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How many Stanford investors were fraudsters themselves?
By David Arthur Walters
Last edited: Sunday, May 09, 2010
Posted: Friday, May 07, 2010

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First in the Series: As the Press Spins - Anatomy of an Award-winning Expose

An old adage says that if something seems too good to be true , then it probably is, with the exception of the Hereafter. Still, as con artist Charles Pietro Giovanni Guglielmo Tebaldo Ponzi and his illustrious successors such as Bernie Madoff, Scott Rothstein, and Allen Stanford knew, many people cannot resist an extravagant offer. They do not duly conduct diligent research into the character of the persons making the offer, their capacity to handle obligations, and whether they will have sufficient capital available to pay obligations when due.


Not every victim of a con is entirely naive and gullible. Many of the con artist's marks, especially where considerable sums are concerned, rely on experts such as accountants and attorneys to inquire into such matters. And they rely as well on the perceived reputation or social status of the confidence man, a reputation that he has taken care to build. And then there are the trusty regulators to protect us all. But what can one do when regulators are hoodwinked by high-powered pettifoggers and inadvertently overlook the fraud, most notably when the culprits are some of the most highly esteemed men and law firms in our society, members and organizations of the very power elite whose example is emulated by the rest?


John Emerich Edward Dalberg Acton's statement to Bishop Mandell Creighton in an 1887 letter comes to mind more often than usual lately: "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."


Civilization is built on trust, but the term 'trust' has become a name for fraudulent transfers, a way to secretly cheat creditors, investors, the government, and members of one's own family to boot. Incidentally, two of the chief selling points, besides high returns, in the Stanford Trust sales literature, were secrecy and tax haven advantages.


Everyone is indirectly victimized by fraudulent schemes perpetrated by reputable people. But we feel especially sorry for the innocent dupes, the direct victims who lost their life savings, such as the elderly Mexican woman who invested in Allen Stanford's phony CDs because they offered an extraordinarily high rate of return even during down times - a rate that an astute investor knows is a sign of high risk or probable fraud. We refer to the October 28, 2002 letter of a complainant to the Fort Worth SEC office, a letter quoted in the Office of Inspector General's Report of Investigation into Mr. Stanford's alleged Ponzi scheme, Case No. OIG-526:


'During the 2002 Examination, the FWDO Enforcement Staff Received a Letter From the Daughter of an Elderly Stanford Investor Concerned That the Stanford CDs Were Fraudulent On December 5, 2002, Degenhardt received a letter dated October 28, 2002, from a citizen of Mexico who raised concerns about Stanford similar to those raised by the Examination staff. The Letter stated: "My mother is an old woman with more than 75 years of age and she has all her money my father inherited to her for his life work in CDs of Stanford Bank. This is the only money my mother has, and it is necessary for my mother, my sisters and me for living. My mother put it in the United States because of the bad situation in Mexico and because the most important thing is to look for security.


“I am an accountant by profession and work for a large bank in Mexico. I know some banking regulations of my country that are very different from practices in Stanford Bank and for that reason I am very nervous. Please look at this bank and investigate if everything is honest and correct. There are many investors from Mexico in this bank. My questions and doubts are listed here:


“1. Stanford says the CDs have insurance. My mother receives two statements of accounts. One from Stanford bank in Antigua with the CDs and another one from Stanford and Bear Stearns in New York. I know Bear Stearns is a very good company, but the statement of Bear Stearns only has cash that my mother uses to take out checks. This cash is the interest that the CD pays. Is the bank in Antigua truly covered by insurance of the United States Government? 2. The CD has a higher than 9% interest and I know other big banks like Citibank pay interest of 4%. Is this possible and secure? 4. In December of 1999 the bank had a lot of investments in foreign currencies and in stocks. In all the world many stocks and foreign currencies came down in 2000. If a lot of money was in investments that came down, how did the bank make money to pay the interest and all of the very high expenses I imagine it has. 5. The accounting company that makes the audit (C.A.S. Hewlett & Co) is in Antigua and [no]body knows. I saw the case of ENRON with bad accounting and I am preoccupied with another case of fraud accounting. Why is the auditor a company of Antigua that [no]body knows and not a good United States accounting company?


“I know some investors that lost money in a United States company named InverWorld in San Antonio. Please review very well Stanford to make sure that many investors do not get cheated. These investors are simple people of Mexico and maybe many other places and have their faith in the United States financial system."


