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Tuesday, 31 January 2012

Ex-Stanford adviser: Moreno lost $20 million

Written by Leslie Turk
Monday, January 30, 2012


Lafayette businessman Mike Moreno got more than half of his money out of Stanford Group but still had $20 million invested in the company when regulators shut it down in February 2009, according to court testimony last week.

Allen Stanford, 61, is on trial in Houston, accused of masterminding a $7 billion Ponzi scheme centred on the sale of so-called CDs at the Stanford International Bank, based on Antigua. Court testimony in the fraud trial of Allen Stanford revealed Moreno’s substantial losses. Jason Green, a former Baton Rouge-based financial adviser, testified that Moreno tried to pull his money out before the company crashed, but his request was denied. Bloomberg reported
Friday on the on-going trial:

A former Stanford Group Co. executive told a jury that one client of R. Allen Stanford’s securities brokerage lost at least $20 million before the business was closed by U.S. regulators.

Jason Green, who led Stanford Group’s private-client group, offered the figure while being cross-examined by the defense on the fifth day of Stanford’s investor fraud trial in federal court in Houston.

Stanford’s lawyers have said that customers who bought the certificates of deposit issued by Antigua-based Stanford International Bank Ltd. and sold by the brokerage were able to withdraw every penny of their money until the Securities and Exchange Commission sued in February 2009.

Asked by defense attorney Ali Fazel if anybody had not gotten their money back before then, Green replied, “Yes, one person I know of specifically” was denied $20 million. Green later identified the client as Michael [stet] Moreno, who had residences in Lafayette, Louisiana, and in Houston.

As the Insider previously reported, Moreno was among 49 investors Stanford receiver Ralph Janvey listed in July 2009 court filings who either cashed out some of their holdings before Stanford was shut down or moved their money into non-Stanford accounts. Those 49 investors took out a total of $494 million, $47 million of that withdrawn out by Moreno. Green testified that Moreno needed the money to settle tax obligations, according to Bloomberg.

Moreno, [Green] said, entrusted Stanford’s business with almost $50 million before withdrawing some of those funds to address a tax obligation. The $20 million withdrawal request was made shortly before Stanford stopped allowing clients to redeem CDs before their maturity date to stanch the outflow of capital as the global financial crisis deepened.

Receiver Janvey tried unsuccessfully in 2009 to claw back Moreno and other investors’ proceeds. Read more on that here.

In their opening last week, prosecutors said Stanford treated the savings of thousands of investors as his “personal piggy bank” to buy two airlines, build a cricket team and stadium, funnel money to a Swiss bank account and otherwise live a life of luxury on the Caribbean island of Antigua, The New York Times reported.

Stanford faces 14 charges of defrauding nearly 30,000 investors from 113 countries.

Moreno said in mid-October that he has been living temporarily in Dallas, raising $300 million to start a new fracking company.

Stanford Used Threats, Charm to Influence Antiguan Regulator

By Laurel Brubaker Calkins and Andrew Harris - Jan 31, 2012

An Antiguan judge who is also the island’s top banking regulator told the jury at R. Allen Stanford’s investment fraud trial that he repeatedly tried to influence the agency that oversaw his banking operations there.

Marian Althea Crick said she complained to Antiguan officials shortly after Stanford relocated his bank to the island until the financier was removed as a director of the agency that predated the Financial Services Regulatory Commission, where she is now chairman. She said it was “a clear conflict” to have the owner of a regulated entity participating in the agency that oversees the business.

“It reminded me of a saying we have at home,” Crick, a government witness, testified yesterday in federal court in Houston in the second week of the trial. “It was a classic case of the rat being put in charge of the cheese.”

Stanford, 61, who was indicted in June 2009, is charged with 14 counts including mail fraud, wire fraud and obstruction of a probe by the U.S. Securities and Exchange Commission. He denies the charges.

Crick testified that Antigua’s prime minister told her Stanford wanted her fired after she had a series of public and private disagreements with the financier in the 1990s. She said Stanford even briefly took control of her agency while she was out of the country in 1998, until she got Antigua’s Attorney General to reverse the decision on legal grounds.

Month-Long Trip
In 1999, Stanford paid for office space and placed several of his employees on the official committee tasked with conducting a formal review of Antigua’s international banks, Crick said. In 2001, she said, Stanford urged government officials to send her and an auditor examining Stanford International Bank Ltd. on a month-long trip so that a different auditor could complete the bank’s audit.

Stanford tried charm when threats failed, Crick said. Once, Stanford unsuccessfully tried to upgrade her economy flight to first class for a British banking conference. After another disagreement, when she informed Stanford forcefully that she “was not a yes person” and wouldn’t rubber-stamp his requests, she said, “He held my hand, and looked me straight in the eye and said, ‘You remind me so much of myself.’”

When Crick resigned from the regulatory commission in 2002, she was replaced by Leroy King, whom Stanford is accused of bribing with millions of dollars and tickets to the National Football League’s Super Bowl championship games. When King was accused of complicity in hiding Stanford’s alleged fraud in 2009, the agency removed him and put Crick back in charge.

Crick was scheduled to resume her testimony today.

Stanford swayed regulators

By Terri Langford

An Antiguan banking official told jurors Monday that R. Allen Stanford used his influence to manipulate the island nation's regulators and insert himself into the regulatory process.

"This would be a classic case of the rat being put in charge of the cheese," said Marian Althea Crick, who is board chairman of Antigua's Financial Services Regulatory Commission.

Crick, 59, described a series of run-ins with Stanford and his financial empire, beginning in 1998 when she was hired to be executive director of the commission's predecessor agency - which once included Stanford as a board member.

Crick said she often raised concerns about his position.

"It's a conflict of interest, inappropriate," Crick testified.

Stanford - whose businesses and charities in Antigua gave him such prominence that the nation knighted him - eventually was removed from the commission but still influenced regulators, she said.

In 2001, when the Antiguan regulator announced it was scheduling a review of the bank, Stanford contacted the agency and said he didn't want a certain auditor included in the review.

Immediately, that auditor and Crick were sent on a hastily arranged fact-finding mission about financial operations in other Caribbean countries, Crick said.

By 2002, Crick anticipated she would be fired and resigned. Her successor, Leroy King, is one of four people charged in a separate indictment from the one against Stanford.

King, accused of taking bribes to keep regulatory heat off Stanford's operations, is fighting extradition from Antigua. The other three defendants in that indictment were Stanford Group executives.

Crick returned to the Antiguan regulatory agency in 2009 after the U.S. Securities and Exchange Commission sued to force Stanford's operations into receivership and freeze its assets.

Other testimony Monday, as Stanford's trial entered its second week, concerned billions of bank assets in a mysterious portfolio known as Tier III.

Mark Collinsworth, an executive in the Memphis, Tenn., office of Stanford's international financial network, described to jurors a three-tier structure for the bank's investments.

Prosecutors allege that Stanford customers were led to believe the CDs were invested conservatively, but that the money really went into Stanford's risky business ventures and jet-setting lifestyle.

Collinsworth said he understood that Tier III contained conservative investments such as bonds and blue chip stocks, but that he had no personal knowledge of the portfolio.

He said Tier III accounted for $5.5 billion of the bank's investments in 2008, compared with about $1.5 billion for Tiers I and II combined. Tier 1 contained cash and liquid assets, he said, and Tier II contained more aggressive investments.

Collinsworth said under questioning by Stanford lawyer Ali Fazel that Stanford himself had little involvement with the Memphis office, visiting only twice in the 10 years Collinsworth worked there.

Collinsworth testified that his Memphis-based supervisor, Stanford's chief investment officer, Laura Holt, did not discuss Tier III with subordinates.

According to testimony last week, Holt once said she managed Stanford's entire portfolio. But as investigators closed in on the operation, she told associates she had no knowledge of certain investments.

Holt is one of the three executives indicted separately from Stanford and set for trial later.

Stanford's former chief financial officer, James Davis, pleaded guilty to three felony counts and will testify for the prosecution.

Collinsworth said Holt and Davis hired friends and relatives with little financial background for key positions in the office.

They included a close Davis friend with no experience in the Middle East, hired as an analyst on that region, and a Russian analyst, hired by Holt, who had been born there but left as a child and wasn't familiar with Russia's most profitable companies.

“If bad things were happening, he never brought them to my attention,” Mr. Stanford said. “He did his job and I stayed out of his hair.”

Robert A. Scardino, a lawyer for Mr. Stanford, said in his introductory argument last week that Mr. Davis “is going to testify and admit that he is a liar and a crook, and yet these prosecutors are going to ask you to believe him.”

The defense followed that line of attack in the trial’s first week, reminding jurors during cross-examinations that Mr. Davis had often worked alone, that he had been the one in charge of finances and that he had made major executive hires.

Under questioning from the defense attorney Ali Fazel, Michelle Chambliess, a former Stanford marketing executive and government witness, acknowledged that Mr. Davis had been a powerful presence in day-to-day operations. The prosecution countered by putting on the stand Jason Green, a former Stanford Financial Group Louisiana branch manager, and asking if he ever had seen Mr. Stanford overrule Mr. Davis. “Very much so,” he said, smiling.

Mr. Green recalled how Mr. Davis had commissioned an expert to do an efficiency study when others thought she was not right for the job. Mr. Stanford berated Mr. Davis, Mr. Green said, mimicking Mr. Stanford’s jaunty Texas drawl: “He’s my best friend, but I still run the company.”

Gregg Costa, the assistant United States attorney leading the prosecution, said in his opening argument of Mr. Davis that Mr. Stanford had found someone he knew he could control: “Mr. Davis has accepted responsibility. He will give you the ultimate insider’s view.”

The prosecution concedes that Mr. Davis is facing up to 30 years of jail and hoping for leniency, but says that he will take the jury through documents and accounting records that will prove that Mr. Stanford was skimming investor money. That money, he will say, was secretly invested in real estate and other high-risk, illiquid assets, as well as personal loans and a secret Swiss bank account.

It is likely Mr. Davis will portray himself as an emotionally needy man who was easily bullied by Mr. Stanford.

