People love an exciting crime story, and storytellers are inclined to spin lurid tales to oblige them. Yet when reporters and their editors employ sensationalism to twist news stories beyond resemblance to the truth that the known facts should convey, and win awards for doing so, they should be stripped of their medals and drummed out of the news corps.
We have already demonstrated that 1) former Florida bank regulation director Arthur M. Simon was repeatedly and unfairly defamed by the Miami Herald, as he did not, over the objections of the banking department's chief counsel Richard T. Donelan, approve of an agreement with Allen Stanford et al to open an international trust representative office in Miami; 2) contrary to Miami Herald reports, the agreement he signed was in no way illegal or contrary to state or federal law; 3) contrary to Miami Herald reports, Dr. Simon did not permit Stanford Trust Company Limited d/b/a Stanford Fiduciary Investor Services to violate Florida law during his tenure as director of the banking division; 4) contrary to Miami Herald reports, Florida law did not prohibit such an office from opening; 5) contrary to the Miami Herald reports, Stanford could have otherwise legally proceeded to open such an office, but decided to submit to criteria proposed by the Department of Banking, criteria that in principle was already standard in respect to out-of-state domestic trust representative offices; 6) contrary to the Miami Herald reports, the agreement did not exempt the Florida representative office of Stanford Trust Company from state and federal anti-money-laundering laws or any other laws whatsoever including securities violations; 7) contrary to Miami Herald reports, the actions brought against the Stanford Group entities and related persons are for securities violations and not for trust representative office activities per se, therefore the regulatory responsibility for that would not have been with the state banking division but with the state securities division and the federal regulatory agency.
Now we turn to the Miami Herald account of the Florida banking division's examination of the conduct of Stanford Trust Company's representative office in Miami, d/b/a/ Stanford Fiduciary Investor Services. Merely representative offices of out-of-state trust companies are usually not examined by bank examiners because it is supposed that the home state of the trust company is conducting examinations, the out-of-state representative being just that, merely representative, and not conducting discretionary trust business. Of course if information came to the banking division's attention that a trust representative office was conducting trust company business, that is, acting as a financial institution in the state without being properly registered as a financial institution, then an investigation into the information by way of examination should be conducted.
A GOOD CAUSE FOR EXAMINATION
The first visit by bank examiners to Stanford Fiduciary Investor Services office was apparently prompted by the fortuitous discovery by bank analyst David Burgess of an article in Miami Today, as follows:
Week of Thursday, November 16, 2000
Stanford Fiduciary to increase staff, consolidate downtown
by Candi Calkins
'Stanford Fiduciary Investor Services will soon double its presence in downtown Miami. Nelson Ramirez, executive director, said the Houston-based company will consolidate its Miami operations in one location and double the number of employees hired to serve international clients by the summer. The Stanford Group will lease an additional floor in the Miami Center, 201 Biscayne Blvd., Mr. Ramirez said. He said the move is scheduled for May or June following renovations to the space. Stanford's Miami representative office, which was first approved last year as the state's first representative office of an international trust company, now occupies one-half of a floor in the Miami Center. The representative office, which reports about $10 billion in assets under management or in an advisory capacity, employs about 18 people. The company reports it has about 30,000 clients in 57 countries. Another Stanford Group company, a full-service broker dealer at 1221 Brickell Ave., employs about 15 people. Mr. Ramirez said that company will add about 30 new positions when the move is completed, likely by May or June. "We're going to be able to provide a full investment and private banking service for the international client," Mr. Ramirez said. "It would be a lot more efficient to be able to provide services to the client from one location." Stanford Financial Group, the parent firm, owns 11 Stanford companies, including offices in the US, Latin America and Caribbean.'
The following handwritten notations by bank officials appear on the body of the above article:
Linda - I ran across this article by accident, but it looks like we should do some investigation, a trust rep office should not have any assets under mgmt. Also, I've never heard of a TRO [trust representative office] with 36 (or 18) employees. (1) See Page 2 # 3 of agreement for ability to examine. -DB- [David Burgess] 12-7
(1) Also never heard of TRO with 30k clients or $10 billion AUM [assets under management] even as a 'convenience' provider. -A-
DB- I agree, David. Let's copy 'agreement' & article to Battle & have one of the WPB [Division of Banking, West Palm Beach office] guys go to Miami to take a look. -LT- [Linda Townsend] 12/29
We note that Dave Battle was with the Division of Banking, as Area Financial Manager for the West Palm Beach office. He reported to Linda Townsend in Tallahassee - Linda Townsend reported to the Division Director. Mr. Battle is a very experienced bank examiner, and he is also a qualified and highly competent forensic analyst. Linda Townsend is a long-time Division of Banking employee. In 2000 and before, she was the Department of Banking and Finance's Division of Banking Bureau Chief with responsibility for South Florida. After the Office of Financial Regulation was created, she continued in the same role.
David Burgess was the banking analyst whom the Miami Herald said wrote the crucial legal memo that provided justification, contrary to federal and state laws, alleged the Miami daily rag, for the illegal establishment of Stanford Trust Company's international trust company representative office in Florida - but we have already seen elsewhere there was nothing illegal about the agreement between the trust and the state for the establishment of that office. On May 27, 2010, Arthur M. Simon, the banking director at the time, refuted the notion that Mr. Burgess had masterminded an illegal arrangement between Stanford and the State of Florida:
"Obviously, David Burgess played a role here. However, in my opinion he did nothing wrong – at least with regard to the Memorandum of Agreement. He reported to Linda Townsend and me. His information was timely, impartial and accurate. Although he helped Richard Donelan – constructively I might add –with preparation and negotiation of provisions in the MOA, he was not responsible for the initial decision to proceed with an amicable settlement of the pending Stanford matter (i.e., the parties’ legal dispute over the pending international trust company representative office) nor was he responsible for the final decision to execute the MOA. I was. Of course, neither he nor Donelan advised AGAINST execution of the MOA. Much later, when the Department of Banking and Finance or Office of Financial Regulation began having concerns about business being conducted by Stanford Fiduciary Investor Services in Miami, I am confident he was involved to some degree, given his position as the DBF/OFR senior trust company analyst. But I can’t say for sure."
