SEC: Fraudulent scheme overloaded with private equity

The SEC today accused billionaire Allen Stanford, who runs Stanford Financial Group, of fraudulently selling $8bn worth of certificates of deposit, claiming that these securities were backed by liquid assets when in fact they were highly exposed to private equity and real estate.

The US Securities and Exchange Commission has charged billionaire Robert Allen Stanford with running a massive $8 billion fraud that included hiding from customers the fact that their certificates of deposit were primarily backed by illiquid assets, including private equity and real estate. 

Stanford runs a vast wealth management empire called the Stanford Financial Group that claims more than $50 billion under management. The Stanford International Bank, part of that holding company, has about $8.5 billion in assets under management and allegedly serves 50,000 customers. The bank doesn’t make loans, but sells certificates of deposit to US-based customers.

The SEC alleges that Stanford sold clients $8 billion worth of CDs by promising “improbable and unsubstantiated high interest rates”.

Stanford allegedly told customers that their deposits were re-invested largely in liquid financial instruments, when in reality “at least” 23 percent of the bank’s $8.4 billion investment portfolio was allocated to private equity, according to the SEC. The commission alleges that some 90 percent of Stanford’s assets “consist primarily of illiquid assets – namely private equity and real estate”.

The bank reported in 2007 that its “alternatives” allocation was 15.6 percent.

Stanford allegedly told customers the bank monitors its portfolio through a team of more than 20 analysts and is subject to yearly audits by Antiguan regulators, where the bank is registered, the SEC said. Stanford also told customers the portfolio had no exposure to the Bernard Madoff fraud.

Today’s SEC complaint disputes these claims, saying the bank’s portfolio was monitored only by Stanford and the bank’s chief financial officer, James Davis. The portfolio was not subject to audit by Antiguan authorities and the portfolio did have some exposure to Madoff through a feeder fund.

In what the SEC described as evidence of further irregularity, SIB allegedly sought to remove $178 million from its accounts in the past two weeks.

The SEC did not detail which private equity investments were owned by Stanford, nor did it specify how it learned the true allocation mix of the portfolio.

One private equity firm to which SIB has allocated capital is Tennessee-based Memphis Biomed Ventures, which raised $54 million for its second private equity fund in 2006 with investors including Stanford Financial Group, according to a press release.

Memphis Biomed, which invests in life sciences companies, did not return a call for comment Tuesday.