Stephen Foley: The returns seemed too good to be true – and they were

Thursday 19 February 2009 01:00 GMT
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The charges laid against Sir Allen Stanford inevitably invite comparisons with Bernard Madoff, the Wall Street swindler who turned himself in last December. Both men claimed to have found a miracle-grow formula for investing, able to return double-digit percentage profits, year in, year out – but were vague when anyone dared ask how. Even the headline numbers coincide: both Madoff and Stanford claimed to be managing about $50bn (£35bn) in customers’ assets. Both men were faking it, it is now alleged.

The scale and details of Mr Stanford’s alleged fraud, as set out in a lawsuit from the US regulator, the Securities and Exchange Commission, are very different. Unlike Mr Madoff, who used money from new investors to pay old ones, his fellow Texan appears to have been doing something with the billions loaded into Stanford International Bank in Antigua – just not what he was telling clients.

Savvy investors might have known that Stanford’s investment returns were too good to be true. But the company used a network of richly rewarded brokers to solicit money, who added credibility to his claims.

His cricket sponsorships, and his deals to get the Stanford logo on to the clothing of stars including the footballer Michael Owen, were all calculated to raise his profile. Some clients were wooed with flowers – but it was the outsized returns that appealed.

A little over $8bn was held in Antigua, paying the returns on certificates of deposit, normally one of the safest investments outside a bank account. A year ago, the average CD was paying about 4 per cent; Stanford was paying 7 per cent. It claimed to be able to do so because – unusually – funds went into a pool that invested in shares, commodities and hedge funds, which it claimed grew at between 11.5 per cent and 16.5 per cent for 15 years – something that the SEC claims is impossible for that mix of investments.

The SEC claims that four-fifths of the money was in fact handed over to Mr Stanford and his old college roommate, James Davis, to invest secretly as they saw fit. It went into property and private equity, risky investments that were harder to sell than any client was ever told. Some $400,000 was also invested in a Madoff-related fund.

Senior staff at Stanford’s Houston headquarters – when quizzed by brokers about oversight of the Antiguan investments – were told to steer their questioners away from the subject. The information “wouldn’t leave an investor with a lot of confidence”, one explained to the SEC.

Now the authorities are beginning to piece together exactly where the $8bn in Antigua actually is, and whether a further $1bn in US mutual fund products has also been fraudulently marketed to Stanford’s 50,000 investors. It seemed unlikely that Mr Stanford’s claims to manage $50bn are true – but separating fact from fiction in the life of Mr Stanford won’t be an easy business.

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