Much of what Mr. Davis is expected to say has been laid out in a 2009 plea agreement in which Mr. Davis admitted to various counts of fraud and conspiracy to obstruct a Security and Exchange Commission investigation.

The fraud began as early as 1988, when Mr. Stanford owned the Guardian International Bank on the Caribbean island of Montserrat, and Mr. Davis served as his controller. Mr. Davis told prosecutors that Mr. Stanford had ordered him to make false entries into the bank’s general ledger to report false revenue and investment portfolio balances. The practice continued after the bank was transferred to Antigua and renamed the Stanford International Bank.

Over the years, as the bank sold high-interest certificates of deposit, Mr. Stanford, Mr. Davis and other executives promoted the investments as safe and secure, as they amassed assets of over $7 billion.

But by 2008, 80 percent of the money went to various risky Stanford investments. Mr. Davis said that for years, at Mr. Stanford’s request, he and others had “created false books and records.” At least $2 billion of personal loans to Mr. Stanford were concealed and disguised, Mr. Davis told prosecutors.

Mr. Stanford has pleaded not guilty to all charges.

Mr. Davis’s plea agreement was nothing if not graphic and detailed. Sometime in 2003, he said, Mr. Stanford and the two top Antiguan bank regulators had taken a “blood oath,” with Mr. Stanford pledging to provide bribes, and the officials promising not to “kill the business.” When Mr. Stanford needed money to pay the bribes, he would instruct Mr. Davis to withdraw funds from a secret numbered Swiss bank account.

When the Antiguan bank was finally running out of money in mid-2008, Mr. Davis said he, Mr. Stanford and other executives artificially inflated the bank’s assets by devising a real estate transaction in which they falsely inflated the value of a $65 million real estate transaction into a $3.2 billion asset.

Mr. Gershowitz, the University of Houston law professor, said Mr. Davis was a compelling witness.

“When you got a guy who says ‘I was in the room and I can tell you exactly what happened,’ it’s a lot easier for a jury to understand and believe than to figure it out from a mountain of paper,” he said. “It’s hard to swallow that Stanford was smart enough to make billions of dollars, but not smart enough to know what the guy down the hall was doing.”

Stanford Deputy Sought to Falsify Returns, Witness Says

By Laurel Calkins

Jan. 30 (Bloomberg) –- Laura Pendergest Holt, former chief investment officer of Stanford International Bank Ltd., asked a company research analyst to change negative investment returns to positive ones that could be given to bank owner R. Allen Stanford, the analyst said.

Mark Collinsworth, who then worked for Stanford Financial Group Co., testified today in Houston federal court that Holt made the request in March 2008 after showing him an e-mail she said she received from Stanford. The financier was requesting performance results for part of the bank’s investment portfolio.

“She showed me the e-mail on her iPhone and said, ‘I’m going to forward this to you but I want you to make the numbers positive,’” Collinsworth, a government witness, said during cross-examination in the second week of Stanford’s $7 billion criminal fraud trial.

“I thought, surely she wouldn’t ask me to change negative numbers to positive numbers,” he said. Collinsworth said he refused to make the changes and didn’t know if Stanford was presented the correct investment results at a meeting the next day. “I was not going to lie to the owner of the company,” Collinsworth said of why he sat silently at the meeting with Stanford and was relieved not to be called upon.

Stanford, 61, who was indicted in June 2009, is charged with 14 counts including mail fraud, wire fraud and obstruction of an SEC probe. He denies the charges.

The case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston).

Monday, 30 January 2012

Inside Stanford’s Ponzi puzzle palace

By STEVE MCVICKER

After an opening week of testimony marked by talk of peanut butter sandwiches and mac and cheese, the Ponzi scheme trial of disgraced financier R. Allen Stanford shifts into high gear this week.

Uncle Sam’s key witness, James Davis, the former chief financial officer at Stanford’s firm — and a former college roommate of the alleged fraudster — is scheduled to take the stand and tell jurors just how the massive fraud was carried out.

Stanford’s alleged $7 billion Ponzi scheme, the largest such scam after Bernie Madoff’s $65 billion fraud, robbed more than 30,000 people from 113 countries, according to prosecutors.

The 14-count indictment, which carries a prison term of up to 20 years, claims the financier, through his Antigua-based Stanford International Bank, lured investors in with high interest rates on CDs.

Prosecutors claim Stanford didn’t buy the CDs but instead used investors’ cash to fuel a lavish lifestyle. Stanford has denied the charges.

Last week, jurors heard one fleeced investor, 69-year-old retiree Joseph Flynn, testify that he lost his entire life’s savings, some $1.6 million, which he had invested in Stanford bank CDs.

Flynn also told the jury he gets by these days by selling his possessions on eBay and by eating lots of mac and cheese.

Flynn wasn’t the only person in the courtroom to discuss a hard-times menu. Stanford’s legal team complained to Judge David Hittner about the peanut butter sandwiches served up by the federal courthouse kitchen.

The lunches were not providing Stanford with enough energy to allow him to participate in his defense, they claimed.

After they raised the issue a couple of times, it was dropped and the courthouse menu is now apparently more to Stanford’s liking.

Saturday, 28 January 2012

One Stanford Client Lost $20 Million, Ex-Executive Tells Jurors at Trial

By Andrew Harris - Jan 27, 2012
Bloomberg


A former Stanford Group Co. executive told a jury that one client of R. Allen Stanford’s securities brokerage lost at least $20 million before the business was closed by U.S. regulators.

Jason Green, who led Stanford Group’s private-client group, offered the figure while being cross-examined by the defense on the fifth day of Stanford’s investor fraud trial in federal court in Houston.

Stanford’s lawyers have said that customers who bought the certificates of deposit issued by Antigua-based Stanford International Bank Ltd. and sold by the brokerage were able to withdraw every penny of their money until the Securities and Exchange Commission sued in February 2009.

Asked by defense attorney Ali Fazel if anybody had not gotten their money back before then, Green replied, “Yes, one person I know of specifically” was denied $20 million. Green later identified the client as Michael Moreno, who had residences in Lafayette, Louisiana, and in Houston.

Stanford, 61, who was indicted in June 2009, is accused of leading a $7 billion investment fraud cantered on CD sales. He is charged with 14 counts including mail fraud, wire fraud and obstruction of an SEC probe. He denies the charges.

Stanford, who suffered a jailhouse beating after his arrest, began rubbing his head during today’s proceeding. The judge offered to let him lie down and follow the trial from another room.

Joined in 1996
Green told the court yesterday that he joined the Stanford Group brokerage in 1996 and stayed until its end.

Moreno, he said, entrusted Stanford’s business with almost $50 million before withdrawing some of those funds to address a tax obligation. The $20 million withdrawal request was made shortly before Stanford stopped allowing clients to redeem CDs before their maturity date to stanch the outflow of capital as the global financial crisis deepened.

He also spoke of his efforts to persuade Stanford and the company’s chief financial officer, James M. Davis, to reassure customers after New York money manager Bernard Madoff’s December 2008 arrest for running the largest investment fraud in U.S. history.

‘Antiguan Madoff’
Green read an e-mail he sent to Stanford and Davis days before the SEC sued, in which he cited news articles that accused “Sir Allen of being the Antiguan Madoff” and said that he and other managers believed that if immediate steps weren’t taken to provide transparency, “we would not have a business to defend.”

On cross-examination today, Fazel asked Green about risk disclosures provided to prospective clients, offering them the opportunity to ask questions and receive answers about the firm’s “financial condition and affairs.”

Fazel asked if there was anything illegal about that.

“Only if people lie about their financial condition and affairs,” Green replied.

“Did you lie?” the lawyer asked.

“No, but I feel like I was lied to,” Green said. “I have a lot of clients, friends, relatives who haven’t gotten a penny back because there was no money.”

Later, Fazel questioned Green about Stanford Group’s ability to conduct financial research. The former executive told the court about a unit in Washington staffed with people he described as “political insiders,” including a retired brigadier general and a surgeon formerly with the U.S. Food and Drug Administration.

‘Politics Into Profit’
Their mission was to analyse legislation and “turn politics into profit,” Green said.

Asked by Fazel what became of that group after the Stanford firm closed, he replied, “I think they went to MF Global (MFGLQ).”

MF Global Holdings Ltd., parent company of the MF Global Inc. commodities brokerage, filed for bankruptcy protection in October. More than $1.2 billion may be missing from its customers’ accounts, trustee James Giddens has said.

The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston). The SEC case against Stanford is Securities and Exchange Commission v. Stanford International Bank, 09-cv-298, U.S. District Court, Northern District of Texas (Dallas).

Friday, 27 January 2012

Stanford Decried Greed in Speech Shown at Trial

By Laurel Brubaker Calkins and Andrew Harris - Jan 26, 2012

R. Allen Stanford, standing trial on allegations he led a $7 billion investment fraud, appeared in an October 2008 video shown to his jury decrying “damn greed” on Wall Street as the financial crisis deepened.

“People are stupid, they’re greedy, they’re lazy, they don’t stick to their core values,” he told a gathering of Stanford Financial Group Co. executives in Miami. “We’re different.”

In the video, shown today in Houston federal court, the financier told his audience that the company was “$5.5 billion more liquid than it should have been.” Four months later, U.S. regulators sued Stanford claiming his businesses were missing billions of dollars in investor money. He was indicted in June 2009.

Charged with mail fraud, wire fraud and obstructing a U.S. Securities and Exchange Commission probe, Stanford, 61, told jurors earlier this week that he isn’t guilty. He faces as long as 20 years in prison if convicted on the most serious charges.

U.S. District Judge David Hittner, who is overseeing Stanford’s case, said the trial, which began Jan. 23, could last six weeks.

Earlier today, the former president of Stanford Group Co.’s private client group testified about a monthly newsletter Stanford drafted for his investors and sent to him for his input in December 2008, the month that New York money manager Bernard Madoff confessed to the biggest Ponzi scheme in U.S. history.

‘Exposure’ to Madoff
“We want our depositors to know that SIBL had no direct or indirect exposure to any of Madoff’s investments” or to subprime debt,’’ said Jason Green, read from the newsletter.

