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VOL. 124 | NO. 190 | Monday, September 28, 2009



After the Fall: The messy cleanup of Stanford Financial

By Andy Meek

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In this June 25 photo, Texas billionaire R. Allen Stanford is escorted into a federal courthouse in Houston. -- AP FILE PHOTO/DAVID J. PHILLIP

R. Allen Stanford, the Texas billionaire now passing time in a Texas jail for his role in what U.S. regulators have called a “massive Ponzi scheme,” once told a roomful of his employees they ought to have three priorities in life.

The list he gave them was “God, family and me.”

Given his larger-than-life persona, outsized wealth, hulking physique and vast power and influence, it’s not surprising some of Stanford’s employees later wondered whether those items were ranked in order of importance.

But while they may have been what Stanford wanted people who worked for him to focus on, these days the fallen financier has more pressing fish to fry.

Less than two months from now, one of his oldest friends – a well-known Memphian – is scheduled to be sentenced by a federal judge in Houston for his own role in the Stanford investment scandal. Meanwhile, a former employee has written a book about his experiences while on Stanford’s payroll, and the company’s assets are coming off the shelves in a massive gone-out-of-business sale.

A wing and a prayer

James Davis, once a college roommate of Stanford’s at Baylor University, was the company’s dapper, silver-haired chief financial officer who copped a plea deal a few weeks ago.

Regulators began dismantling Stanford’s international business network in February, claiming it was financed by the sale of bogus certificates of deposit. Investors were lured into turning over their money by the siren song of steady returns that never failed to beat the market.

Stanford and several associates face a mix of civil and criminal charges, and a court-appointed receiver is in charge of what remains of the company’s far-flung operations.

Among other things, Davis told prosecutors the company flouted the rules from day one. He’s likely to get a recommendation of leniency from prosecutors if he continues cooperating, including as a trial witness against Stanford.

In a hint of what might be ahead, Stanford was admitted to a hospital last month with a racing pulse hours before his former CFO stood before U.S. District Judge David Hittner, who asked Davis if he had done what prosecutors accused him of.

“Yes, your honor,” Davis replied.

Chief investment officer of Stanford Financial Group Laura Pendergest-Holt, right, and her attorney, Dan Cogdell, leave a federal courthouse in Houston Feb. 27. -- AP PHOTO/PAT SULLIVAN

Davis, who used to fly to Stanford’s Memphis office on a company jet from his home in small-town Mississippi, traveled the globe frequently but often worked in Memphis. He was on the board of the National Civil Rights Museum and gave the keynote address for the museum’s Freedom Awards ceremony in 2006.

Davis often opened company meetings with a prayer, one of the few things he and other disgraced Stanford officials apparently have left.

One reason that’s the case is Stanford receiver Ralph Janvey. A Dallas attorney, Janvey is mortgaging as many of Stanford’s proverbial family jewels as he can in an attempt to preserve value for the company’s burned investors.

Up in shreds

Janvey’s team – in addition to other investigators – also is gunning for former Stanford officials at all levels of the company.

Thomas Raffanello, a former federal drug agent, was indicted this month for allegedly hampering the receiver’s efforts to take control of the Stanford estate. A former special agent in charge of the U.S. Drug Enforcement Administration’s Miami office, Raffanello faces charges that he ordered the shredding of documents in Stanford’s Fort Lauderdale, Fla., office where he worked, despite a court order requiring their preservation.

Court filings say the veteran federal agent ordered a deputy to contact a shredding company to arrange for the destruction of all documents in the office.

An employee of the shredding company filled a 95-gallon bin with documents, while Stanford employees watched and helped, according to the indictment against Raffanello and Bruce Perraud, a Stanford global security specialist. And four Stanford workers made about eight trips between their office and the shredder truck carrying documents to shred, according to court filings.

When a representative of the Stanford receiver showed up, Raffanello allegedly told the representative to “sit in the back office” so he couldn’t ask anyone about Stanford records.

His lawyers compared what the Stanford officials did to “taking out the garbage” and said that “every action that was done has a credible and legitimate explanation.”

News crews set up outside the federal courthouse in Richmond, Va., for a June hearing for Stanford. The chairman of Stanford Financial Group was scheduled to appear on fraud charges after surrendering to FBI agents.
 -- AP PHOTO/STEVE HEIBER

“The theory of the government’s indictment is that a routine practice of the security office, in which trash was periodically shredded by an outside vendor and pertinent items scanned and saved in electronic format, was an intentional attempt to obstruct a federal investigation,” Raffanello’s lawyers argued in a court filing a little more than a week ago.