THE MIAMI HERALD'S SUPPOSED WHISTLE-BLOWER
The banking division, having been alerted to the Miami Today article suggesting that Stanford's Miami trust representative office was engaged in or planning to engage in what would appear to be financial institution activities or activities outside the purview of a merely representative office, scheduled the first visit to Stanford's Miami office.
"When Jasper [bank examiner Keith Jasper] showed up at the office in 2001," reported the Miami Herald, "he said he was unclear over what to inspect.... "
However, the Miami Herald, in its eagerness to characterize Mr. Jasper as an ignored whistle-blower, did not report that the records immediately available to its reporters and editors showed that Mr. Jasper should have been quite clear about his examination duties. First of all, the terms of the December 10, 1998 Memorandum of Agreement between Stanford Trust Company and the State of Florida specified what Stanford Trust Company d/b/a/ Stanford Fiduciary Investor Services could and could not do in Florida.
The Agreement separated the activities of a trust company, which would be fully regulated as a financial institution doing business in Florida, from the activities of an out-of-state trust representative office, which would be limited to merely representing a trust company and not engaging in actual trust company functions or activities over which trustees themselves normally have discretion. Notwithstanding a complaint from someone, an out-of-state trust representative office would not be regulated or regularly examined by state bank examiners because the regulation of the trust company itself would presumably take place by bona fide authorities in another state of the United States. Stanford Trust Company Limited might have landed in Florida under the radar if it had not tried to register itself with the Florida Department of State's Division of Corporations using "trust company" in its name, for those words are expressly prohibited by Florida law from being used by any entity besides a regulated financial institution. The general definitions, so to speak, were incorporated in the Agreement as follows:
"4. The parties agree that the following enumerated activities will be deemed as permissible business activities to be conducted by the officers and employees at any trust representative office located in Florida: a. Distributing and communicating as to various investment products available through trusts established with Stanford Trust and its affiliates; b. Forwarding trust agreements and other documents executed in Florida by clients to Stanford Trust offices located outside the State of Florida, and vice versa. c. As a convenience for customers only, forwarding money or securities to Stanford Trust Offices located outside of the State of Florida and receiving money or securities for customers from Stanford Trust offices located outside the State of Florida; d. Facilitating communications between customers and companies where investments held in trust are located; e. Obtaining rate quotes and other information and communication such information at the request of existing and potential customers; f. Responding to customer inquiries by communication persons or entities involved in trust accounts established at offices of Stanford Trust located outside the State of Florida; g. Acting as liaison between existing and potential customers and offices of Stanford Trust located outside the State of Florida; h. Providing information to customers concerning existing trust accounts established at offices of Stanford Trust located outside of the State of Florida; i. Soliciting new fiduciary accounts on behalf of Stanford Trust and affiliates, including providing brochures and other written information, and conducting meetings with prospective customers; j. Reviewing past investment decisions and investment performance with customers.
"5. The parties agree that the following enumerated activities are not permissible business activities to be conducted by the officers and employees at any trust representative office located in Florida, and Stanford Trust agrees to refrain from conducting any of these activities at any trust representative office located in Florida: a. carrying on a trust business by acting as a (i.) trustee; (ii.) committee, guardian, custodian, conservator, or other personal representative of a person, property, or an estate; (iii.) registrar or transfer agent of stocks, notes or bonds; (iv.) fiscal or financial agency; (v.) investment advisor; (vi.) receiver; (vii.) trustee in bankruptcy; or (viii.) assignee for creditors; b. conducting discretionary investment activity including any of the following when done on a discretionary basis: (i.) execution of buy and sell orders; (ii) selection of securities for customer accounts; (iii.) collection of dividends and interest, periodic deposit of income to an account, remittance to customers or reinvestment; (iv.) bookkeeping (other than appropriate record keeping for the operation of the trust representative office), receipt of deposits, and exchange or delivery of securities (except as provided in sub-paragraph 4.c. of the Agreement), (v.) receipt of annuities, rents, royalties, or similar payments, except to forward such items to Stanford Trust or it its customers upon request of customers of Stanford Trust; (vi.) safekeeping of securities (except as provided in sub-paragraph 4.c. of the Agreement); (vii.) purchase and sale of securities, physical possession thereof, bookkeeping (other than appropriate record keeping for the operation of the trust representative office), and collection functions; c. effecting client transactions, such as trading or buying stock, or closing a transaction; d. acting as an investment advisor; and e. performing acts of discretion regarding any fiduciary accounts, including daily administration of accounts. "6. Stanford Trust agrees that no employee stationed at any trust representative office located in Florida shall have or exercise discretionary signatory authority on behalf of Stanford Trust regarding any customer account or related matter."
Furthermore, the Miami Herald neglected to mention that the bank examiners had in hand a procedural checklist of what to look for during the examination, as follows:
Determine activities conducted at the office. Are they in conformance with the written agreement? Are any discretionary trust decisions or day to day trust adminsitration made/conducted at the office?