Green also read to the jury the text of an e-mail message he sent to Stanford and to Stanford’s chief financial officer, Jim Davis, less than a week before the SEC filed suit and put him out of business. Davis is the Stanford finance chief who has pleaded guilty to the scheme and is expected to testify against Stanford.

In the e-mail, Green urged the men to hire a major accounting firm as the Stanford business auditor, replacing a sole practitioner in Antigua, to publish a validation of its asset values by their custodians, and to hold a conference call or town meeting with Stanford investors to provide transparency in the “trust-but-verify” post-Madoff era.

‘Antiguan Madoff’
Green in that e-mail referenced news articles accusing “Sir Allen of being the Antiguan Madoff,” adding that he and other managers believed that absent taking the steps he’d outlined, “We would not have a business to defend.”

Asked by prosecutor William Stellmach whether Stanford responded, Green said, “The silence was deafening. No.”

Earlier today, Green testified that Stanford structured commissions at his securities brokerage to reward members of his sales force who sold the most certificates of deposit issued by his Antigua bank.

Those CDs are at the heart of U.S. government charges that Stanford orchestrated an investment fraud scheme.

Brokers who had quarterly sales of at least $1 million in CDs in excess of any funds clients withdrew during the period earned bonuses and commissions twice as big as those paid to employees who didn’t, Green said. Those who fell short of that target were dropped to the lowest compensation rate.

‘Reward Growth’
“You’d only get 50 percent of what you’d make,” Green testified today. He said he understood Stanford designed the compensation system “to reward growth” in CD sales, an objective the financier often emphasized in capital letters in company memos.

Dressed in a charcoal-gray suit and blue shirt, Stanford watched and took notes as Green, a former top aide, answered the prosecutor’s questions and read from documents shared with the jury.

Green told jurors that while he hasn’t been criminally charged for his role in the alleged scheme, he has been sued by former brokerage clients on claims of negligence for recommending the CDs.

Green said the receiver appointed in a lawsuit filed against Stanford by the U.S. Securities and Exchange Commission also sued him, seeking to recover those bonuses and commissions he earned selling the CDs.

‘Taking Some Risk’
“I’m taking some risk in testifying, but I feel that it’s the right thing to do,” Green said under questioning by Stellmach. “That’s why I’m here.”

Stanford first began selling his Caribbean bank CDs to U.S. citizens around the time Green joined the company in 1996. Previously, the CDs were only sold to non-American citizens to limit the Antiguan bank’s exposure to U.S. regulations and oversight, Green said.

Stanford’s CDs paid as much as 4.5 percentage points higher interest than comparable CDs issued by American banks, Green said, based on what employees were told were consistent double- digit earnings by the bank’s “globally diversified portfolio.”

“The bank was earning on average a 6 percent spread on what it was paying clients and earning, so they could afford to pay the clients a higher rate,” the one-time branch manager testified. Advisers were told the bank’s portfolio consisted largely of marketable securities that could be converted to cash “very quickly; that was one of the big selling points of the bank in terms of mitigating risk” to investors’ money, he said.

13 Years
Green said that during his 13 years at Stanford’s company, about 3 percent of the bank’s investment portfolio was managed by analysts in Stanford’s office in Memphis, Tennessee, while the rest was handled by a team of European money managers.

Prosecutors accuse Stanford of skimming more than $1 billion in investor deposits to fund a lavish lifestyle and support a wide array of real estate developments and unrelated companies ranging from regional airlines to newspapers.

The financier is also accused of deceiving employees and investors about the extent to which he personally managed the bank’s investment portfolio. The government claims Stanford and the company’s finance chief managed about 90 percent of the bank’s funds, which prosecutors told jurors Stanford treated “like a personal piggybank.”

Green testified that he would have been concerned to learn that Laura Pendergest Holt, the firm’s chief investment officer, wasn’t overseeing all of Stanford’s investment portfolio as he’s been told by “Mr. Stanford, Mr. Davis, everyone that was affiliated with the bank that was in a position to know.”

“You wanted to know that somebody was managing the managers,” Green said. Pendergest Holt told him “maybe two or three days before the FBI and the receiver shut us down” that she managed just a fraction of the bank’s portfolio.

Regional Teams
Stanford organized brokers into regional teams that competed to sell the most CDs every quarter. Team names ranged from the Miami Money Machine for Stanford’s top producers in South Florida to the Aztec Eagles for his Mexican operation. Prosecutors showed jurors a scorecard that Green said showed sales by these “superstars” were as much as $323 million in 2006, which was 110 percent of their goal.

Green said Stanford clearly ran the company, in his opinion. He recalled an instance where Stanford heatedly objected to a decision made by Davis.

“‘I don’t know who Jim Davis thinks he is,’” Green said he remembered Stanford shouting. “‘This is my company.’ I know that he talked to Mr. Davis about it, and I’m sure he gave him an earful. Mr. Davis wasn’t very nice to me for some time” after the incident.

The criminal case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston). The SEC case against Stanford is Securities and Exchange Commission v. Stanford International Bank, 09-cv-298, U.S. District Court, Northern District of Texas (Dallas).

INSIGHT - How Allen Stanford kept the SEC at bay

By Murray Waas
Fri Jan 27, 2012 3:54am IST

REUTERS - In 2009, federal investigators finally arrested Houston financier R. Allen Stanford. For twenty years, Stanford allegedly had run a $7 billion Ponzi scheme from his offshore bank on the Caribbean island of Antigua. U.S. authorities had been nosing around Stanford's empire for longer than a decade but hesitated to open a full-blown probe.

As Stanford's trial began this week, one question left unanswered was: How did he keep authorities at bay for so long? A Reuters examination of his case finds that the answer lay in part in the legal advice he obtained from former SEC officials and other ex-regulators and law-enforcement officials.

Among those Stanford sought help from was famed securities lawyer Thomas Sjoblom . Then a partner at the international law firm of Proskauer Rose and chair of its securities practice, Sjoblom also was a former 20-year veteran of the U.S. Securities and Exchange Commission's enforcement division.

What Sjoblom allegedly did next for Stanford has drawn the scrutiny of federal prosecutors. The Justice Department has been investigating Sjoblom for possible obstruction of justice, witness tampering, and conspiracy related to his efforts to persuade the SEC to stand down from its investigation of Stanford, according to people familiar with the probe.

Sjoblom is one of the most senior attorneys ever to be investigated for allegedly crossing the line from legal advocacy on behalf of a client to violating the law. He hasn't been charged, however, and it is possible he never will be.

Stanford went on trial on Monday in federal court in Houston on charges that he defrauded more than 30,000 investors from more than 113 countries, and also obstructed the SEC's investigation of him . Only Bernard Madoff is alleged to have stolen more. Stanford has pleaded not guilty.

Prosecutors are likely, in making the obstruction portion of their case against Stanford, to detail Sjoblom's alleged role in assisting Stanford in that effort. Attorneys began their opening arguments on Tuesday.

IMMUNITY SOUGHT, AND REJECTED

People with first-hand knowledge of the matter say that Sjoblom had offered the Justice Department his testimony against Stanford in exchange for a grant of immunity from prosecution for himself - an offer rejected by the Justice Department. Prosecutors demanded a formal acknowledgment by Sjoblom of his own alleged criminal participation in an attempt by Stanford to derail investigations by the SEC, according to people involved in the discussions.

Sjoblom declined to answer questions when reached by telephone as well as inquiries submitted to him by email.

Ordinarily, attorneys are precluded from being witnesses against former clients because of the attorney-client privilege.

But under a legal doctrine known as the crime-fraud exception, an attorney can tell what he knows if his client has sought advice that would abet the commission of that fraud or some other criminal act - or in rare instances, if the attorney himself aided a crime. The crime or fraud disclosed or discussed must also then occur for the attorney to be able to testify. If Sjoblom had testified against Stanford, he would have been one of the most prominent attorneys to turn against such a client.

THE STANFORD EIGHT

The trials could cast light on the broader mystery of how the alleged Stanford fraud could have gone on so long even though federal regulators were examining the Texas financier for years. The case has put the SEC and other federal agencies in an embarrassing light, creating fresh fodder for critics of the revolving door between government and the private sector.

Stanford, Reuters has found, paid at least eight former senior U.S. and foreign regulators and law-enforcement officials for legal advice or investigative services.

Among the former government figures who worked for Stanford is Spencer C. Barasch, who headed the enforcement division of the SEC's office in Ft. Worth, Texas.

Barasch agreed this month to pay a $50,000 fine for allegedly violating federal ethics laws by representing Stanford after overseeing regulation of Stanford's U.S. brokerage businesses. It is illegal for many former federal regulators, including those at the SEC, to represent private clients if they have "personally and substantially" participated in any matters related to those clients during the course of their government employment.

Examiners at the SEC had suspected as early as 1997 that Stanford was engaged in a Ponzi scheme and felt the SEC should investigate. But year after year, until 2005, their warnings and calls for investigation were ignored by higher-ups.

A FRIEND IN FT. WORTH

In January 2009, the SEC was seeking the sworn testimony of both Stanford and James Davis, the chief financial officer for Stanford International Bank. Davis, Stanford's top deputy, has since pled guilty to securities-fraud and mail-fraud charges and has become a government witness against Stanford and others.

Stanford sought to delay and wear down regulators and investigators, Davis and other witnesses told the government, according to a 2009 plea agreement between Davis and federal prosecutors filed in federal court in Houston.

In 1997, 1998, 2002, 2004, and 2005, according to internal agency records seen by Reuters, examiners for the SEC recommended that the agency investigate Stanford. In three of those instances, Barasch, at the time an SEC official in Ft. Worth, personally overruled the examiners' recommendations, according to those records. Those decisions helped the Ponzi scheme to continue unabated for several additional years, costing investors additional billions of dollars, according to a report by the SEC's Inspector General.

Barasch told the SEC Inspector General that he made those decisions because he was not sure the SEC had the statutory authority or jurisdiction to investigate. He blamed his superiors and a broader culture within the SEC for pressuring the staff not to pursue complex and difficult cases, according to the Inspector General report.