Raffanello is one of the most recent Stanford officials to get caught up in the legal flap. He retired from the DEA in 2004, ending a more than 30-year career as a federal agent. The Miami DEA office he headed had some 400 agents.

Among the top drug cases in his career, Raffanello helped prosecutors convict former Panamanian dictator Gen. Manuel Noriega for drug trafficking in the early 1990s.

Conceit and consumption

Within the past few weeks, meanwhile, the Stanford receiver has cast a wide net for not only company officials, but former financial advisers who sold Stanford’s sham CDs. Several of those advisers worked in Stanford’s brokerage office in the East Memphis Crescent Center, including former state Sen. Paul Stanley.

A Germantown Republican, Stanley resigned his seat in the Legislature last month in the wake of an intern sex scandal.

Of more than 250 financial advisers listed in an August complaint Janvey filed, six of them from Memphis allegedly got more than $3 million in CD proceeds. That’s money Janvey is seeking to bring back into the receivership estate.

It was paid as commissions and other compensation for the CD sales. Janvey’s complaint seeks to recover about $134 million from 253 former financial advisers, but the complaint doesn’t accuse them of any wrongdoing.

Dallas attorney Ralph Janvey, shown in this March photo, has a team of firms working for him in his capacity as the receiver of what’s left of the Stanford Financial Group family of companies. -- AP PHOTO/HOUSTON CHRONICLE/MAYRA BELTRAN

“Money that new investors were deceived into paying to purchase CDs funded the Stanford network; lavish offices and appointments; extravagant lifestyles for the individual defendants and their families; employees’ salaries; loans, commissions, bonuses and … payments in the form of interest and redemptions to unwitting investors,” the complaint reads. “This fraud endured, in part, by incentivizing a sales force with big commissions for selling CDs.”

By April, Janvey’s team had laid off more than 1,000 of Stanford’s U.S. employees and closed 36 offices in 33 U.S. cities after deciding Stanford’s U.S. businesses were not profitable and could not continue. Shutting down Stanford’s Memphis office put about 50 people out of work.

Among the Stanford assets Janvey’s team seized were offices around the world and a fleet of six company aircraft. They also are getting court approval to unload whatever they can.

The receiver’s team this month asked court permission to sell Stanford’s stake in a Memphis-based venture capital fund that invests in health care companies. The Shelby County Retirement Board has made an offer to buy that stake in MB Ventures II.

David Pontius, manager of pension investments for the county, told The Memphis News the county is trying to acquire it at a substantial discount.

“We already have an investment in the fund, and at the right price this addition would be a good fit,” Pontius said.

Stanford Venture Capital Holdings inked a deal in August 2006 committing to an investment of $5 million in the fund. To date, Stanford only had funded about half of that commitment.

But that $2.45 million stake is losing value because of setbacks faced by companies in MB Ventures’ portfolio, according to documents filed by Janvey’s team. The Shelby County pension board wants to buy the stake for $490,000.

If that sale went through, it would grow the county pension board’s holdings in MB Ventures from $5.3 million to a little more than $5.7 million.

People queue outside the Bank of Antigua trying to get at their frozen assets several days after regulators shut Stanford’s companies down in February. -- GARETH COPLEY/PA WIRE/AP IMAGES

“(MB Ventures) is a venture capital fund that was established to invest in a portfolio of high-growth health care companies, particularly those interested in developing product solutions for musculoskeletal disease, products to alleviate human suffering and molecular therapeutics,” the receiver wrote this month in court documents outlining his wish to sell the Stanford stake to Shelby County. “MBV’s philosophy is to be the lead investor in seed or early stage financings for such companies. MBV currently is invested in 10 different companies, most of which have products in the very early stages of development.

“Over the last quarter, several of the companies in MBV’s portfolio have experienced problems, and (Stanford’s) initial investment has devalued by almost 20 percent to under $2 million. These problems include valuation write-downs, difficulties in securing financing and product development setbacks.”

The receiver used a private equity adviser to find a buyer for the Stanford stake. Two bids were submitted out of invitations to 40 prospective buyers, with one of the bids coming from the Shelby County Retirement Board.

The source of a second $320,000 offer was not identified, and the remaining 38 that were approached declined to bid.

