Mr. Stanford, according to the court papers.

The SEC’s freeze order over all of the assets of the group remains in effect. Its web site contains links for investors to contact regarding their investments. The criminal cases and the SEC’s enforcement action are in litigation. See also DOJ Press Release, June 19, 2009; SEC Lit. Release 21092 (June 19, 2009).