The Anatomy of an Alleged Fraud

The SEC hasn’t yet charged Allen Stanford with a crime, but it would seem the regulator is getting much closer, especially after the mountain of damning findings that the court appointed receiver, Ralph Janvey, filed in a Dallas court Friday.

The court filing includes revealing details about how the Stanford companies operated. For starters, the company had locations in 100 different places around the world and more than 200 different accounting systems, most of which didn’t report centrally. “In contrast to a conventional multi-tiered corporate structure, the stock of almost half of these entities was owned directly by Allen Stanford,” reads the report. And “rather than through a central holding company … the structure was seemingly designed to obfuscate holdings and transfers of cash and assets.”

Interestingly, Janvey, an attorney, says the firm relied almost entirely on the sale of its now notorious off-shore CDs through its U.S.-based financial advisors to fund the rest of its operations. Registered Rep.’sApril cover story chronicled the turmoil of some highly successful Stanford FAs that had recently joined Stanford seeking refuge from their own troubled, national firms embarrassed by the subprime fiasco. The irony: The FAs joined a firm that was shuttered because of fraud allegations. The FAs in our story hadn’t sold any (or many) CDs, because they were suspicious or not impressed with Stanford’s proprietary CDs.

Janvey’s report alleges the CDs not only kept the U.S. broker dealer (The Stanford Group Company) in business—providing $95 million of 2008’s $256 million in total revenue—but the entire firm as well. Janvey is suing 66 former Stanford financial advisors for $40 million for the commissions they received on the sale of the CDs.

From the report:

“To the outside world, before commencement of the Receivership, these financial

businesses appeared to be independently viable … however, based on [the Receiver’s] investigation to date, that the principal purpose and focus of most of the combined operations was to attract and funnel outside investor funds into the Stanford companies through the sale of CDs issued by Stanford’s offshore entity SIBL [Stanford International Bank]. Stanford’s financial statements show that the low, third-party revenue and high-cost structures of the U.S. broker dealer and related financial operations were not capable of sustaining freestanding operations without the revenue they received upon their sale of SIBL CDs, as well as the infusion of investment capital, all or most substantially all of which was derived from CD sales. Once CD funds entered the Stanford companies, they were disbursed toAllen Stanford or to other Stanford-owned entities or used to purchase private equity and other investments, to pay CD redemptions and interest or to pay other expenses and obligations.”

So while the financial businesses were keeping the firm alive, Stanford was free to dabble in his non-financial pursuits, which apparently focused heavily on real estate. According to Janvey’s report, a forensic accounting firm assisting the receiver found real-estate purchases by the firm between April and December 2008 in Antigua worth $63.5 million. The accountants noticed that, however, by 2008 year end, within months of purchasing the property, Stanford’s books showed the value being written up to $3.2 billion—a fifty fold increase in value at a time when real estate values were plummeting.
Interesting stuff. To read the Receiver’s whole 58-page report, click here.