Ex-Stanford employee warned regulators about fraud

WASHINGTON Fri Feb 27, 2009 1:06am GMT

WASHINGTON (Reuters) - A former Stanford Group Company employee told broker-dealer watchdogs in 2003 that the financial services firm was engaged in fraud, about five years before U.S. securities regulators charged the firm's chairman, Allen Stanford, with an $8 billion fraud.

Leyla Basagoitia, who was fired from Stanford Group Company in 2002, told a broker-dealer arbitration panel that the firm was engaged in a Ponzi scheme, according to a document on the website of broker-dealer watchdog Financial Industry Regulatory Authority (FINRA).

In 2003, Basagoitia and the Stanford Group Company were trying to resolve a loan dispute through an arbitration forum run by a FINRA predecessor.

At the time, Basagoitia told the arbitration panel that before accepting her position at Stanford Group she emphasized that it was not her intent to allocate any of her clients' funds to Stanford Group's offshore bank, Stanford International Bank -- one of the companies named in the government's civil complaint.

She alleged that the firm was engaged in a Ponzi scheme to defraud its clients, where earlier investors are paid with money from later investors.

Basagoitia said her clients were mainly foreign nationals in Latin America and that she believed the investments to be risky in nature, unsuitable and not in the interest of her clients. She alleged that her reluctance to push the offshore bank and its products proved fatal to her employment at Stanford Group.

In the end, Basagoitia was required to pay Stanford Group Company $107,782 to resolve the loan dispute.

Last week, the Securities and Exchange Commission accused Allen Stanford, three of his companies and two executives with fraudulently selling $8 billion in high-yield certificates of deposits.

The SEC alleged that Stanford's Antigua-based bank sold the CDs by promising high return rates that exceeded those available through true certificates of deposits offered by traditional banks.

The Financial Times reported that Basagoitia warned the Securities and Exchange Commission around the same time she raised concerns at the arbitration panel run by FINRA's predecessor.

The SEC had no comment on Basagoitia. But an SEC spokesman said the agency's investigation started in the spring of 2005 based on information it developed in the course of an examination.

Calls to the lawyer representing Basagoitia in the 2003 dispute resolution were not immediately returned. Calls to FINRA were not immediately returned.

(Reporting by Rachelle Younglai; Editing by Gary Hill)