Are sufficient records maintained to determine kind/scope of business conducted?
Interview management for: description of business conduced; clarify newspaper article [Miami Today article] description; determine procedures followed at the office; other.
Obtain and review job descriptions, if available.
Obtain and review any other documents governing operation at the office and transactions/business with offshore office (trust company).
Obtain/review logs, minutes, or other documentation of office business.
Review customer files.
Ascertain office structure/management responsibilities.
Ascertain how customer relationships are managed; e.g. assigned on site relationship managers, periodic visitation by trust company personnel, etc..
Ascertain how documents/assets transferred to/from main office.
Review asset safekeeping/transfer procedures.
Review computer links with the trust company. Is access to trust company files appropriately limited? What kind of communication/transactions can be effected through the system?
Ascertain any office involvement in investment transactions: How are investment instructions communicated to main office? How/where are investment transactions conducted?
Obtain/review literature disseminated by the office. Should identify Stanford Trust Company as provider of trust services at its offshore office. (Should not imply that rep office is a full service office of the trust company.)
Check for clear separation/identity of office from other Stanford entities.
Check for relationships/activities for entities other than the trust company.
Obtain as much information as possible about Stanford Trust Company and related entities.
Now, then, Mr. Jasper, having had the benefit of hindsight, and in response to the Miami Herald's loaded questions, provided savory grist for the scandal-mongering paper mill, which was spun to leave the reader with the impression Mr. Jasper and his fellow examiner Howard Smith, whom the Miami Herald did not mention, discovered that the fraudster's employees in the "opulent" office - its opulence of course indicative of fraud - were stuffing hundreds of thousands if not millions of dollars into bags to be thrown onto private planes, shredding the evidence, denying that there were any records of the misconduct suspected.
Here are a few excerpts from the Miami Herald's award-winning series, MIAMI HERALD WATCHDOG - ALLEN STANFORD FRAUD:
"When Florida regulator Keith Jasper arrived at the opulent Miami trust offices of billionaire banker Allen Stanford in 2001, he expected to see records showing that money turned over to the company was safely invested. But when the veteran bank examiner asked for the reports, he was told there were none. In fact, records of the millions of dollars that flowed though the office has been shredded. State regulators could have demanded the documents, or even taken steps to shut down the office to protect investors over the next eight years. Stanford's offices were allowed to continue selling investments, destroying records and sending money overseas on private jets in what prosecutors are now calling an enormous Ponzi scheme."
"He said he asked to look into pouches going overseas, but was told there was none that day. Jasper said he then asked for any other records. 'We found nothing,' he said, 'I think they told us something about officers keeping papers in their desks, and we asked to see that, and of course that wasn't available.'"
"Though he had been examining banks and trust offices since 1969, 'The Stanford office was like no other place I had seen before,' he said. When he arrived, he was led down a hallway with ornate wood walls and expensive art work to a waterfront room to see a promotional video. It was a 'dog and pony' show,' said Jasper. 'They showed us the film about how Stanford got started, and we sat and watched it.'"
"'I tried to write it down plain enough so they could see what was going on," said Jasper, 65, now retired from the State Department of Banking and Finance. 'More should have been done.' From the moment Jasper arrived, he said he found employees funneling hundreds of thousands of dollar to Stanford's bank in Antigua. 'They weren't wiring the money - like most financial institutions - but stuffing checks in bags to send overseas. They had these pouches that were going back and forth by courier in airplanes, and we had no access to them. I had never seen anything like it.' He reported his findings to supervisors, but they never responded. 'It was there for them to read,' Jasper said."
"The shredding of the records alone was enough for the state to launch an investigation into the Miami operation. Under the state's agreement, state agents had the right to ask for all the records of money transfers. If they had, state agents could have discovered that customers were buying CDs from office employees - in violation of the agreement - In addition, state agents could have found employees were giving financial advice - another violation."
THE RED HERRING
As a matter of fact, Mr. Jasper saw nothing that was not in accord with the principles of the Memorandum of Agreement. He saw nothing like he had seen before because the banking division did not examine trust company representative offices because there was supposedly nothing to examine notwithstanding a complaint that something illegal was being done, such as actually operating as a trust company without registering as such. But in this case, of an offshore or international trust company representative office, certain standards expected of all trust company representative offices, no matter where their parents were located out of state, were set forth in the Agreement.
The marketing presentation, including the opulent premises, was a permitted activity. The documents shredded were photocopies and were shredded after the originals were received in Antigua. Mr. Jasper did not attach records indicating hundreds of thousands or millions of dollars were being collected. He provided a Transmittal Log for March 20, 2001, that indicated that checks totaling $176,464, in amounts from $189.86 to $70,100, were transmitted - items collected over an unknown period of time. Mind tou that the principles of the Agreement actually prohibited Miami employees from keeping records and having any discretion over client accounts.
Furthermore, the shredding and absence of records was in accord with the purposes foreigners may have in establishing trusts in countries with secrecy laws. For instance, a non-U.S. person might want to hide his or her assets from a repressive government and avoid or evade income and estate taxes and probate costs. A non-resident alien would not want to establish such a trust in the United States because it would be subject to U.S. law and the reach of U.S. courts and subsequent disclosure, therefore she or he could conveniently fly into Miami and meet with a representative of an offshore trust, keeping the records and their location in Antigua a secret - the assets themselves, according to the trust agreements, were to be held in British Virgin Islands. The prospective customer could fill out an application for a trust service agreement, along with instructions to the trustee to buy a Stanford International Bank certificate of deposit once the trust is approved. That application along with his check would be forwarded to Antigua, where the offer to enter into the trust service agreement would be accepted, and the certificate of deposit purchased. Hence it would appear that the actual business with non-US clients, including the acceptance of the trust agreement and the purchase of the security, was done in Antigua. The sale of the securities was, arguably, to foreigners in a foreign land, and therefore not subject to U.S. securities law nor to certain SEC regulations exempting registration, providing that foreigners were not actively being defrauded on U.S. soil.