In his final days at the SEC in 2005, Barasch overruled examiners one last time on a request to investigate Stanford, according to the Inspector General report and interviews with SEC officials. The SEC's formal investigation of Stanford began exactly one day after Barasch left the agency.

Barasch referred questions to his lawyer; his attorney didn't respond to requests for comment.

'I HATED BEING ON THE SIDELINES'

Barasch was told at the time by an SEC ethics officer that he was legally precluded from representing Stanford. Barasch went to work for Stanford anyway. In a later investigation of the failure to catch Stanford earlier, the SEC Inspector General asked Barasch why he did so. His reply, according to the Inspector General's report: "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines."

FBI agents and prosecutors also uncovered evidence that on at least two occasions Barasch sought confidential information regarding the SEC's probe of Stanford during his brief representation of the banker, Justice Department officials said in court records and a press release.

In agreeing to pay the fine, Barasch denied any misconduct, settling the matter "to avoid the expense and uncertainty of protracted litigation," his attorney, Paul Coggins said.

In a related action, the commissioners of the SEC rejected a settlement negotiated between Barasch and SEC staff under which Barasch would have agreed to an order barring him from practicing before the agency for six months. The commissioners rejected the proposed settlement as too lenient, to send a message that its former staff should abide by its rules and federal laws regarding the revolving door.

'REVOLVING DOOR'

"This misconduct highlights the dangers of a 'revolving door' environment between the SEC and the private securities law bar," outgoing SEC Inspector General H. David Kotz said in statement about the Barasch case.

The Justice Department's agreement with Barasch was reported by Reuters earlier this month [ID:nL1E8CD9DB]. The SEC, which has the authority to bar professionals from practicing before the agency, has not announced any disciplinary action.

The SEC is also preparing a separate civil case against another former regulator, Bernerd Young, who worked as a compliance officer for Stanford's bank, said a person familiar with the matter. Before he worked for Stanford, from 1999 to 2003, Young was a district director of the Dallas office of the National Association of Securities Dealers, which was then the brokerage industry's self-regulator. Regulation of the industry has since been taken on by a successor agency, the Financial Industry Regulatory Authority.

Young was notified by the SEC staff last June that they were preparing a civil complaint against him for securities-law and other violations and seeking a lifetime ban on his employment in the securities industry, according to a person who reviewed the SEC's notification to Young. Young hasn't been charged with any wrongdoing.

In November 2007, the Financial Industry Regulatory Authority charged that Stanford had used "misleading, unfair and unbalanced information" and fined him $10,000, but with no admission of guilt. Young was central to decisions by the NASD not to take tougher action against Stanford, according to government officials involved in the matter.

Randle Henderson, an attorney for Young, said Young had "done absolutely nothing wrong" and that he and Young had been cooperating with SEC investigators. If an enforcement action was brought, Henderson said, he and his client would engaged in a "full and complete and aggressive defense" of the allegations.

THE AIRCRAFT HANGAR SESSION

Sjoblom began work for Stanford as early as 2005, as the SEC began a formal investigation. Barasch began representing Stanford in September 2006.

Barasch's successor at the SEC had reversed course and given a green light for the SEC to investigate. Stanford believed that hiring former SEC officials was the best course to thwart the agency, according to emails written by Stanford to subordinates and later cited by the SEC's Inspector General.

Barasch worked on the case until December 2006, dropping out after SEC ethics officers warned him that any further involvement would violate a federal law.

On January 21, 2009, Stanford, his deputy Davis and other senior executives of the Stanford International Bank met Sjoblom in an aircraft hangar in Miami, Florida, to devise a strategy for fending off the SEC, according to the Davis plea agreement entered in Houston federal court.

Stanford, a bulky man with a thick mustache, paced nervously in the aircraft hangar, according to an account one of the attendees gave to federal investigators. In contrast, Sjoblom appeared calm and collected as they discussed their next move, the attendee told federal investigators.

The group allegedly agreed on a strategy: Sjoblom would go to the SEC and tell officials that both Stanford and Davis knew very little about the business they ran. Instead, he would tell them, two other, lower-ranking executives of the Stanford International Bank understood much better how the bank invested customers' money. He would then propose that they testify in place of Stanford and Davis, according to the plea filed in federal court in Houston.

SJOBLOM'S STRATEGY

Sjoblom knew that these assertions were false, and was also by then aware that Stanford had engaged in a massive financial fraud, according to the Davis plea. Still, Sjoblom moved forward with the effort to obstruct the SEC investigation, the Justice Department alleged in the Davis plea.

Early the next morning, on Jan 22, 2009, Sjoblom met in Houston with attorneys for the SEC, according to the Davis plea. There, Sjoblom told the SEC staff that Stanford and Davis did not "micro-manage" clients' portfolios. Taking Sjoblom's word, the SEC agreed to delay the testimony of Stanford and Davis, according to the plea filed in Houston federal court.

The Justice Department has since alleged that Sjoblom's actions constituted an obstruction of their investigation. Based in part on information given them by Davis, federal prosecutors alleged that Sjoblom continued trying to prevent the SEC from learning the truth even after Sjoblom learned about Stanford's massive fraud.

After convincing the SEC to forego Stanford's and Davis's testimony, Sjoblom allegedly helped prepare Laura Pendergest-Holt, Stanford International's chief investment officer, to testify in their absence, according to the Davis plea and an indictment against Pendergest-Holt in federal court in Houston.

Prosecutors allege that in reality, Stanford and Davis were the only two Stanford executives intimately familiar with the finances of the company. Pendergest-Holt only learned the full extent of the fraud around the same time that Sjoblom did, when the two were preparing her to testify before the SEC, federal prosecutors assert. Pendergest-Holt and Sjoblom learned then that the firm was insolvent and most of its financial claims fictional, prosecutors allege in the Pendergest-Holt indictment and the Davis plea.

On February 5, Stanford admitted to Davis and Sjoblom that his bank's "assets and financial health had been misrepresented to investors, and were overstated," according to Davis's plea agreement with prosecutors.

$4 MILLION MORE?

Instead of dropping Stanford as a client and setting the record straight with the SEC, Sjoblom went back to Davis and Stanford with an offer, Davis told the FBI, according to a person familiar with the case. Sjoblom told the pair that they both faced serious criminal jeopardy and asked each to pay him a retainer of $2 million to represent them personally, for a total of $4 million, this person said. That money would have been in addition to what Stanford's firm had already paid Sjoblom's firm. It is not clear whether the additional money was paid.

On February 10, Pendergest-Holt gave testimony to SEC officials. That morning, Davis admitted in his guilty plea, he phoned Pendergest-Holt and encouraged her to lie to "continue to obstruct the SEC investigation," according to the Davis plea agreement.

During her testimony, Pendergest-Holt said she knew little about the assets the SEC wanted to know about. All during her testimony, Sjoblom sat at her side, as five attorneys from the SEC's enforcement division fired away questions.

A federal grand jury later indicted her on obstruction of justice and conspiracy charges related to her allegedly false testimony. She is currently awaiting trial. Her lawyer declined to comment.

The indictment of Pendergest-Holt also implicated Sjoblom. "Holt, Attorney A Sjoblom and others would make false and misleading statements to the SEC staff attorneys in order to persuade them to delay" Stanford's testimony while Pendergest-Holt would "provide false testimony," the indictment alleged.

Days after Pendergest-Holt's testimony, on February 14, Sjoblom resigned as a lawyer for Stanford and wrote to the SEC: "I disaffirm all prior oral and written representations made by me and my associates to the SEC staff."

Federal prosecutors are looking to Pendergest-Holt to see if she corroborates Davis' testimony regarding Sjoblom, and will then decide whether to charge Sjoblom, according to sources close to the case. (editing by Martin Howell and Michael Williams)

Thursday, 26 January 2012

Former employee says Stanford knew his business

By Anna Driver

HOUSTON | Wed Jan 25, 2012

HOUSTON (Reuters) - A financial adviser who worked for former financier Allen Stanford testified at his trial on Wednesday that Stanford personally pressured her to bring in new clients for his bank.

Stanford, 61, is accused of selling fraudulent certificates of deposit from Stanford International Bank Ltd, which was based on the Caribbean island of Antigua, in a scheme that lasted for more than two decades. He has pleaded not guilty and his lawyers have portrayed him as a visionary who left details to others.

Michelle Chambliess, whose job was to get clients from Mexico and other countries in Latin America, recalled an incident in 2002 in which Stanford told her and a small group of her colleagues to get more clients by any means.

"Do whatever you need to do. I don't care how you do it. Just don't tell me. I don't want to know," Chambliess recalled Stanford saying.

Chambliess, the first witness in the trial held in federal district court in Houston, said she began selling CDs for Stanford in 1987 and was fired in 2002, the same year as the meeting with Stanford, after her sales lagged targets.

She also told the jury that Stanford signed off on documents to show potential investors that their deposits were being invested in safe, liquid investments. Prosecutors have said that Stanford was engaged in a $7 billion Ponzi scheme and used the proceeds to finance his own lifestyle.

Chambleiss also testified that she became concerned when Stanford International Bank disclosed a $13 billion loan to Stanford in its annual report for 1996, after she had been told the offshore bank would only take deposits and not make loans.

Stanford's lawyer, Ali Fazel, challenged Chambliess' knowledge of the Stanford business and questioned her statement that Stanford directed his salesforce to do whatever it took to raise more CD proceeds.

Fazel asked why she didn't quit after the meeting with Stanford about getting new clients. "Did you turn in your papers right away?" Fazel asked. "Did you say I'm quitting right now, Mr. Stanford?"

She did not quit because she could not afford to, Chambliess said.

Another witness, Leonel Mejia, a graphic designer who started working for Stanford in the late 1980s, testified that Chief Financial Officer James Davis asked him to alter an expired insurance policy to help reassure nervous clients.

