Business Ethics Now 3rd Edition by Andrew Ghillyer

Exercise 60

Sir Allen Stanford, a Texas-born citizen of the Caribbean island of Antigua who resided in the U.S. Virgin Islands, seemed to have the life that dreams are made of. As the founder and majority shareholder of the Stanford Financial Group (SFG), based in Houston, Texas, Stanford led a complex network of interlinked financial companies that claimed to manage over $50 billion in assets. He loved the English game of cricket and invested millions of dollars in supporting West Indian teams, including building a cricket ground in Antigua and underwriting the "Stanford Twenty20 tournament" that offered a $20 million winner-take-all prize in a championship of 20 cricket matches.
Stanford's business skills seemed to know no limits. His business interests included two major banks, a trust company, a real estate development company, a newspaper, a cricket ground, two restaurants, and large tracts of land-and that was just in Antigua. The jewel of his portfolio was reputed to be the Stanford International Bank (SIB) of Antigua. As an "offshore bank," SIB operated outside of U.S. banking regulations. With a reputed $8.5 billion in assets, the bank took money from depositors by an unusual route. No loans were ever made by the bank, although it did have a traditional stock and bond trading department. Clients deposited funds by purchasing certificates of deposits (CDs) that offered above average interest rates (at times more than twice as high as prevailing market rates) in return for reduced liquidity- in other words, once deposited with SIB, customer funds took 60 days to be returned. The above average interest rates proved irresistible to U.S. investors-over $3.5 billion was invested in SIB CDs, which inevitably brought the bank to the attention of the Securities and Exchange Commission (SEC).
Stanford's lifestyle has been referenced in the past tense, because at the time of writing, he is in jail charged by U.S. securities regulators over a "massive investment fraud" through SIB. Investigations by SEC personnel uncovered some interesting information about Stanford's operations:

• Over $8 billion of the CD funds invested in SIB were, it is alleged, used to fund Stanford's lavish lifestyle and other investment vehicles in a complex "Ponzi scheme" (refer to Thinking Critically 6.1 on page 128 for more information on Ponzi schemes). The reduced liquidity of the CDs gave Stanford time to move money around if any investors elected to cash in their investments. Some $6 billion is claimed to be "unaccounted for."
• Other companies in SFG claimed investment funds that far exceeded their actual deposits. For example, Stanford Financial Company (SFC), a registered broker and asset management business, had only about $147 million of assets as the wealth management division of a $50 billion company. Further investigation revealed that SFC served only as an "introductory broker" to other investment companies such as Bear Stearns and, ironically, Bernard Madoff.
• When stock markets around the world began crashing in 2008, SFG reported a year-end loss of only 1.3 percent after a decade of consistent double-digit growth that has been described as "suspiciously smooth."
• Stanford's heavily marketed knighthood came not from the Queen of England, but from the governor general of Antigua.
The biggest red flag of Stanford's operation was the governance structure of his multiple and complex corporations. The chief financial officer (CFO) of SIB, James Davis, was Stanford's college roommate. The chief investment officer of SFG, Laura Pendergest-Holt, had no financial services or securities experience, and claimed to have limited knowledge of "the whereabouts of the vast majority of the bank's multi-billion investment portfolio" according to the SEC. Other senior corporate officers included Stanford family members, friends, and business associates with cattle ranching and car sales companies in Texas. Of the three key individuals, Pendergest-Holt is the only one to have been charged criminally with obstruction of justice. The indictment contends that she misled SEC investigators on several occasions and failed to disclose that she had several preparatory meetings with other SFG executives before meeting with SEC investigators.
Stanford is professing his innocence by claiming that he was wrong to trust the integrity of his CFO, James Davis. "The investment and risk committee reported to Jim Davis, not to me," he said. As for the collapse of his financial empire and the current inability to repay investors, Stanford blames the SEC for the "ripple effect" of its indictment that prompted regulatory agencies around the world to freeze the assets of his multiple investment companies. "I don't think there is any money missing," Stanford said. "There never was a Ponzi scheme, and there never was an attempt to defraud anybody."
How did SIB's status as an "offshore bank" facilitate Stanford's alleged fraud