Of course we know now that the international trust company representative office structure was just part of a colossal con perpetrated by Allen Stanford and his U.S. co-conspirators and headquartered in Houston. And we now know that the SEC's Fort Worth office was aware since 1997 that Stanford was probably operating a Ponzi-scheme, but the enforcers took a pass on it because they figured that most of the victims were foreigners; and because they did not as U.S. regulators have jurisdiction over Antigua therefore evidence would be nearly impossible to obtain; and because they had much easier infractions to pursue to their immediate credit. And now we know very well that the Stanford International Bank in Antigua was just a Potemkin bank with a figurehead president, that the chief Antiguan bank regulator was Allen Stanford's blood-brother employee, and that Stanford's Greenberg Traurig expert lawyers had forged favorable Antiguan banking laws.
As for defrauding foreigners on U.S. soil, U.S. courts have accepted jurisdiction over such cases. For example, see the jurists discussions in Securities and Exchange Commission v. Kasser 548 F 2nd 109: "We do not think Congress intended to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners.... It is hard to believe Congress meant to prohibit the SEC from policing (such) activities within this country.... The federal securities laws, in our view, do grant jurisdiction in transnational securities cases where at least some activity designed to further a fraudulent scheme occurs within this country.... The securities acts expressly apply to 'foreign' commerce.... We decline to immunize for strictly jurisdictional reasons, defendants who unleash from this country a pervasive scheme to defraud.... To deny such jurisdiction may embolden those who wish to defraud foreign securities purchases or sellers to use the United States as a base of operations. By sustaining the district court as to the lack of jurisdiction, we would, in effect, create a haven for such defrauders and manipulators. We are reluctant to conclude that Congress intended to allow the United States to become a 'Barbary Coast,' as it were, harboring international securities 'pirates'."
Considering Stanford's experience with the Fort Worth SEC examiners, we are not surprised that he was looking about for a choicer location for his fraudulent operations. Miami, aka the Magic City aka the money laundering capital of the nation, was perfect because it was easily accessible by foreigners, and, as his lawyers discovered, there was a loophole in Florida law: so-called trust representative offices did not have to register with Florida regulators as financial institutions hence were not examined by bank examiners. In effect, the Stanford Fiduciary Investor Services of Miami was a jewel of the grand confidence game, giving us due cause to wonder if any of the lawyers who conceived it knew Allen Stanford was a thief back then, in which case they could be correctly called pettifoggers and disciplined.
Stanford Fiduciary Investor Services, as a virtually unregulated trust representative office, was a red herring, an illegal legal fiction, if you will, that still causes us to take our eyes off the grand larceny. To this very day, we are unduly distracted by the fraudulent gem. To better appreciate the legal aspects of the red herring, the reader may be interested in a May 11, 2010 e-mail that we received from John Kuczwanski, Deputy Director of Communications for the Office of Financial Regulation of Florida, in response to our question about the examination of trust representative offices:
Question: IF a trust representative office (TRO), which, by the way, is not a 'trust service office' located in a bank etc as defined by law, "may be established without a charter, license, authorization or other approval document from the Division of Banking as long as the TRO acts as a representative of the out-of-state trust company and does not make discretionary decisions or administer fiduciary accounts in Florida," as Greenberg Traurig counsel for the Stanford Trust Company Limited wrote, and IF, as further noted by that counsel, TROs are not expressly identified in or restricted by Florida law, and may operate by virtue of a non-statutory convention of the Banking Division called a "Courtesy Letter", THEN how would the Banking Division ever know if the domestic out-of-state TRO was complying with the informal set of rules set forth in the List I mentioned above - the List that is presumably based on Paul M. Horman's 1981 letter?
Answer: "A TRO for an out-of-state trust company can not and does not operate in Florida “by virtue of a non-statutory convention called a “courtesy letter”. An out-of-state trust company is able to establish and operate a TRO in Florida because the activities a TRO engages in are not considered to be the operation of a “trust business” as defined in Section 658.12(20), Florida Statutes. Florida law does not require an out-of-state trust company to provide any notice to the Office of Financial Regulation (“OFR”) regarding the establishment of a TRO in Florida. On occasion, however, out-of-state trust companies do notify the OFR regarding the establishment of a TRO as a courtesy. The home state regulator of an out-of-state trust company may also notify the OFR regarding the establishment of a TRO by one its trust companies.
"The state regulator that licenses or charters a trust company is responsible for regulating the operations of the trust company, including the operations of a TRO operating in another state. Should another state regulator determine that a TRO is engaging in prohibited activities in Florida, that regulator would have the responsibility of notifying the Office of Financial Regulation (OFR) so that appropriate enforcement action(s) could be coordinated between the regulators. State regulators, including the OFR, often enter into information sharing and joint examination agreements to enhance and coordinate the regulation of state chartered financial institutions with operations in more than one state. The OFR is also an accredited member of the Conference of State Bank Supervisors, a national organization that advocates for the state banking system and promotes communication between the various state banking departments.