When Mejia refused, Stanford set up a shell company, British Insurance Fund Limited, to be the insurer for his offshore bank's clients, prosecutors said

Ex-Stanford employee tells jurors he saw problems

Published January 25, 2012

HOUSTON – A former employee of Texas financier R. Allen Stanford told jurors at Stanford's fraud trial Wednesday that he believes he saw the former billionaire making up accounting figures used in an annual report to woo investors.

Leo Mejia, who worked for an advertising company created by Stanford to promote his various businesses, testified that he became uneasy working for the financier because he lost confidence in the accuracy of financial information he was given to include in advertising materials.

Mejia testified that one of his responsibilities was to help put together the bank's annual report, which was used to promote the bank and attract new customers. He said that when he was preparing the bank's 1988 annual report, he saw Stanford and his chief financial officer, James Davis, use a calculator to make various faulty changes to figures related to the bank's finances just before the report was sent off to be printed.

"Did you notice any problem with the numbers Stanford was getting by punching into the calculator?" prosecutor Gregg Costa asked Mejia.

"Yes. When I was working I noticed very easily that some of those numbers didn't add up correctly. I mentioned they didn't add up. They laughed and corrected those numbers," Mejia said.

At the time, the bank was in Caribbean island nation of Montserrat. It later moved to neighbouring Antigua.

Mejia described the errors he saw as an "obvious mistake. Like nine plus one does not give you five."

Davis has pleaded guilty in the case and is expected to testify against Stanford.

Mejia also told jurors he was surprised that after those figures were submitted to the bank's auditor, they were approved and sent back to him in 15 minutes.

"It took me more to do my checkbook. I thought that was quick," he said.

Prosecutors allege Stanford bribed the auditor as well as Antiguan regulators to hide the true condition of the bank's financial health and promote the fraud.

Mejia also told jurors Stanford described investors as "greedy" and that the bank's office in Montserrat was mostly an empty building that had a couple of computers that were not plugged in. Mejia said he was fired in 1992 for receiving an overpayment of $750.

The prosecution's first witness, Michelle Chambliess, who had worked for Stanford selling CDs to investors, testified earlier Wednesday that she had also become uneasy with how the financier ran the bank, including using deposits for personal loans. She also said the bank's insurance policy was from a company set up by Stanford.

Ali Fazel, one of Stanford's attorneys, tried to suggest to jurors that both Mejia and Chambliess, who was also fired, were not experts in the complexities of the financier's various businesses and were not qualified to assess if there was any wrongdoing.

"You're just guessing? You're just speculating?" Your entire testimony is speculation," Fazel told Mejia.

Stanford Invented Insurance Company for Bank Depositors, Prosecutor Says

By Andrew Harris and Laurel Brubaker Calkins - Jan 25, 2012 10:43 PM GMT-0400
R. Allen Stanford failed to tell a financial adviser he hired for his first offshore bank that the insurer he selected for the institution was a company he created, a federal prosecutor said at the financier’s investment fraud trial.

Assistant U.S. Attorney William Stellmach made that claim today while questioning the adviser, Michelle Chambliess, on the first day of testimony at the federal courthouse in Houston.

Chambliess said she was one of Stanford’s first hires in 1987, at Guardian International Investment Services, a U.S.- based sibling of Stanford’s Montserrat-based Guardian International Bank Ltd. Guardian was the precursor to Stanford International Bank Ltd., the Antiguan entity at the heart of Stanford’s alleged $7 billion fraud.

Stanford told her he’d obtained insurance for the bank from a carrier called British Insurance Fund Ltd., which appeared to be an independent U.K.-based company.

“Did he ever tell you it was a shell company he had set up?” Stellmach asked.

“No,” Chambliess replied.

‘Any Difference’
“Would that have made any difference to you?” he asked.

“Absolutely,” she said. “Then there wouldn’t be insurance.”

The Guardian bank later moved to Antigua, where it was renamed. Stanford is charged with wire fraud and mail fraud, crimes that carry maximum sentences of 20 years in prison, as well as obstruction of an SEC investigation. U.S. District Judge David Hittner has said the trial may last about six weeks.

Stanford, 61, told the jury yesterday he isn’t guilty. Today, wearing a double-breasted navy suit and a light blue shirt, he occasionally pursed his lips and shook his head as he watched his ex-employees testify against him.

The bank’s offshore location made it a tax haven for depositors and removed it from U.S. regulatory oversight and the backing of the Federal Deposit Insurance Corp., Chambliess testified. Its money-market accounts and certificates of deposit offered higher rates of return than those of banks required to comply with U.S. reserve regulations and tax laws, she said.

Fired in 2002
The financial adviser said she was fired in 2002, after working for Stanford for almost 15 years, when she lost her three largest clients and her CD sales dropped. By that time, she said, she had already started circulating her resume because Stanford had told her to “do whatever you need to do” to land a client.

That advice left her “flabbergasted,” she testified.

Chambliess told the court she learned that Stanford and some of his businesses borrowed money from the bank from a disclosure in Stanford’s 1996 annual report. She said she was surprised by the loans, as Stanford had promised investors and employees that the bank didn’t make commercial loans and invested solely in high-grade liquid assets.

The document said the financier personally borrowed $13.5 million while two affiliated companies borrowed an additional $11 million. When she asked about the loans, Chambliess said Stanford replied that he’d guaranteed the loans with his own liquid assets “and there was no risk” it wouldn’t be repaid.

Annual Report
The ex-employee said a disclosure in the company’s 1998 annual report indicated Stanford repaid the personal loan in full, along with $480,000 interest.

She said there were no subsequent disclosures of lending to Stanford or any of his companies and that financial advisers weren’t told Stanford continued to invest depositor funds in outside ventures ranging from regional airlines to newspapers.

Employees believed “the bank’s money stayed at the bank” in the conservative, highly liquid portfolio advertised to investors, Chambliess testified.

Under questioning by defense lawyer Ali Fazel, Chambliess said the Caribbean bank was subject to different international accounting standards than what U.S. companies are required to follow.

Under the international rules, Fazel said, the bank didn’t need to disclose its loans to Stanford and his companies.

Key Theme
Fazel revisited a key defense theme with Chambliess, that none of Stanford’s investors lost money until U.S. regulators seized his operations and destroyed their value.

“Was there anybody who did not get paid their money when the CDs were due?” Fazel asked Chambliess.

“Not while I was there,” she replied.

Leonel Mejia, who Stanford hired to head a captive advertising and marketing business called Idea Advertising in 1988, testified he was asked by James Davis, chief financial officer of the securities brokerage Stanford Group Co., to alter the coverage dates of an expired copy of a British Insurance Fund document.

Mejia said he declined to do so because he believed he was tampering with a legal document. Davis asked Mejia if he’d make the changes with permission from the owner of the British insurer. When he agreed, Davis and Stanford showed him papers indicating Stanford owned the insurance company, Mejia said.

CD Rates
Mejia, an El Salvador native, also testified that Stanford purposely set his bank CD rates two to four percentage points higher than U.S. rates to attract investors willing to forgo FDIC insurance on their deposits to get a better return.

“He said that people were willing to risk their money for 2 percent, they’re greedy,” Mejia said. “It was not very respectful to his clients, in my opinion.”

Mejia also testified that Stanford and Davis changed numbers in the bank’s 1988 annual report using a handheld calculator. The bank’s auditor in Antigua signed off on the revised numbers by fax 15 minutes later.

“It took me more time to do my checkbook,” Mejia said of the auditor’s rapid approval. “I thought that was quick.”

Questioned by Fazel, Mejia said he didn’t know if Stanford and Davis were consulting with the auditor and accountants in another room when they changed the annual report numbers.

“You’re speculating and guessing about everything, aren’t you,” Fazel asked Mejia. While disagreeing with that assertion, Mejia conceded that his knowledge of Stanford’s financial empire was limited.

The case is U.S. v. Stanford, 09-cr-342, U.S. District Court, Southern District of Texas (Houston).

Tuesday, 24 January 2012

Federal court hears row over Stanford investor claims / Angela Shaw says she is confused!!

1/24/2012
WASHINGTON, Jan 24 (Reuters) - A hearing in federal court on Tuesday gave the victims of Allen Stanford's alleged Ponzi scheme little clarity after a federal judge said he needed more time before deciding whether an industry-backed fund should be forced to let the investors file claims.
The case before the U.S. District Court for the District of Columbia centers on a dispute between the U.S. Securities and Exchange Commission and the Securities Investor Protection Corp, a non-profit corporation that helps investors recover missing funds in the event a brokerage fails.
Stanford, 61, was arrested in 2009 over charges that he ran a $7.2 billion Ponzi scheme linked to certificates of deposit issued by his Antigua-based bank.
His criminal trial began on Monday in Texas. U.S. prosecutors told the jury on Tuesday that Stanford used lies and bribes to steal customers' hard-earned savings.
The SEC in December took formal legal action to try and force SIPC to launch a liquidation proceeding in Texas so that the victims of Stanford's alleged scheme may file claims.
SIPC is standing by its decision not to intervene on behalf of Stanford investors, saying its governing law does not apply to the Stanford bank.
In a three-hour hearing in Washington on Tuesday, a lawyer for the SEC urged the court to compel SIPC to launch a liquidation proceeding.
The SEC also sought to convince District Judge Robert Wilkins that he should leave it to another court to rule on the merits of whether or not certain customers will be eligible for compensation.
"We are not saying a court will never decide the customer question," said Matthew Martens, the chief litigation counsel for the SEC. "There is a time and place for such a determination."
SIPC argues it is limited by law to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms. And while Stanford's Texas-based brokerage was a SIPC member, its offshore bank was not.
Eugene Assaf, outside counsel for SIPC from Kirkland & Ellis, said the SEC is trying to punt the matter down to Texas because the agency knows it does not have the facts to back up its argument.
"One of the facts they rely on is from a coalition of people who invested. That is at best double or triple hearsay," said Assaf. "I am skeptical when I don't see facts laid out the way they are normally laid out between litigants."
SIPC said if the judge decides to order it to start a liquidation proceeding, then it in turn will be forced to litigate each matter claim by claim, a process that will cost its fund a lot of money.
Wilkins, who asked skeptical questions of both sides during the hearing, said he would try to rule soon.
Angela Shaw, the founder and director of the Stanford Victims Coalition which says it can show investor money never went to Stanford's bank and was misspent by the brokerage arm, said she was a bit disappointed by Tuesday's hearing.
"I'm confused. There seems to be no sense of urgency," said Shaw, who flew in from Texas for the hearing. "It's going to take time the victims don't have."
The SEC case against SIPC is SEC v Securities Investor Protection Corporation, U.S. District Court, District of Columbia, no. 1:11-mc-00678-RLW.
For the SEC: Matthew Martens of the SEC
For the SIPC: Edwin U of Kirkland & Ellis
(Reporting by Sarah N. Lynch)

