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By Alison Fitzgerald and Saijel Kishan
Feb. 19 (Bloomberg) -- Stanford International Bank Ltd., accused by U.S. regulators of defrauding investors, relied on more than high interest payments to sell $8 billion of what it called certificates of deposit.
The Antigua bank, founded by Stanford Group Co. Chairman R. Allen Stanford, attracted clients with assurances that its CDs were as safe as U.S. government-insured accounts, if not safer, investors said.
“Security was the key aspect,” said Pedro, a 62-year-old software engineer in Mexico City who invested $150,000 in CDs issued by Stanford International.
“They told me that they had insurance. The broker told me not to worry and that the bank was safe,” said Pedro, who asked that his last name not be used because he didn’t want to anger bank officials.
Most U.S. certificates of deposit are insured for as much as $250,000 by the Federal Deposit Insurance Corp. CDs issued by Stanford International, a foreign company, aren’t FDIC-protected.
A Stanford International training manual obtained by Bloomberg instructed financial advisers to tell clients that “the FDIC provides relatively weak protection.”
While its marketing materials played up coverage, the bank didn’t explicitly guarantee investors’ funds.
An “extensive insurance program has been in place for years and requires that a regular review of the bank’s risk management practices be conducted to determine that adequate safeguards are in place,” Stanford International said in a December newsletter signed by President Juan Rodriguez Tolentino.
‘Excess FDIC’
The bank “maintains insurance coverage through Lloyd’s and other underwriters: Bankers Blanket Bond; Directors and Officers Liability; Professional Liability (errors and omissions); and Excess FDIC,” the newsletter to clients said.
“Although we are aware that Stanford International Bank has insurance arrangements with the Lloyd’s market, any coverage is unlikely to extend to investment loss,” Sean McGovern, Lloyd’s general counsel said in an e-mailed statement. “We are currently researching what effect fraudulent activity will have on any coverage.”
The U.S. Securities and Exchange Commission on Feb. 17 said that Stanford, 58, ran a “massive, ongoing fraud” through his group of companies and lured investors with “improbable if not impossible” claims about investment returns. Stanford Group, Stanford International and Stanford Capital Management LLC were named in the SEC complaint.
The Federal Bureau of Investigation is investigating regulators’ allegations, a person familiar with the case said.
Whereabouts Unknown
Stanford’s whereabouts are unknown, the SEC said. He probably isn’t in Antigua, Prime Minister Winston Baldwin Spencer said.
U.S. District Judge Reed O’Connor signed a temporary restraining order on Feb. 17 freezing the Stanford companies’ assets and property, and regulators appointed a receiver to account for investor money.
A spokesman for Stanford, Brian Bertsch, earlier this week referred media inquiries to the SEC. He couldn’t be reached for comment yesterday.
Stanford told clients their funds would be placed mainly in easily sellable financial instruments, monitored by more than 20 analysts and audited by regulators on the Caribbean nation of Antigua, the SEC said.
Investments
Instead, the “vast majority” of the portfolio was managed by Allen Stanford and the Antigua subsidiary’s chief financial officer, James Davis, according to the regulator. Davis was named in the SEC complaint. A “substantial” part of the portfolio was invested in private equity and real estate, it said.
Stanford International’s one-year, $100,000 CD paid a 4.5 percent annual yield as of Nov. 28, according a posting the Web site last week. A one-year, $10,000 CD purchased at JPMorgan Chase & Co. would earn 1.75 percent, according to its consumer banking Web site.
Calling the product a CD created a false sense of security, said Bob Parrish, a financial planner and accountant in Longboat Key, Florida.
“It was a familiar term being used to describe an instrument that really would not fall within the meaning of a CD,” Parrish said in a telephone interview. He advised six clients to take their money out of Standard International, he said.
Training Manual
Stanford financial advisers were to tell clients that their CDs would be safer than certificates issued by a U.S. commercial bank, according to the training manual, issued in 2003.
“Financial institutions that do not make commercial loans are more secure than commercial banks because they do not face the risks connected with such loans,” the manual said. Stanford International didn’t make commercial loans.
Coverage included a depositary insolvency policy protecting bank funds held in correspondent financial institutions, a “Bankers Blanket Bond with Lloyds of London” and directors and officers insurance, according to the manual.
“SIB is probably the only offshore bank in the world with this type of coverage,” the manual stated.
Allen Stanford worked to create the image of a company with decades of history. In an internal publication called “The Lodis Report,” provided to Bloomberg by a former marketing executive, Stanford Group described how it hired an outside firm to “create a new image campaign” that would “return to the very beginnings of our family of companies.”
Caribbean Background
Promotional materials then began invoking the image of Allen Stanford’s grandfather, Lodis B. Stanford, the founder of a small insurance company during the Great Depression, and saying the younger Stanford’s group of companies rose out of those beginnings. U.S. court records show that Stanford International, which Allen Stanford founded first, was formed in 1985 on the Caribbean island of Montserrat and moved to Antigua in 1990.
A black and red, hardbound book provided to investors shows a photo of Lodis Stanford on the cover with the quote, “Build a business step-by-step, on a firm foundation of hard work, clear vision and valuable service.”
The quote appears on Stanford Group’s Web site as well.
Allen Stanford set up a network throughout the U.S. south, hiring brokers from large investment firms including UBS AG and Merrill Lynch & Co. to court wealthy investors such as doctors and retirees who were not always experienced with financial products, according to two former financial advisers and clients. Stanford then set up an incentive structure to steer money into the Antigua bank.
U.S. Trust Hires
In July 2007, the company hired a team of eight executives from U.S. Trust Co. to work out of Greensboro, North Carolina, where the firm’s private-client group planned to target wealthy investors, according to statement at the time. The team was made up of John Rich, Glenda Burkett, M. Jo Brooks, Ken Dimock, Anthony Monforton, Virginia Saslow, William “Wes” Watson and Suzanne Wilcox.
Peter Comer, an Austin, Texas, software salesman, said he moved his money to Stanford when his Merrill Lynch brokers started working there, and invested in the offshore CDs.
“Sometimes it didn’t feel right, but I got assurances from my brokers,” he said. “These guys who worked for Merrill and moved over to Stanford, they had reputations.”
Stanford created a mutual-fund wrap program as a way to attract high-net worth customers and funnel additional money to the Antigua bank, according to Jerry Walters, a former Houston investment analyst who said he helped create the product.
Broker Bonuses
Called the Stanford Allocation Strategy, it was conceived by Chief Investment Officer Laura Pendergest-Holt in 2006, Walters said. Pendergest-Holt was named in the SEC complaint.
“She wanted a product that was really hitting high-net- worth people,” he said.
Walters said the company would put half an investor’s money into a variety of mutual funds and the other half into the CDs. The company offered broker bonuses, and sales of the CDs exploded after the mutual-fund wrap product was introduced, nearly doubling from $200 million in November 2005 to $372 million three months later.
“The only way they were going to make any money is if they used this product,” Walters said.
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