A worker posts a temporary closure notice at Stanford Financial Group’s offices in Houston, Texas, US, on February 17, 2009.

Stanford International Bank Ltd., accused by US regulators of defrauding investors, relied on more than high interest payments to sell US$8 billion of what it called certificates of deposit.

“Security was the key aspect,” said Pedro, a 62-year-old software engineer in Mexico City who invested $150,000 in CDs issued by Stanford International.

“They told me that they had insurance. The broker told me not to worry and that the bank was safe,” said Pedro, who asked that his last name not be used because he did not want to anger bank officials.

Most US certificates of deposit are insured for as much as $250,000 by the Federal Deposit Insurance Corp. CDs issued by Stanford International, a foreign company, are not FDIC-protected.

A Stanford International training manual obtained by Bloomberg instructed financial advisers to tell clients that “the FDIC provides relatively weak protection.”

While its marketing materials played up coverage, the bank did not explicitly guarantee investors’ funds.

An “extensive insurance program has been in place for years and requires that a regular review of the bank’s risk management practices be conducted to determine that adequate safeguards are in place,” Stanford International said in a December newsletter signed by President Juan Rodriguez Tolentino.

‘Excess FDIC’

The bank “maintains insurance coverage through Lloyd’s and other underwriters: Bankers Blanket Bond; Directors and Officers Liability; Professional Liability (errors and omissions); and Excess FDIC,” the newsletter to clients said.

The US Securities and Exchange Commission said February 17 that Stanford, 58, ran a “massive, ongoing fraud” through his group of companies and lured investors with “improbable if not impossible” claims about investment returns. Stanford Group, Stanford International and Stanford Capital Management LLC were named in the SEC complaint.

The Federal Bureau of Investigation is investigating regulators’ allegations, a person familiar with the case said.

Stanford’s whereabouts are unknown, the SEC said.

A district judge signed a temporary restraining order February 17 freezing the companies’ assets and property, and regulators appointed a receiver to account for investor money.

A spokesman for Stanford, Brian Bertsch, earlier this week referred media inquiries to the SEC. He could not be reached for comment Thursday.

False security

Stanford told clients their funds would be placed mainly in easily sellable financial instruments, monitored by more than 20 analysts and audited by regulators on the Caribbean nation of Antigua, the SEC said.

Instead, the “vast majority” of the portfolio was managed by Allen Stanford and the Antigua subsidiary’s chief financial officer, James Davis, according to the regulator. Davis was named in the SEC complaint. A “substantial” part of the portfolio was invested in private equity and real estate, it said.

Stanford International’s one-year, $100,000 CD paid 4.5 percent annual yield as of November 28, according to a posting on the website last week. A one-year, $10,000 CD purchased at JPMorgan Chase & Co. would earn 1.75 percent, according to its consumer banking website.

Calling the product a CD created a false sense of security, said Bob Parrish, a financial planner and accountant in Longboat Key, Florida.

‘More secure’

“It was a familiar term being used to describe an instrument that really would not fall within the meaning of a CD,” Parrish said in a telephone interview. He advised six clients to take their money out of Standard International, he said.

Stanford financial advisers were to tell clients that their CDs would be safer than certificates issued by a US commercial bank, according to the training manual, issued in 2003.

“Financial institutions that do not make commercial loans are more secure than commercial banks because they do not face the risks connected with such loans,” the manual said. Stanford International did not make commercial loans.

Coverage included a depositary insolvency policy protecting bank funds held in correspondent financial institutions, a “Bankers Blanket Bond with Lloyds of London” and directors and officers insurance, according to the manual.

‘A new image’

Allen Stanford worked to create the image of a company with decades of history. In an internal publication called “The Lodis Report,” provided to Bloomberg by a former marketing executive, Stanford Group described how it hired an outside firm to “create a new image campaign” that would “return to the very beginnings of our family of companies.”

Promotional materials then began invoking the image of Allen Stanford’s grandfather, Lodis B. Stanford, the founder of a small insurance company during the Great Depression, and saying the younger Stanford’s group of companies rose out of those beginnings. US court records show that Stanford International, which Allen Stanford founded first, was formed in 1985 on the Caribbean island of Montserrat and moved to Antigua in 1990.

A black and red, hardbound book provided to investors shows a photo of Lodis Stanford on the cover with the quote, “Build a business step-by-step, on a firm foundation of hard work, clear vision and valuable service.”

The quote appears on Stanford Group’s website as well.

Allen Stanford set up a network throughout southern US, hiring brokers from large investment firms including UBS AG and Merrill Lynch & Co. to court wealthy investors such as doctors and retirees who were not always experienced with financial products, according to two former financial advisers and clients. Stanford then set up an incentive structure to steer money into the Antigua Bank.

Source: Bloomberg