Monday, 23 January 2012

Grant Thornton Claims Form Update

I have been speaking to a member of the Grant Thornton team regarding the forms we are being asked to fill in. They are VERY AWARE that there are problems and they are working on getting the problems sorted out.
For all of you asking about confirmation of receipt from them, again, they are working on this. To date they have over 300 enquiries so it might help if we give them a little time and space to deal with the problems we have highlighted, and try to avoid sending too many more questions to them until they have sorted the current problems. A lot of the queries are repeats and once they have dealt with the main points it should be a lot easier for us all.
One question that they are being inundated with is "Why do I have to fill in a form when you have all the records?" Here is Marcus Wide's reply to that question.
"As to why - it’s the statute that says creditors must make their claim in writing. This is usual in any insolvency anywhere that has a proper insolvency system including the US, Canada, the UK, Barbados, the whole Eastern Caribbean, NZ, Australia, Switzerland, Guatemala, Bahamas, and so on."
So it is a legal requirement, please do not keep asking this. If it could be done an easier way I am sure GT would have done it by now. Please don't clog up the system with this question.
I will keep you all posted with updates when and where appropriate. Please follow the blog and forum for more information. GT will also post answers to questions via these links to avoid having to answer dozens of enquiries all asking the same question, so if they do not reply to you personally, they will reply through their website, the forum or the blog.
I hope this helps, and again, please be patient, they are working flat out to get this claim system in place.

Saturday, 21 January 2012

In the Madoff mould?

The fraud trial begins on Monday of Allen Stanford, the billionaire who bankrolled English cricket.

By Stephen Foley (The Independent)

When the Texan financier Allen Stanford swept into English cricket in 2008, landing his helicopter at Lord's and wheeling a chest containing $20m in new banknotes in front of the cameras, traditionalists decried the debasement of the sport by the lure of filthy lucre. What they didn't know then, and what we are about to find out now, is whether Mr Stanford's lucre was indeed filthy.

This weekend, Mr Stanford's lawyers are furiously and reluctantly preparing for the trial that will decide if that $20m, and hundreds of millions or billions more, was the proceeds of a spectacular fraud.

In 14 criminal charges, he is accused of using his business on the Caribbean island of Antigua to perpetrate a $7bn pyramid scheme, an alleged fraud second in size only to that of Bernard Madoff. He was aided, prosecutors say, by a gang of associates who conjured fake investment returns from their imaginations, falsified documents and funnelled cash from Swiss bank accounts to fund his sports sponsorships and his extravagant lifestyle. In the trial's most eye-popping allegation, he is said to have sealed the co-operation of Antigua's chief bank regulator through a bizarre "blood brothers" ritual.

For 20 years, his indictment alleges, Mr Stanford and his co-conspirators solicited deposits from more than 20,000 people across the US and Central and South America and, "contrary to their representations to investors, they misappropriated a significant percentage of the proceeds ... to finance his personal, failing business ventures and for his own use and enjoyment, including personal living expenses, several yachts and private jet airplanes and numerous residences around the world".

"Yes," Mr Stanford had answered, smirking, in one television interview before his arrest, "it is fun being a billionaire – but it's hard work". Just how hard is dealt with in by court documents filed in Houston, which set out the lengths to which Mr Stanford is said to have gone to conceal his alleged fraud – as told to prosecutors by his right-hand man and one-time university roommate, Jim Davis.

"When the chief financial officer flips and agrees to testify for the prosecution, this is extremely bad" for a defendant, says Andrew Stoltmann, a securities attorney who has represented investors in cases against a string of banks and insurers. "Similar situations happened in the Enron trial and the Worldcom trial. Jurors tend to find their testimony to be very persuasive." Whether this will be the case here remains to be seen.

Mr Stanford built a network of testosterone-fuelled salesmen who touted his investment products, Mr Davis claims, in testimony that he will repeat in court during the six-week trial. This sales force hawked fabricated investment data that purported to show a miracle-grow investment strategy at work, while the company's founder creamed off several billion dollars as bogus loans. The $7.2bn Stanford International Bank (SIB) claimed to have built on behalf of its clients was in reality as little as $500m. The alleged co-conspirators at the top of the firm will be tried in the summer, separately, and it remains an open question whether Leroy King will be among them. Mr King is the main reason US regulators' investigations into SIB ran into the sand. He was chief executive of the Antiguan Regulatory Commission, a man the prosecution claims was bought and paid for by Mr Stanford. But Mr King has been fighting extradition from Antigua, saying local banking secrecy laws meant he could not assist US investigations. As part of his plea bargain, Mr Davis claims that Messrs Stanford and King took a "blood oath", sealed by cutting themselves and mingling their blood.

Mr Stanford entered a not guilty plea last week, and has argued before that if there was any illegal activity at his firm, it must have been the work of Mr Davis or his other underlings. His lawyers are also preparing to argue that the firm was solvent, properly investing its monies, and returning cash to anyone who asked – until the federal authorities swooped and destroyed the business.

The charges against Mr Stanford in 2009 caused a sensation. Panicked investors thronged his operations in Antigua, Caracas and Panama City, among other business centres, demanding their cash back. Those who had been lured by the too-good-to-be-true returns of his Antiguan certificates of deposit are still fighting to get back pennies on the dollar.

Mr Stanford's personal decline has been perhaps even more striking than his business losses. Barely three years ago, he was the brash Texan, famed for fathering six children with several women, pictured bouncing the wives and girlfriends of the England cricket team on his knee, and caring not a damn about the outrage he was causing. His $100m Twenty20 sponsorship had made him a giant in the sport.

But as civil and then criminal charges mounted, he appears to have lost his bearings. He was interviewed drunk and weeping on television, protesting his innocence. His fiancée, Andrea Stoelker, told The Independent the couple were "living on the charity of my family". In custody in Texas, he was beaten by fellow inmates so brutally that he sustained brain damage and, claim his lawyers, became addicted to painkillers.

The trial was delayed by a year, but Houston Judge David Hittner ruled this month that Mr Stanford was finally fit to face a jury. His lawyers were still begging to differ last week but they now say their client may even take the stand in his own defence next month.

What will be revealed if he does? Thousands of out-of-pocket investors want to know if they were duped and, if so, whether it was by a Walter Mitty character or a cold and calculating fraudster in the Madoff mould. The trial begins on Monday.

Dramatis personae: Key figures in the trial

The accused, Allen Stanford

The 61-year-old Texan turned his sleepy family finance firm into an offshore powerhouse that dominated Antigua and provided him with the life of a playboy. The England and Wales Cricket Board fawned as he promised to lavish $100m on Twenty20 cricket.

The betrayer, Jim Davis

Mr Stanford's university roommate and his right-hand man as he built his empire. Faced with the prospect of years in prison, Mr Davis, has turned evidence for the prosecution, alleging that the pair plotted to fabricate profits and lure investors.

The judge, David Hittner

Hittner has already declared he will brook no nonsense. He has banned lawyers from talking about the case outside the court, and had no truck last week with the idea Mr Stanford was unfit to face a jury.

The 'conspirator' Laura Pendergest-Holt

The first person to receive a criminal indictment in the case, she was in the front line with the federal authorities came to investigate the alleged pyramid scheme in 2009. She is charged with obstructing their inquiries, as well as helping Mr Stanford dupe his sales staff into believing they were marketing world-beating investment products.

The bank regulator, Leroy King

The prosecution alleges Mr Stanford showered the Antiguan official with bribes, including impossible-to-get tickets to the US Super Bowl and tens of thousands of dollars in cash from Swiss bank accounts, and even swore a blood oath to win his assistance in shielding Stanford International Bank from prying eyes. He says local laws mean he cannot assist the SEC.

Friday, 20 January 2012

Stanford Investors Endure ‘Living Hell’ on Eve of Fraud Trial

By Andrew Harris and Laurel Brubaker Calkins

Jan. 20 (Bloomberg) -- R. Allen Stanford’s investors, after waiting three years to see the Texas financier go to trial on charges of leading a $7 billion fraud, must hold on even longer before learning when they will get some of their money back.

Stanford’s customers have received nothing since the U.S. Securities and Exchange Commission closed his businesses in February 2009.

Stanford, accused of misleading people who bought certificates of deposit from his Antigua-based bank, spent their money on bad investments, sports sponsorships and a lavish lifestyle that included yachts, a fleet of jets, mansions and a private Caribbean island, U.S. prosecutors said. Jury selection in his criminal trial is scheduled to start Jan. 23 in federal court in Houston. Stanford, who denies any wrongdoing, faces as long as 20 years in prison if convicted.

“It’s not fair that we have to be put through this living hell,” said Blaine Smith of Louisiana, who claims to have lost $1 million in life savings invested with Stanford.

A court-appointed receiver for Stanford Group Co. has spent at least $103 million on litigation, wind-down costs and other expenses, while collecting less than $212 million in cash and material assets since the SEC sued Stanford in February 2009.

The expenditures include fees and expenses for the primary outside law firm used by Ralph Janvey, the receiver. Janvey has asked court permission to pay Houston-based Baker Botts LLP $21.3 million for work done from Feb. 17, 2009, to Sept. 30, 2011, according to court records.

Other Cases

Unlike Stanford, repayment processes have moved forward for claimants in the Bernard L. Madoff fraud case and the bankruptcy of MF Global Holdings Ltd., the parent of commodities broker MF Global Inc.

