Summary Of The Allen Stanford Case
The Allen Stanford case is one of the biggest fraud schemes in America. Allen Stanford founded Stanford International Bank in 1991 in Antigua, a small nation in the Eastern Caribbean. Stanford owned a large amount of land, was highly involved in the Antigua community and held a significant amount of power in Antigua (Ishmael 2009). In raising investment funds, Stanford targeted wealthy Latin Americans who were worried about the stability of their governments and hence the security of their wealth. This laid the foundation of his empire and he quickly became the island's largest employer. Stanford also maintained a company in Houston, called Stanford Financial Group. This company was a traditional Securities and Exchange Commission (SEC) regulated
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broker and it managed portfolios, traded stocks and sold certificates of deposits (CDs). James Davis, Stanford’s best friend, was appointed director and chief financial officer of both companies, however Stanford was the sole shareholder.
Within just three years Stanford International’s assets grew remarkably and were valued at $350 million in 1997, at which time Stanford opened another office in Miami.
This new office was located midway between his Antigua bank and his Houston investment headquarters, and was close to the wealthy Latin American investors to whom he catered (Elfrink 2009). In less than a decade Stanford’s companies had assets of $3 billion. At the pinnacle, the Stanford Financial Group had clients from 140 different countries with assets of $50 billion under management. The Antigua bank held more than $8 billion in investments. Stanford’s investments were advertised as ultra safe (blue chips) investments that promised returns that were roughly three per cent higher than similar investments sold by competitors (Ibrahim 2012). These investments were advertised as being in heavily audited financial instruments (Prince 2012). The CDs were sold through a Texas investment advisor registered with the SEC, and supported by an effective sales force across the US. Stanford misrepresented the financial health of his bank and assets to investors and claimed to generate higher returns than was possible (The United States Department of Justice 2017). Stanford used the fact that he was examined, and cleared, numerous times by the SEC, to persuade any nervous investors to leave their money with him (Kotz 2014). One major company involved with Stanford was the Toronto Dominion Bank (TD). TD were a highly reputable and well regarded investment bank. TD gave Stanford access to its US accounts and the ability to trade in US dollars. TD worked with Stanford since 1991 when he first opened Stanford International Bank (Roff
2017).
Rather than undetectable blue chip investments as promised, Stanford and Davis actually invested depositor’s money in high risk private equity and real estate, and used part of the proceeds to finance their own extravagant lifestyles (b. Fionda & Shochat 2016). By 2007, Forbes had estimated Allen Stanford’s personal worth at $2 billion. Stanford came across as a well presented, confident and very convincing operator. In the late 90’s the Stanford group began expressing corporate social responsibility, commencing sports sponsorships and charity donations. This included donations to local not-for profit organisations and donating expensive medical equipment to the Texas Scottish Rite hospital for Children in Dallas (Elfrink 2009).
Concerns about Stanford’s risky business practices were first raised in 1997 by investors. However, the SEC approved no formal investigation at that time (Shain 2010). In 2003, Charles Hazlett, a former broker at Stanford Financial group, quit his job after questioning how Stanford’s CDs performed so consistently well (Elfrink 2009). Hazlett stated that brokers were heavily pressured to sell Stanford’s offshore CDs and were not told where the CDs were being invested. Hazlett was not the only employee raising concerns and as the companies grew larger and Stanford’s personal wealth grew exponentially, encounters with legal and regulatory authorities became frequent. However, it was not until after an economic downturn that authorities began to properly investigate his business.
In 2009, after the global financial crisis (GFC), Stanford’s fraudulent behaviour was revealed. It was uncovered that Stanford had obtained over $2.2 billion of his personal fortune from a very complicated and sophisticated Ponzi scheme.
A Ponzi scheme involves generating artificially high returns for older investors by paying part of that return from funds raised by new investors. Eventually there is not enough new money being raised to pay the artificially high returns to all investors and the scheme collapses (Haines 2017, p.183). Stanford’s scheme collapsed when many of his investors wanted to redeem their investments after the GFC and there were not enough funds available for every investor.
When Stanford’s empire collapsed, many people were affected across the globe. Stanford had received approximately $7 billion from 21,000 investors who were typically middle class Americans. These investors believed Stanford International was a safe place to invest their life savings (Russell 2016). The collapse of the company left many victims with no retirement savings and wiped out billions of dollars of their wealth. TD claims it conducted regular and routine monitoring of its relationship with Stanford International Bank and were unaware of this fraudulent behaviour (Shochat & Fionda 2016).