"Should the OFR receive information from any source that indicates a TRO operated by an out-of-state trust company is engaging in any prohibited activities, the OFR is authorized pursuant to Section 655.032, Florida Statutes, to conduct an investigation to determine whether a violation of the financial institutions codes or the rules adopted by the Financial Services Commission pursuant to such codes has either occurred or is about to occur (e.g. conducting a trust business without a license). Should the OFR’s investigation establish that a violation is occurring or is about to occur, the OFR’s enforcement authority includes the ability to seek injunctive relief pursuant to Section 655.034, Florida Statutes, and impose administrative fines pursuant to Section 655.041, Florida Statutes.
"As state above, the use of the term “courtesy letters” to characterize or imply that the OFR issues some type of approval regarding the establishment of, or any authorization to operate, a TRO in Florida by an out-of-state trust company is not accurate. An out-of-state trust company is able to establish and operate a TRO in Florida because the activities a TRO engages in are not considered to be the operation of a “trust business” as defined in Section 658.12(20), Florida Statutes. The OFR does not actively track how many TROs are being operated in Florida by out-of-state trust companies, so it can not provide an answer to your question regarding how many may have been in existence in 2009. The OFR did not conduct any on-site visitation at any TRO operated by an out-of-state trust company during the 2009 calendar year."
Florida's first known international trust company representative office was not the only loophole employed by the fraudsters. It has been claimed that certificates of deposit are not securities at all; but that argument is spurious, for the CDs were not insured, therefore there was risk, therefore there was investment, therefore the CDs were securities.There has been undue attention given to the pretense that the Stanford International Bank's certificates of deposits were securities exempt from registration in the United States under Regulation D, which allows securities to be sold to certain qualified buyers - sophisticated or "accredited" buyers. And it is claimed that Stanford Fiduciary Investor Services was created to sell the CDs to non-accredited buyers, i..e foreign fools. We do not know if a Form D was filed after the first sale, which is required to qualifiy under Regulation D, but we do know that far more than 35 sales were made to non-accredited buyers, which is prohibited under the Regulation D exemption, so there was no exemption. Regulation S has also been mentioned, which exempts registration of U.S. securities sold to foreigners on foreign soil, but that device is usually used for another sort of scam. In any event, there is no exemption for securities fraud, and foreigners and citizens purchasing securities in the United States are protected by U.S. securities.
An experienced securities attorney, who does not wish to be identified for personal reasons, said that the Stanford Trust Company Limited d/b/a/ Stanford Fiduciary Investor Services office was really unnecessary to originate sales of Stanford International Bank CDs to non-U.S. residents, because Stanford Group Company was empowered to do the same thing. Likewise, he saw no basis for the contention that Stanford's international trust company representative office in Miami could circumvent securities laws otherwise applicable to Stanford Group Company for marketing and sale of Stanford International Bank CDs to non-U.S. residents, especially since the anti-fraud provisions , in particular, always apply irrespective of whether the issuer registered the security with the SEC (or the sate) or not, and irrespective of whether persons and companies engaged in the fraudulent promotion and sale of securities are dutifully registered/licenses or not, and irrespective of whether affected investors are U.S. residents or not. Why then was the international trust company representative office created? One can only speculated about Allen Stanford's motivation, he said, and/or any legal opinion he relied on.
In any case, said the securities attorney, all the brouhaha about the Memorandum of Agreement between the State and Stanford, and the international trust company representative office, and ancillary questions about the Florida Financial Institutions Code, distract from the two most important issues, which are: the fraudulent nature of the Stanford International Bank CDs; and the inexcusably shallow enforcement of federal laws by the SEC. He said that if issues were raised about Stanford-related securities to Florida securities regulators, they would have referred the matter to the SEC field office in Florida, which in turn would have referred the matter to the Fort Worth field office. It was the field office in Fort Worth that really dropped the ball, he said.
The Office of Inspector General of the United States conducted an investigation of the SEC's responses to concerns regarding Robert Allen Stanford's alleged Ponzi scheme, and released a report on March 31, 2010 under Case No. OIG-526. The OIG investigation found that the "SEC's office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to the conclusion a mere two years after Stanford Group Company ("SGC"), Stanford's investment adviser, registered with the SEC in 1995." Here are a few excerpts that will show how explicit the Fort Worth examiners were when reporting suspicious activities:
"After reviewing SGC's annual audit in 1997. a former branch chief in the Fort Worth Broker-Dealer Examination group noted that, based simply on her review of SGC's financial statements, she 'became very concerned' about the 'extraordinary revenue' from the CDs and immediate suspected the CD sales were fraudulent. In August 1997, after six days of field work in an examination of Stanford, the examiners concluded that Stanford International Bank’s statements promoting the CDs appeared to be misrepresentations.... The Assistant District Administrator for the Fort Worth Examination program concurred, noting that there were 'red flags' about Stanford operations that caused her to believe it was a Ponzi scheme, specifically the fact that the 'interest' that they were purportedly paying on these CDs was significantly higher than what you could get on a CD in the United States...."
"The examiners also were concerned about the recurring annual 'trailer' or 'referral' fee that SGC received from SIB for referring CD investors to SIB, which they viewed to be 'oddly high' and suspicious. This suspicion was heightened because the examiners found that SGC did not maintain books and records for the CD sales, and purported to have no actual information about the SIB or the bases for the generous returns that the CDs generated, notwithstanding the fact that they were recommending CDs to their clients...."