'An examiner testified that his reaction to the letter was, “[T]his is great, we’ve got actually somebody complaining.” The examiner also felt that “we need[ed] to get in touch with this lady,” because he was “almost certain there was something to her complaint.” The examiner drafted a response to her letter. That draft response stated, in part: If the person who sold the CD to your mother is a registered representative of SGC [Stanford Group Company], a registered broker dealer and investment adviser in the United States, there may be some aid we can provide... If you wish your letter to be considered a complaint with regard to this registered representative’s actions, we will forward your letter to SGC and ask that they respond to you and this office to explain why such an investment was suitable for your 75-year old mother. That response might be enlightening to all of us. With respect to the interest rate being paid, we share your concerns about whether it is possible to pay such a high interest rate in the current economic environment. As I am sure you are aware, the general principal [sic] is that the higher the interest rate offered, the more risk is being taken in the investment.'


The OIG investigation found out that the response letter to the complainant was never sent. Examiners presented their view that Stanford was probably operating a Ponzi scheme due to the high returns, but SEC enforcement officers did not pursue the matter, purportedly because employment incentives encouraged the pursuit of simple hot-item cases and not complex operations such as Stanford’s, where U.S. officials may not examine records in foreign countries: “The Enforcement Staff told the Examination Staff that an investigation of Stanford would be too difficult because of the Staff’s inability to obtain records from Antigua.” [Case No. OIG-526]


In 1998 one of Allen Stanford's zombie entities, Stanford Trust Company, Ltd., established an international trust company representative office in Miami, named "Stanford Fiduciary Investor Services, Inc" because Florida Statute 655-922 limits the use of the phrase "trust company" to regulated financial institutions, and the office was purportedly the mere representative of an out-of-state trust. Beginning in mid-2009, McClatchy's Miami Herald ran an award-winning series of muckraking articles (Miami Herald Watchdog - Allen Stanford Case) taking regulators, lawyers and politicians to task for allowing the establishment and operation of Stanford Fiduciary Investor Services, Inc. On July 5, 2009, the paper identified a victim of the Miami office under the headline 'State aided suspect in huge swindle' - we withhold the names of the persons identified by the Herald:


'[Name withheld] says word of the Miami office spread throughout the hemisphere. She recalls escorting her father to the Miami office four years ago. Their trust representative, [name withheld], offered a five-year, $300,000 CD at higher returns than most banks, said [she]. Her father, 69, a retired banker from the Dominican Republic, signed a trust agreement and a check. The money was to go to Stanford's bank in Antigua, which issued the CDs."


The reader is left to wonder, in both the OIG case and the Miami Herald case: Just how high was the interest rate in comparison to that offered by other banks? Certainly a fact-oriented newspaper would be interested in such an important detail, one that is now considered as a badge of fraud in Ponzi schemes. The reader would probably want to know why the Dominican man fell for the scheme; for he was a banker himself - we have seen that the Mexican bank accountant was suspicious. We recall that master fraudster Charles Ponzi was paying his investors impressive rates of return: some investors were in fact paid $750 interest on a $1,250 investment. He had learned the scheme named after him during his rise from teller to bank manager at Banco Zarossi in Montreal. The bank was paying impressive interest for the time, 6% or double the average 3% rate, funding the payments with principal received from new investors. Mr. Zarossi fled to Mexico with much of the proceeds. As for Charles Ponzi,  a very simple financial analysis of his deal would have exposed his fraud. At first bank examiners did not detect any fraud. As the truth became known, bank regulators were worried that an exposure would result in a banking collapse. The Boston Post won the Pulitzer Prize for Journalism for its investigative reporting on the case.


Since the Miami Herald has charged state regulators with aiding the scheme, as virtual co-conspirators if not just grossly negligent regulators, we would also want to know if Stanford's Miami office was complying with the terms of the agreement between Stanford Trust and Florida: Did the newspaper obtain a copy of the trust agreement? Was it accepted by Stanford Trust offshore and signed offshore by Stanford Trust, and then returned to the investor in Florida? Was there also an application for a trust agreement to be signed in Miami and forwarded to Stanford Trust offshore? Further, was the CD, which was apparently the asset to be held by the trust once the trust agreement was in effect, delivered to the customer later, or was the CD delivered in Miami exchange for the check?


The publication of the answers to these questions would certainly help answer the question as to whether the trust was conducting discretionary trust business in Florida contrary to its agreement with the state to run a representative office only; i.e. the sales office would be in Miami, but the sales themselves would be approved hence actually made offshore. Of course we may question the utility of allowing offshore representative offices of international banks, trust companies and financial institutions to exist in the first place. The big difference, from a regulatory perspective, between dealing with a representative in the United States whose boss is upstairs, and a representative whose boss is in a tax haven, is that the boss upstairs and the company's records may be immediately examined in this country and the laws and regulations duly enforced, but the federal and state regulators do not have any authority in foreign countries.


Since it appears that the victim identified by the Miami Herald may have been residing in the United States at the time, we would also want to know: Did he file tax returns as a resident alien? Did he report calculated interest income on the CDs? Did he file Treasury Form TD F 90-22.1 REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS?


