Wall Street Crime and Punishment: Allen Stanford's Caribbean Ponzi Scheme Nightmare

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

On Feb. 20, 2008, President George W. Bush sent a congratulatory letter on White House stationery to Allen Stanford, the Houston financier whose Stanford Financial Group had recently expanded its operations in the U.S. Virgin Islands.

“I send greetings to the gathered in St. Croix, Virgin Islands to celebrate the expansion of Stanford Financial Group,” Bush wrote on White House stationery. “To protect their future well-being and that of their families, it is important for individuals to give careful thought to strengthening their financial security.”

Within a year of the letter being sent, Bush was out of the White House and Stanford was receiving a very different type of federal correspondence: he was charged by the U.S. Securities and Exchange Commission (SEC) with orchestrating a $7 billion investment fraud, the second-largest Ponzi scheme in history surpassed only by Bernie Madoff’s shenanigans.

Deep in the Heart of Texas: Robert Allen Stanford was born in Mexia, Texas, on March 24, 1950. His father, James Stanford, owned an insurance brokerage and was active in local politics, serving as a city council member for 15 years and two terms as Mexia’s mayor. His mother, Sammie, was a nurse. Stanford’s parents divorced in 1959 and Stanford and his brother were raised by their mother, although he maintained a close relationship with his father and would later collaborate with him on business ventures.

Stanford graduated from Baylor University in Waco, Texas, in 1974 with a bachelor's degree in finance. He initially worked with his father in the insurance field, but was eager to find his own niche in a market that was somewhat flashier.

Standing 6-foot-4 with an athletic physique framed by college weightlifting, Stanford initially sought to harness the growing public interest in bodybuilding in the late 1970s by opening a gym in Waco, but that venture failed after a few years. He had more luck speculating in Houston’s real estate market, teaming with his father to acquire depressed properties when the local oil economy weakened in the early 1980s and later selling them at significantly higher prices to overseas investors when the market did an aggressive turnaround.

In the mid-1980s, Stanford relocated to Montserrat, an island in the British West Indies, with the goal of getting a toehold in the lucrative offshore banking sector. During the late 1960s and the 1970s, the U.K. government encouraged many of its territories to develop independent financial services industries — the initial goal was to make them less dependent on London for their fiscal needs.

But this policy had an unintended effect: these territories became havens for the world’s wealthiest people to safely squirrel their money away in tax havens. As a result, tiny locations including Guernsey and Jersey in the Channel Islands, the Isle of Man, and the Caribbean outposts of Anguilla, the British Virgin Islands, the Cayman Islands and Montserrat gained popularity as offshore banking hotspots.

Stanford set up Guardian International Bank on Montserrat in 1985, attracting many of the overseas investors he worked with during his Houston real estate days. But Stanford soon found himself in the wrong place at the wrong time. The U.K. government began to crack down on shady offshore banking activities in its overseas territories during the latter part of the 1980s, and Stanford became severely uncomfortable at having to answer to this new regulatory regimen.

Rather than head back to Texas, Stanford set his sights on Antigua and Barbuda, a tiny Caribbean nation that gained its independence from the U.K. in 1981. Without having to answer to London’s regulators, Stanford was welcomed by the small country’s government and quickly found himself with the opportunity to build his empire.

Caribbean King: When Stanford arrived in 1990, Antigua and Barbuda was not on anyone’s radar for massive investment and its economy was heavily dependent on tourism. And with a population of less than 100,000, large-scale opportunities were not feasible. But Stanford believed this unlikely location could become a choice destination for offshore banking.

Guardian International Bank, which changed its name to Stanford International Bank (SIB) in 1994, began focusing on attracting international investors to put money into its certificate of deposits, stating that it paid a premium greater than the interest rates on CDs issued by U.S. banks. While CDs might not seem like the sexiest of investments, it is important to remember that five-year CDs issued by U.S. banks at the start of the 1990s carried interest rates at around 8% and were over 5% by the end of the decade.

Stanford was not targeting the working-class retail customer looking to open a CD for a three- or four-digit sum, but rather the deep-pocketed global investors who were eager to obscure their money from their local tax collectors. Plus, the safety and stability that one associates with CDs made SIB a more attractive investment stop than a stock exchange to many investors.

