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Stanford Told ‘Lie After Lie’ to Investors, U.S. Prosecutor Says
January 25, 2012, 12:23 AM EST

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By Andrew Harris, Laurel Brubaker Calkins and Tom Schoenberg


Jan. 25 (Bloomberg) -- R. Allen Stanford engaged in a long- term fraud scheme and lied repeatedly to investors to “live the life of a billionaire,” a U.S. prosecutor told jurors as the financier’s criminal trial started in Houston.

Stanford, 61, was the ringleader of a $7 billion investment fraud, the U.S. said in a 14-count indictment accusing him of mail fraud and wire fraud, crimes that carry maximum sentences of 20 years in prison. He’s also charged with conspiracy to commit mail fraud and wire fraud and to obstruct a U.S. Securities and Exchange Commission probe.

“I plead not guilty to every count,” Stanford, wearing a light gray plaid suit and a white dress shirt and no necktie, told the jury yesterday.

Stanford has been in federal custody since being indicted in June 2009. His trial was postponed three times because of changes to his legal defense team, the after-effects of a jailhouse beating and a subsequent prescription-drug addiction.

In Washington yesterday, the SEC urged a judge to order the federal Securities Investor Protection Corp. to create a claims process for Stanford’s alleged victims.

Stanford stole from investors “so that he could live the lifestyle of a billionaire,” Assistant U.S. Attorney Gregg Costa said in his opening statement in the Houston courtroom. “He told them lie after lie after lie.”

The scheme stretched over 20 years of “lying, cheating and bribing,” Costa told the jury of 10 men and five women, including three alternates.

‘Real’ Empire

“Mr. Stanford’s financial empire was real and did make a lot of money and did pay every penny of what was owed to depositors for 22 years,” Robert Scardino, one of Stanford’s court-appointed lawyers, told the jury in his own opening remarks.

Scardino and defense lawyer Ali Fazel have previously said they will use the records of Houston-based Stanford Group Co. and Antigua-baed Stanford International Bank Ltd. to prove their client never intended to defraud anyone.

No investor lost money until the SEC sued Stanford and obtained a court order to take control of his businesses in February 2009, the defense has said.

Costa called the $7 billion in deposits once held by Stanford’s Antigua bank “a real number.”

“How did Mr. Stanford get so many people to give him so much of their savings?” Costa asked. “That’s where the lying comes in.”

Stanford lied to depositors about the liquidity of their investments, about whether his bank ever loaned those proceeds and about who was managing their money, the prosecutor said.

‘Compound Fraud’

“You’re going to see the power of compound fraud,” he said.

The financier lied about committing $700 million of his own money to shore up the bank’s finances in 2008, while he was actually pulling money out, Costa said.

Stanford also “waved his magic wand” to increase the value of an unimproved island property from $63 million to $3 billion during the worst economic downturn since the Great Depression, according to the prosecutor.

The financier is accused of bribing his now-dead auditor and an Antiguan banking regulator who received cash, National Football League Super Bowl championship tickets and use of Stanford’s private jets.

Costa told jurors they would hear from investors who lost their life savings. These witnesses will tell, “how his lying, stealing and bribing have taken that money and the dreams they had with it.”

‘Complete Picture’

Scardino told jurors the U.S. didn’t have full access to Stanford’s business records and wasn’t presenting “a complete picture” of his client’s business. He said Stanford invested more than $100 million to improve the island and obtain licenses that made the property more valuable.

The defense lawyer called his client “a Texas boy” and “a very resourceful businessman” who became a billionaire. He said the jury may hear from his client during the trial, without being more specific.

Stanford’s lawyer told the panel that the certificates of deposit sold by the Stanford bank weren’t securities and that Stanford’s clients had no say over how their money was invested.

The bank’s CDs were sold only in tranches valued at $50,000 or more, to investors with either a net worth of more than $1 million or an annual income of more than $200,000, the defense lawyer said.

Scardino called those CD purchasers “sophisticated investors” whom he said “know what a CD was and what it wasn’t.”

‘Legitimate’ Business

They also received promotional materials from Stanford’s business disclosing that past performance was no guarantee of future success and that an investor could lose the entirety of an investment.

“We’re going to prove this was not a Ponzi scheme at all,” Scardino said. Unlike frauds in which money from later- arriving investors is used to pay off earlier speculators, he said, “this one was legitimate.”

Marc Nurik, a Fort Lauderdale, Florida, attorney who has been following the Stanford proceedings, called the defense decision to hold out the prospect of Stanford’s testimony a risk. Stanford isn’t required to take the witness stand.

“The traditional wisdom is that you don’t set up for failure,” he said.

An opening statement is tantamount to the making of a promise to the jury, he said. Stanford’s failure to take the stand would breach that promise.

Nurik said Stanford might be pressing his lawyers to let him testify.

Jury Selection

Jury selection began Jan. 23 at Houston’s Bob Casey Federal Courthouse with U.S. District Judge David Hittner’s interview of 80 prospective panelists, many of whom said they had read or heard reports about the case and some of whom told the judge they didn’t know if they could be impartial.

The 15 men and women selected yesterday include a retail optician, an environmental engineer, two accountants, a kindergarten teacher, a chef, a land surveyor, a pawn broker and a retired hairdresser.

The trial may last about six weeks, Hittner said.

In Washington, SEC lawyers asked U.S. District Judge Robert Wilkins during a hearing yesterday to require SIPC, a nonprofit corporation funded by the brokerage industry, to start a liquidation proceeding in federal court in Texas to handle more than $1 billion in possible claims related to the alleged Stanford fraud.

Judicial Review

“Ultimately, what we’re seeking here is to provide a forum where claimants can seek judicial review of their claims,” Matthew Martens, the SEC’s chief litigator, told the judge during a three-hour hearing.

At issue is whether more than 7,000 brokerage customers who invested in the alleged Ponzi scheme run by Stanford are entitled to have their losses covered by SIPC.

SIPC, a congressionally chartered group that insures customers against losses caused by broker theft, 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.

In June, the SEC ordered SIPC to start a process that could grant as much as $500,000 for each Stanford 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.

Individual Investors

SIPC is responsible for providing coverage for individual investors who lose money or securities held by insolvent or failing member brokerage firms. It has agreed to cover losses sustained by victims of Bernard Madoff’s multibillion-dollar Ponzi scheme and investors who may have lost money in the October collapse of commodities broker MF Global Holdings Ltd.

SIPC doesn’t guarantee an investment’s value or protect against fraud, the agency said in court papers. It also doesn’t cover investments with offshore banks or non-member firms.

Stephen Harbeck, SIPC’s president, has said that SIPC shouldn’t get involved in the Stanford case 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.

The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The civil case against Stanford is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The SIPC case is Securities and Exchange Commission v. Securities Investor Protection Corp., 11-mc-00678, U.S. District Court, District of Columbia (Washington).

--Editors: Peter Blumberg, Michael Hytha

To contact the reporter on this story: Andrew Harris in Houston at [e-mail]

To contact the editor responsible for this story: Michael Hytha at [e-mail]
http://www.businessweek.com/news/2012-01-25/stanford-told-lie-after-lie-to-investors-u-s-prosecutor-says.html