In the SEC's internal tracking system, in which it recorded data about its examinations, the Broker-Dealer Examination group characterized its conclusion from the 1997 of SGC as “Possible misrepresentations. Possible Ponzi scheme.” “...the examination staff determined that as a result of their findings, an investigation by Stanford by the Enforcement group was warranted, and referred a copy of their examination report to Enforcement for review and disposition. In fact, when the former Assistance District Administrator for the Fort Worth examination program retired in 1997, her parting words to the branch chief were, 'keep your eye on these people [referring to Stanford] because this looks like a Ponzi scheme to me and some day it's going to blow up' ..."
The OIG reported that the matter under investigation was closed, however, after only three months; Enforcement mentioned the lack of U.S. investors affected by the potential fraud and the difficulty of getting information from Antigua."
In June of 1998, while the matter above was still under investigation, another investigation was opened by the Investment Adviser Examination in Fort Worth, and the examiners reported what they saw was "very suspicious" and that the Stanford Group Company had "virtually nothing" that "would be a reasonable basis for recommending the CDs to its customers."
So we can speculate reasonably as to why Allen Stanford and his co-conspirators were motivated to find a more opaque method of doing business with foreign investors: establishing a international trust company representative office in Florida - where such an office was not prohibited nor regularly examined - of a feigned offshore trust services operation, advertising its advantages: secrecy and tax shelter. What records? There is nothing suspicious about that!
Seasoned Florida bank examiner Jasper was just that, a bank examiner, not a securities examiner. He was not looking for CD sales. When the scandal broke, Arthur M. Simon, the State banking director who signed the Agreement with Stanford Trust, was astonished to hear that the Miami office was selling CDs of an Antigua bank, and he was surprised as well that so many people would buy them. Instead of personally blaming Dr. Simon and the banking division, the Miami Herald should have contacted the state securities division and the SEC.
Whether or not an employee of Stanford's Miami trust representative office could change hats, and, as a licensed broker-dealer, sell securities in the TRO office, is an open question.
THE FIRST VISIT REPORT
Mr. Jasper was definitely not a whistle-blower, and the Miami Herald embellished and twisted the facts, as can be seen by his actual visit report, which was immediately available to the reporters and editors:
Public Record provided by Florida Office of Financial Regulation
Facsimile of Memo dated April 5, 2001 from bank examiner Keith Jasper to his boss David Burgess. The Memo bears the stamp RECEIVED, Bureau of Financial Inst. District II, April 09, 2001," and is initialed by "DB" [David Burgess] and "JA" [???] -
MEMO. DATE: -04-05-01 TO: David Burgess FROM: Keith Jasper RE: Stanford Fiduciary Investor Services, Inc. Miami, Florida
Howard Smith and I visited the Miami office ("TRO") of SFIS Tuesday, March 20, 2001. The office is located in the Miami Center building, 201 S. Biscayne Blvd. The primary
purpose of the visit was to determine if the TRO was operating within the confines of a Memorandum of Agreement between Stanford Trust Company Limited ("STC"), Antigua, West Indies, and DBF. Our procedures consisted of posing questions to Mr. Ramirez and Ms. Llana, general observations, and requesting copies of fee schedules, marketing materials, policies and procedures, and various legal forms, logs, etc.
The quarters consist of approximately 11,000-sq. ft. of floor space located on the 12th floor of the building. A copy of the lease was not available. Mr. Ramirez believes the lease was signed some years ago by another Stanford company. He reported that there are 18 employees, i.e., executive director, office manager, eleven marketing officers, and five assistants. Ramirez also reported that there were no other Stanford Financial Group ("Stanford") companies or personnel operating from within the SFIS office or immediate surrounds. He did say, however, that a move to space on the 21st floor of the Miami Center is planned for mid-2001. SFIS will then have very similar space and offices. The other half of the 21st floor will be occupied by another Stanford company which provides brokerage services. Ramirez assured that there would be no shared space or common access points or keys, and that each entity would have separate security systems. There was no signage or other materials observed in the TRO office that would lead one to conclude that the TRO is other than a marketing only office.
Asked about the nature of the business activities conducted by SFIS, Ramirez assure that there is strict adherence to the terms of the Memorandum of Agreement. He indicated that no account or investment administration activity or acts of discretion are performed or conducted by SFIS or from within from TRO, all such activity handled in Antigua by the "seven or eight" employees of STC. Asked if we could see the client files, he indicated that all client files and documents are located at STC and maintained by STC personnel, not at the TRO or by TRO personnel. Ms. Llana provided a copy of a Transmittal Log (see Exhibit I) that lists items "pouched" to STC on 3-20-01. She indicates that copies are made of the items in case of loss, and that such copies are shredded when STC personnel advise of receipt. I was curious about the "envelopes" listed under numbers 20 and 21 on the log. Ms. Llana explained that the names listed are employees of STC and the envelopes contained non-client related correspondence, magazines, bills payable, etc.
Mr. Ramirez stated that neither he nor any of the SFIS marketing officers are designated account or investment administrators, but that marketing offices do serve as points of contact for the client relationships that they have individually developed. Ms. Llana indicated that no employees of the TRO have online excess to client account information including asset listings and transaction histories, and that no employees of the TRO can in any way effect client account transactions or change data bases. Such information may be obtained from the STC upon request for good reason. Ramirez and Llana report that they can access certain management reports in regard to client accounts. Such is not available through a Stanford LAN/WAN, but through internet connect. Marketing officers of course maintain their own "rolodex" information on clients and relationships.