The FBI would later recount how SIB communicated with its depositors on where their money was allegedly going.

“According to SIB’s annual reports and marketing brochures, the bank purportedly invested CD proceeds in highly conservative, marketable securities, which were also highly liquid, meaning the bank could sell its assets and repay depositors very quickly,” the FBI said in a press statement. “The bank also represented that all of its assets were globally diversified and overseen by money managers at top-tier financial institutions, with an additional level of oversight by SIB analysts based in Memphis, Tennessee.”

In fairness, Stanford wasn’t a total scoundrel — the FBI acknowledged that the “purported investment strategy and management of the bank’s assets was followed for only about 10-15% of the bank’s assets.”

So, where did the rest of the money go? For starters, Stanford was a sports fanatic and used his depositors’ funds to finance high-profile tournaments in the worlds of professional golf, polo, tennis, sailing and cricket. His cricket obsession was especially remarkable — he built a cricket stadium on Antigua and in 2008 financed a series that pitted the English national cricket team against a pan-Caribbean team dubbed the “Stanford Superstars” for a $20 million prize. The Caribbean players won that tournament.

The same year, he signed an agreement with the England and Wales Cricket Board for a multi-million-dollar series of matches carrying his company’s brand.

Stanford also took an interest in the media industry, creating newspapers on Antigua and Barbuda and in the neighboring Caribbean country of St. Kitts and Nevis. He also took a leadership role in land development in Antigua and Barbuda.

His focus on Antigua and Barbuda was so strong that he took out citizenship, and in 2006 the government granted him the honorific of Knight Commander of the Order of the Nation, thus enabling him to be called “Sir Allen,” which he used heavily in his business dealings. Stanford would later claim that he was knighted by Prince Edward, the youngest son of Queen Elizabeth II, but a Buckingham Palace spokesperson refuted that claim by insisting the royal was only a guest at the ceremony when Stanford received his honor.

The newly-minted “Sir Allen” enjoyed a modern aristocratic lifestyle that included a fleet of six private airplanes, a 112-foot yacht — he reportedly spent $12 million lengthening his yacht by six feet — and gambling excursions to Las Vegas. Stanford also helped finance a 2007 movie called “The Ultimate Gift” starring James Garner and Abigail Breslin.

SIB would expand into four South American countries and the U.S. Virgin Islands while maintaining a Houston-based broker-dealer and investment advisory called Stanford Group Company (SGC). If Stanford had maintained his operations without any U.S.-based divisions, he might have saved himself from a world of grief.

Related Link: The complete Wall Street Crime and Punishment series

Delayed Reaction: In a typical Ponzi scheme fashion, Stanford’s bank paid existing depositors who redeemed their CDs with the funds brought in by new depositors. This worked brilliantly during the years when the global economy was roaring and depositors were eager to do business with SIB. But when the 2008 financial crisis hit, CD sales plummeted and redemptions increased dramatically.

At first, Stanford could keep his charade in motion. His bank’s financial documents were riddled with lies concerning its capital base strength and Antiguan authorities fell for his dishonesty. But the bank could not keep up with the redemption requests and, ultimately, some 25,000 clients fell victim to his ruse.

If the Antiguan government regulators were too gullible, their U.S. counterparts were not — except that they didn’t do anything about it for too long. A 2010 report by the SEC’s Office of the Inspector General (OIG) included a damaging revelation that showed the federal government allowed Stanford to run amok for more than a decade before he was called to task.

“The OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to that conclusion a mere two years after Stanford Group Company (“SGC”), Stanford’s investment adviser, registered with the SEC in 1995,” the report said.

“We found that over the next 8 years, the SEC’s Fort Worth Examination group conducted four examinations of Stanford’s operations, finding in each examination that the CDs could not have been ‘legitimate,’ and that it was ‘highly unlikely’ that the returns Stanford claimed to generate could have been achieved with the purported conservative investment approach.”