“The receiver’s team spent a significant amount of time analyzing MBV’s financial statements to determine whether the higher $490,000 bid from Shelby County was fair and reasonable given market conditions, the long-term nature of the investment, and SVCH’s large capital obligations going forward,” court documents read. “Based upon his concerns regarding the performance and outlook of the MBV fund, the receiver made an initial determination that the Shelby County offer presented the best opportunity to maximize value to the receivership estate.”

Janvey also has asked for court permission to sell “Little Eagle,” a 50-foot yacht seized from Stanford’s chairman. The yacht, which Janvey wants to sell for $150,000, currently is docked in a marina in Fort Lauderdale.

It’s one of dozens of examples of the wealth and luxury Stanford once enjoyed.

All that glitters

An artist’s rendering shows Stanford, second from left, flanked by his attorneys during a hearing in federal court in Richmond, Va., after surrendering to authorities earlier this year. -- GARETH COPLEY/PA WIRE/AP IMAGES

A Reuters reporter recently given a tour of Stanford’s private office in Houston was greeted by an eagle sculpted out of mahogany, a large atrium and massive double doors. Among framed items hanging on the wall was a 2006 letter on White House stationery signed by former President George W. Bush.

In the closet of Stanford’s personal bathroom was a fold-up massage table. A private exit in the bathroom led to a parking lot.

Stanford owned restaurants on the Caribbean island of Antigua to which deep-pocketed customers of his bank were flown for expensive meals and private meetings. One such eatery is the Sticky Wicket, where patrons could enjoy items such as eight-ounce grilled Atlantic salmon and Antigua lobster salad.

Stanford’s senior investment officer described such first-class treatment for bank customers in testimony he gave to the U.S. Securities and Exchange Commission.

“They would do, like, lunch at the Sticky Wicket, typically, after the presentation in the morning,” Stanford senior investment officer Michael Zarich said, according to a transcript of his SEC testimony. “And then I think it varies. Some people want to golf and snorkel, and they would do like a tour of the island and then go back to their hotels.”

Burnished mahogany furniture filled offices of the company’s banking arm on Antigua. Two of Stanford’s subordinates who worked for him in Memphis – Davis and Laura Pendergest-Holt, the company’s chief investment officer – had offices in Tupelo with 50-inch plasma screen TVs.

Stanford’s chairman was the honored guest at a party in 2004 to welcome his company to Memphis, where the company was expanding but already had had a small presence for a few years. The party setting was Hardin Hall at Memphis Botanic Garden, and a few hundred people attended.

Ice carvings of the Stanford logo were on hand. A separate reception was held in Stanford’s honor at the home of local fashion designer Pat Kerr Tigrett.

Memphis was important as a hub of Stanford’s U.S. presence and as an area of focus for the sprawling federal investigation that took the company down.

Rose Romero, the regional SEC director in Fort Worth, Texas, told the U.S. Senate’s Banking, Housing and Urban Affairs Committee last month that discoveries made by investigators in Memphis helped them build their case.

“By mid-December 2008, the SEC and (Justice Department) agreed that the SEC should resume its overt efforts to investigate the fraud parallel to the DOJ, and the SEC initiated an around-the-clock investigative effort,” Romero said.

“This investigation has revealed that the estate is comprised, in large part, of grossly overvalued real and personal property, subject to competing claims and legal
proceedings in jurisdictions all over the world.”
– Ralph Janvey
Attorney and receiver of the Stanford estate

She said the SEC’s Office of Compliance Inspections and Examinations began an examination of Stanford’s Houston office and started interviewing Stanford employees in Memphis.

“At the same time, the SEC’s enforcement staff continued to interview current and former Stanford employees, including the bank’s former senior investment officer, who had returned from Antigua,” Romero said. “The former senior investment officer provided the enforcement staff, for the first time, with documents and information indicating that (Stanford International Bank’s) investment portfolio was inconsistent with the bank’s disclosures to investors.

“This conclusion was buttressed by information learned by the SEC and (Financial Industry Regulatory Authority) examination teams during an interview with a Stanford Financial Group employee in Memphis.”

As everyone now knows, Stanford’s glittering house of cards – and the spectacular wealth that created it – turned out to be illusory.

The same way Dorothy pulled back the curtain in “The Wizard of Oz” to reveal the frightening wizard as an elderly, unassuming man, the last few months also have illuminated the underside of Stanford’s empire.

“This investigation has revealed that the estate is comprised, in large part, of grossly overvalued real and personal property, subject to competing claims and legal proceedings in jurisdictions all over the world,” Janvey wrote earlier this month in a status report about his efforts. “The receiver is overseeing the liquidation of luxury items, private equity and real estate during the worst recession in 50 years. It is not a seller’s market.”