We were furnished a copy fo the Stanford Fiduciary Investor Services Inc. Manual. See Exhibit II. The manual includes job descriptions for all SFIS personnel, and outlines a number of policies, procedures and permitted and non-permitted office and officer activities. Although the manual indicates that marketing officers may prepare and execute fiduciary account applications and other documents on behalf of STC, Mr. Ramirez states that for actual trust instruments such offices may only witness client signatures, not sign on behalf of STC. Trust instruments are reported to be pouched to STC for official corporate signature. It should be noted that the manual states that "Case, money orders and traveler’s checks are not acceptable under any circumstances." Each client is expressly informed of the cash policy. See Exhibit II.
Ramirez indicated that the marketing personnel receive an annual salary plus commission. New accounts are reported to be subject to a collective consideration process. The marketing officer extends initial consideration which must be subsequently OK's by Ramirez. Respective new account information then goes to STC for final approval. It was reported that 99% of STC accounts are revocable trusts. "Single- and multi-purpose trusts" are offered. Multi-purpose trusts appear to be more complex and may involved establishment (within the trusts) of International Business Corporations. It seems obvious that the trust products available can and most likely do provide tax havens. It is likely that strict conformity within the limited activity fo a TRO would also serve to ensure that U.S. tax regulations and reporting requirements are averted. Fairly extensive due diligence appears to be applied by marketing officers and assistants during the business development stage.
Asked about STC, Ramirez reported that it manages AUM ["assets under management" Ed.]of approximately $175 million, some $100 million of that total referred by the TRO. He stated that there are seven or eight employees in Antigua, four of those functioning as account administrators. Its quarters are located at 1000 Airport Boulevard, St. John's Antigua, West Indies. Its Post Office address is Box 315. Telephone: (268) 480-5930). Fax (268) 480-5939. He also stated that Miami is the only TRO office that has been established, but that STC is planning to apply for a Texas TRO in the near future. STC's target market is international high net-worth individuals. Marketing materials expressly state that SFIS is a representative office, and that STC "...offers international trust services to non-U.S. citizens and residents only.' STC is said to have a board of directors and an administrative committee.
Asked about the November 16, 2000 Miami Today news article, Ramirez indicated that doubling of the SFIS presence in downtown Miami was misquoted. He indicated that the "doubling" represents the move to the 21st floor where the affiliated brokerage will also be located. He further indicated that it is anticipated that only three to five new marketing personnel will be added to SFIS. The $10 billion in AUM represents total global holdings managed by Stanford. That figure is compatible with figures in internal publications and quoted in a marketing film which we were shown during our interview. Ramirez also stated that the statement that "We're going to be able to provide a full investment and private banking service for the international client," refers to Stanford and not to SFIS. He assured that SFIS would continue only to market the services of STC, and/or advise clients and potential clients of other services available through Stanford.
Exhibit IV - packet of marketing brochures, fee schedules, and various internal forms.
Exhibit V - hardcover book The Stanford Financial Group
Exhibit VI - copy of November 16, 2000 Miami Today article Stanford Fiduciary to increase staff, consolidated downtown
In an e-mail dated April 30, 2010, John Kuczwanski, Deputy Director of Communications for the Office of Financial Regulation, stated that, "Mr. Jasper’s visit and report did not indicate that the Stanford office was conducting any activities that were impermissible under Florida law and the Agreement"
THE SECOND VISIT REPORT
To: David Burgess - Financial Control Analyst
C. Benton Eisenbach, Jr. - AFM
From: Ralph S. Nastari - F/S
Date: November 30, 2005
Subject: Visitation of Stanford Fiduciary Investor Services, Inc. [sic], Miami Florida
The visitation of Stanford Fiduciary Services, Inc. [sic] (Company) began on Monday, November 28, 2005 and concluded on Tuesday, November 29, 2005. The Company's quarters have relocated to the 21st floor of the Miami Center Building. The purpose of the visit was to ensure that the Company is continuing to operate within the guidelines of a Memorandum of Agreement (Agreement) between Stanford Trust Company Limited (STC), Antigua, West Indies, and FLDFS, OFR.
Mr. Ramirez stated that strict adherence is being maintained with the terms of the Agreement, and reiterated that no account or investment administration or acts of discretion are performed by the Company. All such activity continues to be handled at Antigua. As previously reported, all client files and documents are located at STC and maintained by STC personnel, not at the Company or by Company personnel.
Mr. Ramirez confirmed that the responsibility and capacity in which the Company serves continued to be in the realm of marketing and sales only. Neither Mr. Ramirez nor any Company marketing officers are designated account or investment administrators. However, as Mr. Ramirez noted, and was reported in the previous visitation memorandum, marketing officers do maintain contact, and continue communication with clients for which relationships have been established by Company marketing personnel.
The Company has now established approximately $600,000,000 in 2,100 trust relationships being managed at STC, with STC holding approximately $900,000,000 representing about 2,640 trust accounts. Mr. Ramirez reported that globally, total assets under management, or in accounts for which advisory services is performed, is now in excess of $20,000,000,000. He again stated that the Company would continue to only market the services of STC, and/or advise clients and potential clients of other services available through Stanford.
Executive Director confirmation letter.
Stanford Fiduciary Investor Services income statement
Example of the company's transmittal log.
List of employees
Copy of the Company's policies and procedures which disclose products and services
Copy of the Company's policies and procedures regarding Compliance/Anti-Money Laundering.
Copy of the Company's policies and procedures regarding officer/employee titles, position smmaary and essential duties and responsibilities.
