Did Court Ruling Prolong Stanford Probe?

Is the U.S. Supreme Court partly to blame for prolonging R. Allen Stanford's alleged $8 billion fraud involving questionable certificates of deposit sold by his Antigua-based bank?

One reason being offered up by some within the Securities & Exchange Commission for the agency's slow progress in unmasking Stanford's alleged $8 billion fraud is a 1982 high court ruling that tied regulators hands a bit. In Marine Bank v. Weaver, the nation's high court ruled that a bank CD is not the same thing as a stock or a bond and is not governed by federal securities laws.

In effect, the Supreme Court ruling left it up to bank regulators to go after abuses in the marketing or selling of CDs. Ever since, the SEC has been loath to get involved in any investigation involving the sale of CDs for fear the case might be tossed out of court.

Probe Started in 2006

So SEC investigators first tried to get U.S. bank regulators interested in taking a look at the activities of the Houston-based Stanford Financial Group, say people familiar with the Stanford investigation. But these sources, who did not want to be identified, said bank regulators, some of whom were contacted as far back as 10 years ago, didn't seem much interested. The identity of the bank regulators could not be determined.

The SEC itself didn't formally begin its own investigation into the unusually high-yielding CDs sold by Stanford Financial's offshore bank until October 2006. The investigation culminated on Feb. 17 with the SEC filing civil fraud charges against 58-year-old Texas native Allen Stanford and two of his top deputies. Regulators said they can't account for the approximately $8 billion in customer deposits that Stanford's offshore bank, Stanford International Bank, has taken in from the sale of high-yielding CDs.

Securities experts say the initial cautious approach that the SEC appears to have taken in its investigation of Stanford Financial Group is understandable in light of the 1982 court ruling. But the experts also say there should have been little doubt that the SEC had jurisdiction to investigate the firm, since it was Stanford brokers in the U.S. who were marketing and selling the offshore bank's CDs to wealthy investors.

"If it was just an offshore bank and people were going out there and finding the bank on their own, the SEC might be reluctant to get involved," says Christopher Clark, co-head of the white-collar criminal law defense practice at Dewey & LeBoeuf and a former prosecutor. "But this was a registered broker dealer that was actively marketing this product, whether it's a security or not. That's right in the wheelhouse of the SEC."

Misplaced Doubt

In fact, if there was any lingering doubt about the SEC's ability to go after Stanford's operation, it should have ended in 2001. That was the first time Stanford's brokerage arm formally filed a "notice of sale of securities" with the SEC for its "certificate of deposit program." The filing is required any time an investment firm or hedge fund plans to sell securities to U.S. investors. In the 2001 filing, Stanford reported that it intended to sell up to $150 million in CDs to wealthy investors in the U.S. In a subsequent 2007 filing, Stanford registered to sell up to $2 billion in CDs in the U.S.

It's not clear why the SEC's investigations didn't begin until 2006, even though some within the agency had concerns about Stanford's operation as far back as 1998. But on Feb. 17, when the SEC filed civil charges against Stanford, Rose Romero, the SEC's Fort Worth regional director, said: "Before Christmas we got a bit of good information that we didn't have before, and we moved quickly on that information."

SEC spokesman John Nester declined to specifically address the impact of the Supreme Court's 1982 ruling on the Stanford investigation. But he did say the ruling was a landmark decision. Generally, he said, the pace of an investigation can be affected by numerous factors, including the agency's ability to prosecute a matter and the jurisdiction in which the alleged offense takes place.

Latin Beat

A spokesman for Stanford Financial Group has declined to comment since the filing of the SEC charges. Stanford, the sole shareholder of both the offshore bank and the investment firm, has been unavailable for comment. To date, he hasn't been charged with any criminal wrongdoing, but sources said the FBI continues to look into the matter.

In any event, the 1982 court ruling could not have come at a better time for Stanford. Just four years later, he opened the doors for his offshore bank, originally called Guardian International Bank, on the Caribbean island of Montserrat. The Montserrat bank worked in tandem with a Miami investment firm called Guardian International Investment Services marketing the bank.

Guardian, which opened with $6 million in seed money from Stanford and his father, James, quickly found customers in Latin America. The bank took out advertisements in Spanish-language newspapers in Mexico, Venezuela, and elsewhere promoting its CDs, which at the time yielded 10.75%, about double the going rate.

In 1991, after the bank relocated to Antigua following a dispute with Montserrat authorities, Stanford eventually rebranded it with the current name and became chairman and sole shareholder.

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