Madoff’s court-appointed liquidator, Irving Picard, has recovered $8.7 billion of the estimated $17 billion lost and has distributed $325.5 million to victims, according to his website. Madoff’s fraud ended when he was arrested in December 2008.

Customers of New York-based MF Global, which collapsed in October, have already received $3.8 billion of the $6.5 billion they claim, according to that firm’s liquidation trustee, James Giddens.

An attorney for Janvey said last week that it’s too soon to say when investors may see some of the money.

“I know that’s frustrating,” said Janvey’s lawyer Kevin Sadler, a Baker Botts partner. “Investors want to know when and how much.”

Sadler and Janvey in November, under pressure by U.S. District Judge David Godbey in Dallas to start compensating investors, sought court permission to set up an investor repayment plan and establish a claim filing cut-off date.

Lack of Certainty

Sadler estimated that Stanford investors are owed about $5 billion in principal. Lack of certainty as to the total value of allowed claims and the amount of money available to pay them make putting a dollar value or even a ratio on the repayment rate impossible at this time, Sadler said.

On Nov. 11, the receiver submitted to Godbey a report stating it had $114.5 million in cash on hand and $96.6 million in other assets as of Oct. 31.

The largest known pot of Stanford assets is the financier’s foreign accounts, which are largely beyond Janvey’s reach.

Control of the $335 million to $350 million in European accounts was awarded by U.K. and Swiss courts to Stanford International Bank Ltd. liquidators appointed by an Antiguan branch of the Eastern Caribbean Supreme Court.

Edward Davis, the liquidators’ Miami lawyer, said in a phone interview this month that Stanford’s almost 22,000 global depositors could be paid as soon as the second quarter of this year.

Small Amounts

His clients, Marcus Wide and Hugh Dickson, accountants in the global accounting firm Grant Thornton, on Jan. 18 announced the creation of claim-filing forms. Wide and Dickson were appointed to liquidate Stanford’s bank after the tribunal’s original choice, London-based Vantis Plc, collapsed. Wide is managing director of Grant Thornton (British Virgin Islands) Ltd. on Tortola and Dickson is a partner in Grant Thornton U.K. LLP, according to the Stanford bank liquidation website.

At current recovery levels, investors would receive about 10 percent of their money, more if the liquidators are able to invest small amounts of recovered funds to make it easier to sell some Stanford properties, Davis said.

To stop asset recovery and rehabilitation efforts to pay investors now, Davis said, “would be a horrible failure for the victims.”

Control of Assets

Wide and Dickson, using $20 million from frozen Stanford accounts advanced by a London court last year to fund their operations, have spent about $7.2 million to recover $148 million in cash and assets, Davis said.

His clients are fighting with Janvey for control of assets in the U.K., Switzerland and Canada.

They’re also sparring before Godbey, who last month heard arguments over whether Houston or Antigua should be declared the true “center of interest” of Stanford’s operations, which will determine which receiver gets control of the estate. An attempt to resolve that dispute through mediation failed.

“I’m sad to hear the mediation didn’t work,” the judge told the attorneys then. “I’m sadder that the money going to this to pay lawyers is not going to compensate the victims.”

In separate interviews, Sadler and Davis declined to specify the reasons for the lack of comity between their clients.

‘Exploring Ways’

“We are still exploring ways in which we can reach an overall cooperative protocol,” and a means for avoiding duplicative efforts, Sadler said. “We have not reached that yet.”

“We tried to have a dialogue. We’ve gotten nowhere,” said Davis, “nowhere near a palatable deal.”

J. Samuel Tenenbaum, a Northwestern University law professor in Chicago, has been following the Madoff, Stanford and MF Global cases. He also directs the school’s Investor Protection Center, which assists those with limited income or small claims who are unable to obtain legal counsel.

Madoff’s fraud, he said, was easier to unwind because the stolen money remained within a defined circle of people where it could be identified and recovered.

“With Stanford, it’s more complicated,” said the professor, who is also affiliated with the Chicago firm Chuhak & Tecson. “He blew through the money. He either lost it or he spent it.”

Coordinated Response

In such cases, a coordinated global response is needed because otherwise recovery costs increase, Tenenbaum said.

“There should be one overall receiver for Allen Stanford,” he said.

The U.S. Securities Investor Protection Corp., or SIPC, had previously taken the position that the Stanford investors weren’t covered by its enabling Securities Investor Protection Act. SIPC committed to pay Madoff claimants almost $800 million, according to Picard’s website.

SIPC said in July that it would reconsider and make a final decision in September. That month passed without a ruling.

On Dec. 13, the SEC sued SIPC, seeking another path to aid the victims’ recovery. The SEC asked a federal judge in Washington for an order forcing the agency to create a claims process for Stanford’s alleged victims. A hearing is scheduled for Jan. 24.

Postponed Retirement

Meanwhile, Stanford investor Blaine Smith, a custom-home builder, lost the house he built for himself in a foreclosure. His wife has postponed her retirement.

He searches for odd jobs and writes increasingly desperate e-mails to regulators and politicians he hopes can talk Stanford’s receiver into dropping clawback lawsuits against the investors, or persuade SIPC to cover his losses.

“We can’t take any more abuse,” he said.

The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The receivership jurisdiction case is In re Stanford International Bank Ltd., 3:09-cv-00721, U.S. District Court, Northern District of Texas (Dallas).

Thursday, 19 January 2012

STANDFORD INTERNATIONAL BANK JOINT LIQUIDATORS ANNOUNCE CLAIMS PROCESS

Claims Process in Place for Fraud Victims

ANTIGUA-January 18, 2012-- The Joint Liquidators of Stanford International Bank released details of their initiation of the formal claims process to set the amount of claims of all creditors of the Bank. The formal claims process is essential to facilitate distribution to the creditors of which over 99.9% are depositor victims. All creditors of Stanford International Bank, Limited (“SIB”) must complete and submit a claim form if they wish to receive any distributions that may be made in the future. This includes those creditors that may have previously registered their claims with the former Joint Liquidators. All details, including copies of the claims form and other relevant information, can be found at www.sibliquidation.com/claims-administration in both English and Spanish.

The Joint Liquidators are moving forward to put in place the formal process for claims administration in the hopes that either SIB's funds presently held in the UK, Canada and Switzerland become available or a sale of the SIB lands in Antigua is concluded. "Today we can't say that either is imminent," said Joint Liquidator Hugh Dickson of Grant Thornton, "but we continue pushing forward on both fronts as hard as we can to make distribution to depositor victims. We do, however, urge all creditors to lodge their claim as quickly as possible to allow for the possibility of an interim distribution.”

Any questions with respect to completing the claims form can be sent to stanford.claims.support@uk.gt.com. Additionally, the Joint Liquidators are in the process of establishing a dedicated phone number that creditors can call with their questions regarding the claims process. The number will be posted to the liquidation website once it is in place.

Trial Set for Financier Accused in Decades-Long Ponzi Scheme

Aaron M. Sprecher/Bloomberg News

HOUSTON — A federal judge ruled on Wednesday that R. Allen Stanford, the Texas financier accused of defrauding thousands of investors in a $7 billion Ponzi scheme, will go on trial next week, nearly three years after his arrest.

Three years after his arrest, R. Allen Stanford will face a jury.
At the hearing, Mr. Stanford’s lawyers said he would testify at the trial, giving him an opportunity to describe how he was beaten so seriously by a fellow inmate while in custody in Texas that his memory and ability to prepare for trial was impaired.

United States District Judge David Hittner in recent weeks ruled against motions by Mr. Stanford’s lawyers that their client was not mentally competent to stand trial and that the trial should be postponed because they had not had enough time to prepare a defense.

“My finding still remains that he is competent and ready to go,” Judge Hittner said Wednesday.

Defense lawyers for Mr. Stanford argued again this week that they needed a delay in the trial. They said that they needed more time to study possible testimony from expert witnesses on accounting procedures and that one of their contract workers involved in document preparation needed cancer surgery and would be unavailable to work for at least several weeks.

Mr. Stanford, 61, pleaded not guilty to a revised 14-count indictment charging him with defrauding nearly 30,000 investors from 113 countries in a Ponzi scheme involving bogus high-interest certificates of deposit at the Stanford International Bank, which is based on the Caribbean island of Antigua. At the hearing Mr. Stanford, who wore a green prison suit, appeared relaxed while talking with his lawyers. He closed his eyes at times while listening to the lawyers review the procedures for the trial, to start Monday.

Mr. Stanford and three other senior executives of the Stanford Financial Group are accused of lying about the growth of bank assets in investor reports, diverting more than $1.6 billion into personal loans to Mr. Stanford and engaging in wire and mail fraud and conspiracy to obstruct a Securities and Exchange Commission investigation.

According to prosecutors, Mr. Stanford skimmed money from investor funds to live lavishly, with mansions and yachts, essentially converting Antigua into a private playground.

What began as a financial scandal second only to the Bernard L. Madoff pyramid scheme that unfolded as financial markets collapsed in 2008 has devolved into a messy, slow-moving soap opera. Mr. Stanford has been represented since his arrest in 2009 by about a dozen lawyers, many of whom have either quit or were fired for various reasons. Even his current legal team has tried to resign.

Once estimated to have had a personal fortune of more than $2 billion, Mr. Stanford is now considered an indigent defendant deserving of a taxpayer-financed defense since all his assets are frozen by court order.

Mr. Stanford’s latest team of four court-appointed lawyers filed a motion last week to leave the case, explaining that they did not have sufficient resources or time to organize a proper defense. They also said their efforts had been held back when contractors preparing documents for the defense quit at the end of last year because they had not been paid for several months.

The lawyers had argued that they should be given three more months to prepare. Judge Hittner repeatedly rejected the bid, arguing that the defense team had had more than a year to prepare. Meanwhile, the contractors have returned to work after an appellate court ordered them to do so and granted them some back pay.

During a break at the hearing, Ali R. Fazel, a defense lawyer, said he was disappointed with the judge’s decision that the trial would begin on Monday.