THE HUGE RED FLAG
Bank examiner Nastari obviously breezed through the international trust company representative office in no time, collecting documents and summarizing the Miami office's apparent compliance with the Agreement - by the way, there are great places for lunch nearby the opulent quarters. After all, what was there to find in a trust representative office except for some marketing and convenient client services such as forwarding and receiving documents? Nonetheless, a huge red flag, something that escaped the Miami Herald reporters, in the form of the fishy income statement attached to the examiner's report, indicated that the real business of the office was something other than services ancillary to a trust company.
The income statement for "SFIS Miami" is for the "Year to Date at October 31, 2005". We cannot say how many months are in that "Year to Date", but we shall assume that the year-to-date is for a complete year of 12 months, in which case the statement would have been better stated as "The Year Ending October 31, 2005." The Gross Income for that assumed period is reportedly $13,818,090. The largest expense item is Salaries and Wages of $6,886.830. The next highest expense is Rent of $560,285. Net Income is $5,276,308.
That means that its gross income per each of its 2,100 Miami-generated trust relationships would be about $6,600, and its net income per each one of those trusts would be around $2,500. We further assume that those 2,100 trusts were established over six years of operations, beginning in late 1998. We have a Schedule of Fees effective for 1999, which states that the set-up fee for a single purpose trust account is $125, and there is an annual management fee of .10% of assets. The more complex trusts have set-up fees ranging from $1,750 to $3,000, and there are annual renewal fees of $950 each.
But trust set-up and maintenance fee revenue would be properly booked to Stanford Trust Company Limited in Antigua, where the trusts were supposedly set-up and maintained, and not credited to the Miami office. Stanford Trust Company Limited in Antigua was obviously kicking back or allocating from its revenue some a commission or service fee to the Miami office. But that allocation, whatever it is for, is obviously in excess of revenues off the trusts. One might argue that $13,818,090 on the reported $600,000,000 of Miami-generated assets would be only 2.3% for the provision of those assets by the Miami office, but remember that the annual management fees range from a mere .10% to .50% of assets, or $600,000 to $3,000,000.
Why the parent trust in Antigua would want to allocate grossly excessive funds to the Miami office and in doing so generate a substantial profit in the United States, where it could be taxed, is a mystery. We do not know if the Miami net income was reported to federal and state tax authorities.
The financial statement itself is probably bogus. Something is obviously wrong with the picture painted. Bank examiners do scrutinize financial statements, and this one begs askance, beginning with, How is a mere trust representative office generating so much revenue? Let's see your general ledger, please, so we can examine the details. Oh, are these commissions on CD sales? What CDs? So you are selling securities in this office? We had better have the securities people take a look at this. Even then, there might not have been an examination short of complaints from the public.
According to Miami Herald’s January 10, 2010 report, “Charlie Stutts, former general counsel for the Florida Comptroller’s Office… said the state’s deal with Stanford was riddled with problems. ‘It’s unbelievable that they were able to pull it off,’ said Stutts, a Tampa attorney who helped write Florida’s banking law. Even after the office opened, regulators could have taken action, Stutts said. Beyond finding employees shredding records, examiners discovered more than a dozen stockbrokers selling CDs. ‘That should have been a red flag – that’s a tip-off,’ Stutts said. ‘CDs are securities. They had a right to go in there and do an audit.’”
However, as the Miami Herald knew very well from the 2001 and 2005 examiners’ visitation reports on hand, there was no report of CD sales by the examiners. The third visitation report, dated in 2007, is unavailable to the public because of the pending investigation. Mr. Stutts was general counsel for the Comptroller’s office prior to the time the deal with Stanford Trust was made to set up a representative office in Florida. Wherefore the Miami Herald reporters and editors should have identified and obtained explicit confirmation from Mr. Stutt’s source. We shall attempt to contact him to that end.
Advertising by the legal profession is strictly and often absurdly regulated. Lawyers are sometimes too eager to respond to reporters’ queries in order to get desirable publicity. According to his firm’s website, Mr.Stutts, since joining Holland & Knight in 1989, has devoted a substantial portion of his practice to matters involving the federal and state supervision and regulation of banks, trust companies, securities broker-dealers and investment advisers. As former general counsel to the Florida Comptroller's Office and the Department of Banking and Finance, helped develop the agency's policies on banking, mortgage lending and securities regulation. He also directed the agency's securities enforcement efforts and coordinated prosecutions under Florida's "antifraud" provisions with its federal counterparts including the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission. And he helped draft revisions to Florida's banking laws in 1988 and 1989, and served on the Comptroller's Task Force on Banking Sunset. He was a registered lobbyist for the Comptroller and testified on his behalf before the Florida Legislature and the U.S. Congress.
There is a chance that Mr. Stutts was misguided and/or misquoted by the reporters into implying that Florida's financial institution regulators knew of the CD sales all along. We are inclined to believe that the information ,that CD sales were known to examiners early enough to thwart the fraudulent operation, was fabricated by the Miami Herald, as was much of its award-winning series on that operation.
Securities regulators knew that the Stanford Group Company was selling CD’s in another office. The fact that licensed securities dealers were selling CDs in Stanford’s international trust company representative office was reported some time after the scandal broke. Perhaps the Miami Herald collapsed ten years into one in order to spin its story lline. Whether or not there was anything illegal for a trust services representative to take off that hat and put on his or her licensed securities dealer hat and directly sell a CD is an open question. An examination would have been conducted by the state securities division and not the banking division. Irregularities would have been reported to the SEC field office. At this time, we are unaware of any charges being brought against the Miami “stock brokers” involved. We further note that Stanford Trust Company Limited d/b/a Stanford Fiduciary Investor Services is not named as a defendant in the criminal nor the SEC suits.
-To Be Continued-