February 13, 2009 / 12:31 AM / 11 years ago

Stanford Financial raised some red flags for rivals

BOSTON, Feb 12 (Reuters) - Financial services firm Stanford Financial Group, known for its steady returns and bold style, has long stirred concern among rivals, who say they are not surprised to hear regulators have taken a closer look.

Headquartered in Houston, the firm traces its roots to the Great Depression when Lodis Stanford began selling real estate and insurance services. Seventy-seven years later, his grandson Allen Stanford oversees roughly $50 billion in assets spread across bank, wealth management and brokerage units.

Would-be investors have been told they could generate annual investment returns of between 10 and 15 percent since 1995 if they invest with Stanford, said people familiar with firm, whose wealth-management unit caters to those with about $5 million to commit.

The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are investigating Stanford, a person familiar with the matter said, noting that a review of its documents began last summer.

BusinessWeek reported on Wednesday that the SEC, FINRA and the Florida Office of Financial Regulation were investigating Stanford’s ability to pay high yields on certificates of deposit even as it invests CD money largely in stocks, real estate, hedge funds and precious metals — many of which have lost value in recent months.

“People have been speculating for years,” one potential client who visited Stanford told Reuters, asking not to be identified.

In a note to employees on Thursday, Allen Stanford said the review of its books followed complaints raised by former Stanford employees. But he described the inspection as “routine examinations” and said the company is rigorously managed and fully compliant with all U.S. regulations.

“We have been fully cooperative with regulators,” he said in the letter obtained by Reuters.

Its offshore unit, Antigua-based Stanford International Bank (SIB), “remains a strong institution, and even without the benefit of billions of U.S. taxpayers’ dollars we are taking a number of decisive steps to reinforce our financial strength,” he said. Two capital infusions had been made into the bank and other steps were under consideration.

SENSITIVE TIME

News of the investigation comes at a sensitive time for U.S. regulators, who are smarting from public criticism for missing tips about Bernard Madoff’s suspected $50 billion fraud and face pressure to tighten vigilance of the investment-management industry.

Industry sources who studied Stanford’s investment returns and promotional material say the high rates that the company offered on certificates of deposit in its affiliated offshore bank often seemed too good to be true.

“The rates were really, really high and they didn’t look like CDs,” said Scott MacKillop, president of Frontier Asset Management LLC in Denver, who examined the firm’s offering documents. “They looked more like investment pools where you hand over the money and they invest it wherever they want.”

For example, Stanford listed on its Website a $100,000 CD that paid a 4.5 percent annual yield last year — more than double the 2 percent yields paid by banks.

The lofty CD rates and consistent returns across a swathe of markets also caught the attention of Alex Dalmady, a Florida-based independent banking analyst and managing director of financial services Website finanzasconvalor.com.

“They were performing in every category for a really long time in really different financial markets and in this industry that is really extraordinary,” said Dalmady, laying out his suspicions about the Antigua-based bank.

After reviewing Stanford’s financial statements, Dalmady concluded that it used borrowed money, or leverage, to pump up investment returns.

Stanford is known in the industry for its colorful advertisements and array of offices worldwide. Sponsorships of sailing regattas and tennis and golf tournaments help get the Stanford name out. Glitzy television spots promise hard work for its customers.

And its eccentric chairman and chief executive, Allen Stanford, keeps the name in the headlines.

Knighted in 2006 by the Antiguan authorities rather than the Queen of England, Stanford has lived for 20 years in Antigua where he holds dual citizenship and has built a name for developing a cricket empire in the Caribbean. (Reporting by Svea Herbst; Editing by Jason Szep, Leslie Gevirtz)

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