In 2012 Allen Stanford, Jim Davis and several of his top executives were prosecuted for corporate fraud. Stanford is currently serving a 110-year sentence at a federal penitentiary in Florida. He was found guilty on 13 counts, including fraud, conspiracy and obstruction chargers, was given a personal fine of $5.9 billion and will spend the rest of his life in jail (The United States Department of Justice 2017). Stanford denied any responsibility for his crimes and continues to appeal his case. Instead Stanford blames his crimes and investor losses on a lack of government regulation. The victims of Stanford’s Ponzi scheme are still, after over eight years, waiting for their money to be returned. Currently it has been estimated that they have received less than 5 cents in the dollar (Cohn 2014).
broker and it managed portfolios, traded stocks and sold certificates of deposits (CDs). James Davis, Stanford’s best friend, was appointed director and chief financial officer of both companies, however Stanford was the sole shareholder.
Within just three years Stanford International’s assets grew remarkably and were valued at $350 million in 1997, at which time Stanford opened another office in Miami.
This new office was located midway between his Antigua bank and his Houston investment headquarters, and was close to the wealthy Latin American investors to whom he catered (Elfrink 2009). In less than a decade Stanford’s companies had assets of $3 billion. At the pinnacle, the Stanford Financial Group had clients from 140 different countries with assets of $50 billion under management. The Antigua bank held more than $8 billion in investments. Stanford’s investments were advertised as ultra safe (blue chips) investments that promised returns that were roughly three per cent higher than similar investments sold by competitors (Ibrahim 2012). These investments were advertised as being in heavily audited financial instruments (Prince 2012). The CDs were sold through a Texas investment advisor registered with the SEC, and supported by an effective sales force across the US. Stanford misrepresented the financial health of his bank and assets to investors and claimed to generate higher returns than was possible (The United States Department of Justice 2017). Stanford used the fact that he was examined, and cleared, numerous times by the SEC, to persuade any nervous investors to leave their money with him (Kotz 2014). One major company involved with Stanford was the Toronto Dominion Bank (TD). TD were a highly reputable and well regarded investment bank. TD gave Stanford access to its US accounts and the ability to trade in US dollars. TD worked with Stanford since 1991 when he first opened Stanford International Bank (Roff
2017).
Rather than undetectable blue chip investments as promised, Stanford and Davis actually invested depositor’s money in high risk private equity and real estate, and used part of the proceeds to finance their own extravagant lifestyles (b. Fionda & Shochat 2016). By 2007, Forbes had estimated Allen Stanford’s personal worth at $2 billion. Stanford came across as a well presented, confident and very convincing operator. In the late 90’s the Stanford group began expressing corporate social responsibility, commencing sports sponsorships and charity donations. This included donations to local not-for profit organisations and donating expensive medical equipment to the Texas Scottish Rite hospital for Children in Dallas (Elfrink 2009).
Concerns about Stanford’s risky business practices were first raised in 1997 by investors. However, the SEC approved no formal investigation at that time (Shain 2010). In 2003, Charles Hazlett, a former broker at Stanford Financial group, quit his job after questioning how Stanford’s CDs performed so consistently well (Elfrink 2009). Hazlett stated that brokers were heavily pressured to sell Stanford’s offshore CDs and were not told where the CDs were being invested. Hazlett was not the only employee raising concerns and as the companies grew larger and Stanford’s personal wealth grew exponentially, encounters with legal and regulatory authorities became frequent. However, it was not until after an economic downturn that authorities began to properly investigate his business.
In 2009, after the global financial crisis (GFC), Stanford’s fraudulent behaviour was revealed. It was uncovered that Stanford had obtained over $2.2 billion of his personal fortune from a very complicated and sophisticated Ponzi scheme.
A Ponzi scheme involves generating artificially high returns for older investors by paying part of that return from funds raised by new investors. Eventually there is not enough new money being raised to pay the artificially high returns to all investors and the scheme collapses (Haines 2017, p.183). Stanford’s scheme collapsed when many of his investors wanted to redeem their investments after the GFC and there were not enough funds available for every investor.
When Stanford’s empire collapsed, many people were affected across the globe. Stanford had received approximately $7 billion from 21,000 investors who were typically middle class Americans. These investors believed Stanford International was a safe place to invest their life savings (Russell 2016). The collapse of the company left many victims with no retirement savings and wiped out billions of dollars of their wealth. TD claims it conducted regular and routine monitoring of its relationship with Stanford International Bank and were unaware of this fraudulent behaviour (Shochat & Fionda 2016).
In 2012 Allen Stanford, Jim Davis and several of his top executives were prosecuted for corporate fraud. Stanford is currently serving a 110-year sentence at a federal penitentiary in Florida. He was found guilty on 13 counts, including fraud, conspiracy and obstruction chargers, was given a personal fine of $5.9 billion and will spend the rest of his life in jail (The United States Department of Justice 2017). Stanford denied any responsibility for his crimes and continues to appeal his case. Instead Stanford blames his crimes and investor losses on a lack of government regulation. The victims of Stanford’s Ponzi scheme are still, after over eight years, waiting for their money to be returned. Currently it has been estimated that they have received less than 5 cents in the dollar (Cohn 2014).