I spoke with the Miami Herald's lead investigative reporter, Mike Sallah, now editor of Miami Herald Investigations, during the course of his investigation of the Stanford Fraud, an investigation for which he won a pretigious award, the Sigma Delta Chi award from the Society of Professional Journalism for "exposing sweeping government failures that allowed billionaire Allen Stanford to launch a $7 billion Ponze scheme from a bayfront highrise." (Miami Herald 5/2/2010). I pointed out to Mr. Sallah that many of the fraud victims may have been fraudsters themselves, hiding money from tax authorities, for instance, or laundering drug money and other criminal proceeds, and that U.S. taxpayers and residents are supposed to file Form TD F 90-22-1 to report foreign financial accounts, something that he should look into. He brushed aside my observation, and seemed hell bent on going after state regulators and the lawyers involved.


I had been egging Mr. Sallah on in reference to the lawyers for some time, but having reviewed quite a few documents, I now have serious doubts about the culpability of the banking regulators and most of the lawyers - I did find good reasons to literally have contempt for the arrogant arm of the Florida Supreme Court that regulates lawyers, The Florida Bar, which is, as an integrated bar, part and parcel of the Supreme Court itself. As for money laundering and U.S. tax avoidance and evasion, I found references in the negotiations with the State that products and services would be marketed to non-U.S. citizens, and the Stanford sales literature used in Miami said trust services were for non-U.S. citizens and residents, but the agreement between Stanford and the State did not bar marketing to U.S. citizens or resident aliens subject to the tax laws of the United States. I supposed that everyone in this free country, regardless of their country of origin or citizenship, was welcome to do business via the representative office of another country.


In any event, we suppose that everyone involved should be interested in the Instructions to Form TD F 90-22.1, which state that each United States person who has a financial interest in foreign financial accounts with an aggregate value exceeding $10,000 during a calendar year must report it with the Department of Treasury on Form TD F 90-22-1. A “United States person is a citizen or resident of the United States, or a person in and doing business in the United States. A financial account is any financial instruments accounts. A financial interest in a foreign financial account is one in which the U.S. person is the owner or has legal title whether or not the account is held for the benefit of others by an agent, nominee or attorney, and includes interests of more than 50 percent in corporations, partnerships, and trusts. See Form TD F 90-22.1 (Rev. 10-2008) for further information, and consult your tax accountant and/or attorney.


The penalties for failing to file the form can be draconian: "For an FBAR violation occurring after Oct. 22, 2004, the maximum civil penalty for a willful violation of the FBAR reporting and recordkeeping requirements is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Non-willful violations can result in a penalty as high as $10,000 for each violation. Criminal violations of the FBAR rules can result in a fine and/or five years in prison." (IRS FS-2007-15, February 2007). And, "Civil and criminal penalties for non-compliance with the FBAR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together." (IR-2008-79, June 17, 2008) 


Now the Internal Revenue Service, pursuant to its investigation into United States taxpayers as part of its Offshore Compliance Initiative, is following up on the angle ignored by the Miami Herald. On November 30, 2009, in the United States District Court Northern District of Texas Dallas Division, attorneys for the Tax Division of the United States Department of Justice submitted an 'Ex Parte Petition for Leave to Serve John Doe Summons', supported by a  'Memorandum in support of ex parte petition for leave to serve "John Doe" summons', in the case of Securities and Exchange Commission v. Stanford International Bank et al (Civil #3:09-CV-0298-N), "IN THE MATTER OF TAX LIABILITIES OF: JOHN DOES, United States clients of Stanford Group Company, Ltd., who, at any time during the years ended December 31, 2002 through December 31, 2008, directly or indirectly had an interest in or signature or other authority over any financial account maintained at, monitored by or managed through Stanford International Bank, Ltd., or directly or indirectly held a beneficial ownership interest in a corporation, trust, foundation, or other entity formed by or managed through Stanford Trust Company, Ltd."


"The informants who were SGC financial advisors for investors revealed that SGC and STCL generally did not advise its customers to file required annual reports with the Internal Revenue Service on Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR").


“[Revenue Agent] Reeves' declaration pointed out that while some 15-17,500 FBARs should have been filed annually by the U.S. owners of SIB CDs, only 5,000 FBARS were filed in three years. This fact suggests significant non-compliance by U.S. owners of offshore accounts at SIB.


“According to Reeves, another indicator of non-compliance with the Internal Revenue Code is that interest income earned by U.S. customers on SIB accounts may not have been included in the Form 1099 reports sent by SGC to the IRS (Note: An SGC customer with SIB accounts disclosed his consolidated statements and Form 1099 from SGC to the IRS to confirm that no interest income from SIB was included in his Form 1099).


“One SGC financial advisors stated that only 1 in 7 of his U.S. clients may have been fully complaint with respect to Schedule B, FBAR or income reporting requirements for SIB accounts. Based on the foregoing, the IRS has a reasonable basis to believe that members of the John Doe class here may not have complied with internal revenue laws."