The receiver cites several examples, including expensive improvements Stanford made to Little Eagle. Stanford bought the boat in 1993 for $375,000. In 2004, he spent about $1.1 million making upgrades to it, according to court documents.

“Thus, he spent $1,475,000 of investors’ funds on an asset that has a current fair market value of approximately $150,000,” the receiver told the Texas court where Stanford’s case is pending.

Memories

The man Stanford hired to start a newspaper on Antigua – where Stanford’s banking unit was housed – self-published a book about his former boss at the end of August. Titled “Sir Allen & Me” and available through the Internet-based retailer Amazon.com, it purports to offer a peek inside Stanford’s operation and into the behavior of its founder.

Robert Hoffman, the author, worked for Stanford for about two years to get The Antigua Sun up and running before Stanford cut him loose in 1998. After his firing, Hoffman said he fought with Stanford over the billionaire’s refusal to give him back pay, vacation pay and related expenses.

Even though he and Stanford parted ways on unfriendly terms, recollections he provided to The Memphis News were corroborated by other Stanford employees.

“I can remember one day there was a meeting of the company heads,” Hoffman said. “We were in this boardroom (Stanford) had in the bank upstairs. And he starts berating everybody.

“He called me a good newspaperman but said I didn’t know a thing about business. He said, ‘I could snap my fingers and every one of you would be out of work. This is the best opportunity you’ve had in your lives.’ If he ever didn’t like something you said, he might slam his hand down on the table with a terrible whack.”

Stanford was a well-known stickler for mandating that employees at all times wear a lapel pin adorned with the company’s golden eagle seal.

“He had a strange fetish about that pin,” Hoffman said. “And you had to wear it. If you showed up to work without this pin on you, you were really in for it.

“The day after I interviewed for my job, we went to lunch with a woman from (human resources). Stanford comes in to the restaurant, walks over to her and adjusts the pin on her business suit. It was that important to him. And he gave her this sort of reproachful look.”

Also included in the cast of Stanford characters snared in regulators’ net is Pendergest-Holt. A Tupelo native, Pendergest-Holt was brought into Stanford by Davis fresh out of Mississippi State University in 1997 at age 23.

By the time it all collapsed, she was in her 30s and pulling down $1 million a year.

Davis met her when she was a teenager and he was a Sunday School teacher at First Baptist Church in Baldwyn, Miss., where they both attended.

Pendergest-Holt was interviewed by investigators in Memphis Feb. 17, the same day Stanford offices – including the company’s East Memphis branch – were raided and closed for good. Her indictment alleges she lied to regulators at that eleventh-hour meeting by saying she was unaware of certain details about Stanford’s finances.

Lessons hard won

For now, the dust is beginning to settle from the financial scandal. Several Stanford officials are awaiting their day in court. Trial preparations are under way, and prosecutors are sharpening their legal knives.

Indictments of some officials, as well as Davis’ plea agreement, suggest prosecutors aren’t finished and that more Stanford officials could come under fire. Details in Davis’ plea deal include assertions about lawyers inside and outside Stanford who might have facilitated aspects of the scandal.

The once rip-roaring financial services behemoth, however, has been all but swept into the pages of history, meaning the time for hindsight is at hand.

Charles Auerbach, a certified financial planner and co-owner of Wealth Strategies Group in Cordova, came up with four lessons he’d give to investors in the wake of the Stanford scandal.

“Lesson No.1: Always be cautious of investing your money into something that sounds too good to be true,” he said. “The certificates of deposit that were offered by Stanford’s affiliate carried interest rates that were substantially higher than those being paid by U.S. banks. This should have been a red flag and caused investors to be wary.

“Lesson No. 2: Always be cautious when considering investments in or issued by foreign banking institutions, especially those located in the island nations. These institutions have had a reputation as being havens for illegal money laundering operations.

“Lesson No. 3: Always do your own homework and ask questions. Don’t just accept information given to you by a broker or other representative of the financial institution.

“… Final lesson to be learned: Your first instincts are your best. If you are at all uncomfortable with an investment or are feeling external pressure to make a buying decision, walk away.”

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 0 140 16,020
MORTGAGES 0 145 18,537
FORECLOSURE NOTICES 0 0 0
BUILDING PERMITS 0 323 32,794
BANKRUPTCIES 0 121 10,621
BUSINESS LICENSES 0 58 5,144
UTILITY CONNECTIONS 0 90 11,307
MARRIAGE LICENSES 0 60 3,833

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