The SEC’s OIG added that the agency’s examiners “dutifully conducted examinations of Stanford in 1997, 1998, 2002 and 2004, concluding in each case that Stanford’s CDs were likely a Ponzi scheme or a similar fraudulent scheme. The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion.”

However, the OIG grimly admitted, “no meaningful effort was made by Enforcement to investigate the potential fraud or to bring an action to attempt to stop it until late 2005.”

Even the U.S. Department of State was aware of Stanford’s problems. In 2006, Washington warned the U.S. Embassy in the Bahamas that Stanford’s companies were “rumored to engage in bribery, money laundering, and political manipulation,” and the ambassador and the embassy staff were urged not to interact with him.

The Financial Industry Regulatory Agency (FINRA) was also cognizant of what was taking place and fined Stanford’s companies more than $70,000 in 2007 and 2008 for misrepresenting facts about its CD disclosures.

Still, it wasn’t until Feb. 17, 2009, that federal enforcement dropped on Stanford with raids on his Memphis and Houston offices. The same day, the SEC announced it was filing charges against Stanford — although the agency was initially unable to locate him. Stanford was found two days later at his girlfriend’s home in Virginia, and it was later determined he unsuccessfully attempted to secure a charter flight to flee the country to Antigua and Barbuda, where he would not be subject to repatriation.

A Knight Without Honor: Stanford’s arrest devastated Antigua and Barbuda, which relied heavily on his financial presence. In 2010, the country took the unprecedented step of stripping him of his knighthood. One could argue the country never truly recovered from the financial and emotional devastation brought by Stanford’s dishonesty.

In 2012, a federal jury found him guilty of 13 out of 14 criminal charges related to his fraudulent operations. The judge in the case sentenced him to 20 years for conspiracy to commit wire and mail fraud, 20 years each on four counts of wire fraud, five years for conspiring to obstruct an SEC investigation and five years for obstruction of an SEC investigation with those sentences ordered to run consecutively.

He also received 20 years each for five counts of mail fraud and 20 years for conspiracy to commit money laundering, which were designed to be concurrent to the other sentences. Stanford wound up with a total sentence of 110 years.

And the judicial cherry on top was a restitution order for $5.9 billion. U.S. District Court Judge David Hittner passed judgment on Stanford by referring to his actions as “one of the most egregious frauds ever presented to a trial jury in federal court.”

Victims And Predator, Post-Script: While the Madoff case fixated the financial media for years after the financier was incarcerated, Stanford’s actions seemed to fade from sight immediately after his sentencing. While his victims would press on for compensation, the attention of the financial media and the general public shifted elsewhere and the Stanford scandal would occasionally be recalled in the media when efforts were made to force banks to give up deposits made by Stanford prior to his apprehension. Stanford also made numerous political contributions to both sides of the aisle, with former President Barack Obama receiving $4,600, which he donated to charity after Stanford's arrest.

This year, Stanford resurfaced in two separate developments. On Sept. 20, Ralph Janvey, the court-appointed receiver for SFG, announced he finally received $65 million from a June 2016 settlement with a group of insurers including Lloyd's of London following years of litigation.

Janvey stated he hoped to distribute money from the settlement in the first quarter of 2022. Prior to that announcement, he had received court approval to distribute roughly $550 million to Stanford’s clients and had already paid out $443 million. Unfortunately for most of Stanford’s clients, only about 10% of what he swindled over the years was ever recovered.

One month earlier, a New Orleans federal appellate court rejected Stanford’s attempt to vacate his sentence, dismissing his claims that he received an unfair trial.

“The court’s sentence of 110 years fell within the 230-year sentence authorized by the sentencing guidelines and is therefore presumed reasonable,” Circuit Judge Edith Brown Clement wrote in the appeals court’s unanimous ruling.

The 71-year-old Stanford can be found at the high-security Coleman II federal prison in Sumterville, Florida, and one can easily assume he will make a few more requests for release in the near future. After all, Stanford has plenty of time to try again — he isn’t scheduled to be released until March 13, 2103.

Photo: Courtroom sketch of Allen Stanford (second from left) during his 2011 trial. Illustration by Brigitte Woosley, courtesy of the Library of Congress.