The petition was granted by the Court and an Order was served on Ralph S. Janvey, Receiver of the assets and records of Stanford Group Company, Stanford Trust Company, Ltd., Stanford Fiduciary Investor Services, Inc, and related entities, to the effect that Revenue Agent John Reeves or any other officer or agent could obtain records that bear the names of investors and "identify U.S. residents."


Michael Quilling, a lawyer representing some Stanford investors, claimed that his clients paid income tax and did not have offshore accounts to report, so the IRS filing in the SEC case did not apply to him. (Bloomberg 12/3/09)


Arthur Simon, formerly the director of Florida's Banking Division who signed the Memorandum of Agreement with Stanford Trust allowing Stanford Investor Services to open its Miami office, informed me that it is his understanding that it is "most unlikely" that the office dealt with U.S. residents. He said that the IRS and United States enacted specific laws and regulations limiting the tax benefits that had formerly been available to U.S. investors and grantors of offshore trusts, and set stiff penalties for failure to report offshore accounts. Nevertheless, he said, incentives remained for Latin American citizens, due to political instability and other home country concerns, to sequester assets offshore in tax shelters.


For example, as the growth of asset-protection trusts accelerated, the Treasury Department believed that offshore trusts were primarily being used as tax avoidance vehicles for many U.S. persons, and reasoned that the existing reporting and compliance systems were insufficient to monitor the transactions of the foreign trusts with U.S. beneficiaries. to curb abuse, the Small Business Protection Job Act of 1996 increased required reporting requirements and set a penalty for non-compliance.


Since IRS informants did claim that a large portion of U.S. persons failed to comply with the reporting requirements, we have asked the United States attorneys involved to provide us with any information they can about the number of U.S. citizens and residents and foreign business persons who did not comply with the requirements.


Angela Shaw, who said she lost $4.5 million to Stanford, and is director and founder of Stanford Victims Coalition, which has 4,000 members from 38 states and 52 countries, said she believes our question as to how many Stanford victims were fraudsters themselves, and what she calls our "seriously mistaken assumptions," calls for an apology to a lot of Stanford victims - she did not say how many as no one really knows.  It is certainly not our intention to blame the victims or to say that people are generally defrauded by con artists because they are greedy - do we not all have desires? She places the blame squarely on the SEC for not scrutinizing the transactions more closely and allowing the CDs to be sold to unqualified U.S. investors.  As for non-U.S. citizens, "If an investor held citizenship in another country," she explained, "they didn't have to meet the accredited investor criteria defined by US securities laws, so Stanford pushed those investors' sales through other entities, primarily Stanford Fiduciary Investor Services so they wouldn't be subject to federal securities regulations. Stanford wanted to get around the SEC and FINRA and they used the state regulated entities to do just that - and not just in Florida.


"There is a lot more to this story than the Miami Herald reported," she said, "as that trust office that was illegally set up in Florida was replicated two more times – under the state banking regulators in Texas and in Louisiana, and each have their own, unique criminal spin...."


We agree that the Miami Herald story is incomplete. Indeed, at this stage in our investigation we believe that certain portions of the award-winning series is not only inaccurate but are actually malicious. Thus far, after examining considerable documentation, we have seen no hard evidence at all that Florida banking regulators violated Florida or federal law. We welcome receiving such evidence, anonymously if need be, so that we may turn it over to state and federal prosecutors.


We do have reason to believe some investors may have violated the law, perhaps unwittingly. We have heard it said that "ignorance of the law is no excuse." Lawyers may beg to disagree, and have had considerable success with cases where the accused persons had no intent to break the law because they did not even know it existed despite its publication in law books they never read. Florida suspects in need of a lawyer may contact The Florida Bar and consult other sources. A number of lawyers have experience in defending tax crime cases. For example, we have found a December 7, 2009 blog by David S. Seltzer, a Florida tax evasion criminal defense attorney, on the Internet. He writes about the penalties that might be imposed on Stanford investors, which he says would add insult to injury. He claims that "many taxpayers depend on their tax professionals and financial institutions for information about tax reporting. Someone without a financial background may genuinely not know that overseas income is taxable.... As a Miami tax evasion criminal defense lawyer, I believe these are very serious penalties that may be disproportionate to the crime if the taxpayer genuinely didn't realize there was a reporting requirement.",


As for Mr. Stanford's taxes, according to a Motion to Intervene and Motion for Relief filed by IRS lawyers with the Court on March 13, 2009, the IRS believed at the time that Allen Stanford and Susan Stanford owed back taxes from 1999-2003 of precisely $ 110,097,287, penalties of $55,838,222, interest of $60,710,028, and would probably owe much more thereafter. Nobody is feeling very sorry for him.









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