At the hearing, defense lawyers gave some clues about their strategy. They said investors had received payments from their Stanford bank certificates of deposit on schedule until the S.E.C. sued the Stanford Financial Group. Mr. Stanford has long argued that the federal government was responsible for a run on his firm’s assets. Robert A. Scardino Jr., another defense lawyer, said, “We fully intend for Mr. Stanford to take the stand.”

Mr. Stanford was declared incompetent to stand trial last January because he had become addicted to anti-anxiety medication prescribed to him while in detention in a federal facility outside of Houston. Psychiatrists said the drug, prescribed after he had a fight with a fellow inmate over use of a telephone, probably contributed to fits of delirium.

Psychiatrists who testified for the prosecution and defense last year suggested that Mr. Stanford had become mentally incapacitated because of depression, possible brain injury suffered in the fight and addiction to medication prescribed after the beating.

Over the last year, Mr. Stanford has undergone evaluation and drug rehabilitation. He was declared competent in December to stand trial, though his lawyers say he has not had enough time to review thousands of documents to participate in his defense.

Mr. Stanford says he cannot recall events that happened before the fight. But prosecutors and doctors at the North Carolina facility say Mr. Stanford has been faking memory loss. Gregg Costa, the lead federal prosecutor, has said that Mr. Stanford is trying to “game the system.”

As the trial proceeds, the leading witness for the prosecution will be James M. Davis, the former chief financial officer of the Stanford Financial Group, who has pleaded guilty to fraud and conspiracy charges. In a plea agreement, Mr. Davis said Mr. Stanford ordered him to report false revenue and false investment portfolio balances to banking regulators as far back as 1988.

Mr. Davis and the two other former Stanford executives who have been charged in orchestrating the Ponzi scheme face separate proceedings. The prosecution and other lawyers involved in the case said the trial should last at least three weeks.

His lawyers continued to contend on Wednesday that he is not competent to stand trial.

“You’re still pushing that?” Judge Hittner responded incredulously when he heard from the defense lawyers that Mr. Stanford was unable to participate fully in his defense.

Tuesday, 17 January 2012

Fate of 7,000 Stanford Ponzi Investors Hangs on Rare SEC Lawsuit

By Robert Schmidt and Joshua Gallu - (Bloomberg)

For 40 years, the U.S. Securities and Exchange Commission and the congressionally chartered group that protects against broker theft have worked in tandem to reimburse people whose accounts are pilfered.

Now the SEC and the Securities Investor Protection Corp., or SIPC, are about to face off in a bitter court fight that may determine how future fraud victims are covered, raise broker fees that support SIPC and cast doubt on the SEC’s political independence.

The dispute centers on whether more than 7,000 brokerage customers who invested in the alleged $7 billion Ponzi scheme run by R. Allen Stanford are entitled to have their losses covered by SIPC.

SIPC, a nonprofit corporation funded by the brokerage industry, says the Stanford investments don’t fit into the confines of the federal law that governs who’s eligible for the payouts. Investors and their advocates in Congress say SIPC is deliberately taking a narrow view of the law to protect brokers from higher assessments.

The SEC’s commissioners, who have oversight of SIPC, ultimately sided with the investors. In June, the agency ordered SIPC to start a process that could grant up to $500,000 per client -- the same maximum amount it offers in any case. After SIPC balked, the SEC for the first time sued the group in federal court in Washington.

Dollars and Principles
As the two prepare for a Jan. 24 court date, SIPC has come out swinging, hiring two prominent law firms and an ex-federal judge who’s been on the short list for a Republican Supreme Court nomination. In legal briefs, it accuses the SEC of ceding to pressure from Congress to flout the letter of the law, and argues that the agency’s position jeopardizes investor payouts in other cases, including for clients of Bernard Madoff and MF Global Holdings Ltd (MFGLQ).

“The dollars are such and the principles are such that we have to take it seriously,” said Stephen Harbeck, who has worked at SIPC for 36 years and is now its president.

Harbeck said the group would probably have to spend most if not all of the $1.5 billion in its fund and possibly have to borrow more from the Treasury if the court orders it into the Stanford case.

The case “challenges the entire nature of the relationship between the SEC and SIPC,” he added. “I’m quite sure it’s not for the better.”

High-Interest CDs
SIPC may be best known for its logo, which dues-paying brokerage firms put on their marketing materials to show customers they’re protected. While investors may regard the label as equivalent to the guarantee that the Federal Deposit Insurance Corp. gives to bank accounts, SIPC doesn’t run a general insurance fund or cover investment losses. Under the Securities Investor Protection Act, it’s supposed to aid investors when their securities or cash are stolen or go missing.

Stanford, who’s in prison awaiting trial, allegedly used his brokerage to entice investors to buy high-interest certificates of deposits via his private Stanford International Bank Ltd. in Antigua. Instead, according to prosecutors, much of the money was used to support Stanford’s businesses and lifestyle.

Harbeck has said that SIPC shouldn’t get involved because investors received actual CDs after the brokerage passed their money to a bank. What happened after that isn’t under SIPC’s purview because the Stanford account holders have possession of their securities, he told a court-appointed receiver in 2009. SIPC covers theft but not fraud, he said.

Letters from Lawmakers
The SEC’s staff initially agreed. So did David Becker, the SEC’s general counsel at the time, according to an inspector general’s report. As the commissioners mulled the matter, more than 50 lawmakers signed letters asking SEC Chairman Mary Schapiro to explain why constituents weren’t getting aid while SIPC was helping a court-appointed receiver recover billions of dollars for victims of Madoff’s fraud.

Schapiro and other commissioners rejected the staff’s analysis and ordered it redone, according to five people with knowledge of the matter. The SEC commissioners eventually decided that there was no true separation between Stanford’s bank and the brokerage firm. Customers who made investments with the bank, the SEC said, were effectively depositing money with the brokerage and should get SIPC coverage.

Angela Shaw, who founded the Stanford Victims’ Coalition after her family lost $4.6 million in the alleged fraud, said there was no reason for clients to think they weren’t backstopped by the fund.

Settlement Rejected
SIPC “helped Stanford defraud investors, period,” said Shaw, who said that about 7,800 of 20,000 Stanford investors used the brokerage. “They slapped that logo on everything to create an illusion of protection.”

After the SEC ordered the payout, SIPC privately offered to settle the matter with the agency for about $250,000 per customer, according to two people familiar with the legal negotiations. The SEC’s five commissioners voted to reject the deal, the people said.

SEC spokesman John Nester said SIPC’s accusation that the agency was responding to pressure from Congress was “inaccurate” and said “the commission’s decision was based on the facts and the law.”

He declined to comment on the settlement talks. “We have had a long, positive relationship with SIPC that we intend to continue,” Nester said.

SIPC’s Harbeck also declined to discuss the settlement offer. He said that “at the staff level” relations with the SEC still “are really good.”

SEC Criticized
The larger Stanford case has been a lingering embarrassment for the SEC, which has come under criticism from investors and lawmakers for failing to uncover Ponzi schemes. The agency’s inspector general’s office determined that the SEC failed to conduct a meaningful investigation of Stanford Financial Group until 2005 even though its examiners suspected the firm of engaging in fraud eight years earlier.

Stanford was accused by the SEC in February 2009 of running a “massive, ongoing fraud,” and was later indicted on criminal charges. He has denied all wrongdoing.

The SEC, led by its chief litigator Matthew Martens, has taken a narrow tack in the SIPC case. In court papers, the agency says it has full authority over SIPC and asks the judge to enforce its order.

SIPC’s legal team at Kirkland & Ellis LLP -- which includes former U.S. appellate judge Michael McConnell, mentioned as a possible Supreme Court nominee during the George W. Bush administration -- argues that the court shouldn’t just rule on the order but determine whether the Stanford investors are covered by SIPC. The group’s board has also retained law firm Covington & Burling LLP.

‘Wrongheaded Notion’
“The SEC’s position is predicated on the wrongheaded notion that it has the legal authority to compel SIPC to take whatever action the SEC says it must take,” SIPC said in a Dec. 27 court filing.

SIPC’s attorneys also noted that the investor fund first declined to get involved in the Stanford case in August 2009 -- a decision that wasn’t challenged by the SEC for almost two years.

“The SEC expressed no disagreement with SIPC until June 2011, when a United States senator announced a hold on two nominees to become SEC commissioners while the SEC considered this issue -- and the commission abruptly flipped its position on SIPC and Stanford the next day,” SIPC wrote in its filing.

Increased Dues
The Securities Industry and Financial Markets Association, a Washington-based trade association for the brokerage industry, has also weighed in, estimating in an analysis it released last August that its firms’ dues to SIPC would more than double if the protection was extended the way the SEC wants.

Brokers currently pay one-quarter of 1 percent of their net operating revenues from their securities businesses in an annual SIPC assessment.

“While we are very sympathetic for any loss incurred by victims of the Stanford Financial fraud, SIPC as created by Congress in 1970 was never enabled to provide coverage as proposed by the SEC in this case,” said Andrew DeSouza, a Sifma spokesman. “An unprecedented expansion of SIPC protection to investment fraud losses is something Congress never intended.”

Senator David Vitter, the Louisiana Republican who refused to allow the vote on the SEC nominees until the agency weighed in on the Stanford case, said in a statement that SIPC’s court filings and public comments show “just how desperate they are to divert attention from their untenable position.”

Protection Fund
The senator, who has some 1,800 Stanford investors in his state, said that SIPC has “never before in history” ignored an order from the SEC to liquidate a failed brokerage and assess the claims of victims. SIPC is mainly worried that payments to Stanford investors would drain its protection fund, he said.

“Even more disturbing, they’ve highlighted directly to me concerns that their big firm dues-payers are balking at the prospect of having to replenish the fund after a Stanford payout,” Vitter said.

Harbeck said that SIPC’s board, which voted 6-0 to reject the SEC’s order, includes only two industry representatives and has members appointed by the Treasury and the Federal Reserve.

“The viewpoints of the industry were heard, but were by no means controlling,” Harbeck said. “We’ve looked at this as objectively as we can.’